The history behind the development and implementation of Employee Stock Ownership Plans (ESOP) in the U.S. is a bizarre one. An article telling the story makes for an entertaining read. In fact, I found it hard to put down.
In Fifty Years of Utopia: A Half-Century after Louis Kelsos The Capitalist Manifesto, a Look Back at the Weird History of the ESOP , Andrew Stumpff from the University of Michigan Law School details how ESOPs arose almost single-handedly from the efforts of Louis Kelso. He was a lawyer who fancied himself a deep thinker in the mode of John Maynard Keynes and Karl Marx as highlighted by books he wrote under titles like The Capitalist Manifesto(1958).
His grand vision was that the labouring classes should own stocks that pay dividends so they would have a stream of dividend income to supplement their labour income. This was a way to maintain their consumption level and keep the U.S. from falling into a 1930-style depression like the one he grew up in.
To get those dividend stocks, the government would make arrangements to facilitate loans to workers, for example, give incentives to banks to lend money for the purchase of dividend stocks. Then, after the dividends had paid back the loan, workers would own the stocks outright and would receive a passive income in addition to their work income.
Leading economists of the time, such as Milton Friedman, described Kelsos ideas as a crackpot theory. But then Kelso got an audience with Senator Russell Long, who was Chairman of the Senate Finance Committee.
Mr. Long, the son of Huey Long (the Louisiana Governor in the 1930s once described as the Karl Marx for the hill-billies) became a convert to a modified form of the Kelso vision and spearheaded several tax breaks for ESOPs. As a result, they grew in numbers from virtually nothing in the early 1970s to tens of thousands of plans by the end of the 1980s.
Long left the Senate in 1988 and Kelso died in 1991. Most of the tax breaks for ESOPs have since been rescinded, and the spread of ESOPs has tapered of. But probably the biggest knock against ESOPs is the way they concentrate risk. All the worker’s retirement savings and human-capital wealth is tied up in one company.
Thats not very diversified, at all. If the company went bankrupt, the ESOP participant would lose their job and financial wealth. Unfortunately, this has happened more than once. For example, United Airlines, majority-owned by an ESOP, declared bankruptcy in 2002, rendering employees accounts effectively valueless. Enron Corporation maintained an ESOP, as did Bear Stearns, notes Stumpff.
Kelsos overall goal of broad capital ownership actually does seem to have been at least partly realized, and moreover, through the medium of employee retirement plans, but in an entirely different way than he envisioned. Defined contributionparticularly section 401(k)plans are now the dominant retirement plan form in America, and they nearly universally permit the investment of employees accounts, at their election, in corporate stock: not necessarily of the employer but, almost always, among an array of diversified funds of stocks.
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Blogs & Comment
The bizarre history of ESOPs
By Larry MacDonald
The history behind the development and implementation of Employee Stock Ownership Plans (ESOP) in the U.S. is a bizarre one. An article telling the story makes for an entertaining read. In fact, I found it hard to put down.
In Fifty Years of Utopia: A Half-Century after Louis Kelsos The Capitalist Manifesto, a Look Back at the Weird History of the ESOP , Andrew Stumpff from the University of Michigan Law School details how ESOPs arose almost single-handedly from the efforts of Louis Kelso. He was a lawyer who fancied himself a deep thinker in the mode of John Maynard Keynes and Karl Marx as highlighted by books he wrote under titles like The Capitalist Manifesto(1958).
His grand vision was that the labouring classes should own stocks that pay dividends so they would have a stream of dividend income to supplement their labour income. This was a way to maintain their consumption level and keep the U.S. from falling into a 1930-style depression like the one he grew up in.
To get those dividend stocks, the government would make arrangements to facilitate loans to workers, for example, give incentives to banks to lend money for the purchase of dividend stocks. Then, after the dividends had paid back the loan, workers would own the stocks outright and would receive a passive income in addition to their work income.
Leading economists of the time, such as Milton Friedman, described Kelsos ideas as a crackpot theory. But then Kelso got an audience with Senator Russell Long, who was Chairman of the Senate Finance Committee.
Mr. Long, the son of Huey Long (the Louisiana Governor in the 1930s once described as the Karl Marx for the hill-billies) became a convert to a modified form of the Kelso vision and spearheaded several tax breaks for ESOPs. As a result, they grew in numbers from virtually nothing in the early 1970s to tens of thousands of plans by the end of the 1980s.
Long left the Senate in 1988 and Kelso died in 1991. Most of the tax breaks for ESOPs have since been rescinded, and the spread of ESOPs has tapered of. But probably the biggest knock against ESOPs is the way they concentrate risk. All the worker’s retirement savings and human-capital wealth is tied up in one company.
Thats not very diversified, at all. If the company went bankrupt, the ESOP participant would lose their job and financial wealth. Unfortunately, this has happened more than once. For example, United Airlines, majority-owned by an ESOP, declared bankruptcy in 2002, rendering employees accounts effectively valueless. Enron Corporation maintained an ESOP, as did Bear Stearns, notes Stumpff.
Kelsos overall goal of broad capital ownership actually does seem to have been at least partly realized, and moreover, through the medium of employee retirement plans, but in an entirely different way than he envisioned. Defined contributionparticularly section 401(k)plans are now the dominant retirement plan form in America, and they nearly universally permit the investment of employees accounts, at their election, in corporate stock: not necessarily of the employer but, almost always, among an array of diversified funds of stocks.
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