Academic journal article Stanford Journal of Law, Business & Finance

Why (Only) ESOPs?

Academic journal article Stanford Journal of Law, Business & Finance

Why (Only) ESOPs?

Article excerpt

Introduction: ESOPs, Other SOPs & "Ownership Societies"

Recent interest in the idea of an "ownership society" raises an intriguing prospect: since the mid-twentieth century, we have broadly spread ownership of two assets critical to maintaining a populace of productively autonomous, politically independent citizens - homes and human capital.1 We have done so, moreover, by financially engineered means not experienced by those citizens as mere takings and unearned givings. Our federal home mortgage and higher education finance programs were quite cleverly designed in the 1930s-40s and the 1950s-70s, respectively, precisely with those ends in view.2 Might we then employ similar means to spread ownership in that one remaining core asset whose ownership continues to be as concentrated as land and high-end human capital once were- shares in firms?3

There is reason to believe that we might.4 Indeed the familiar employee stock ownership plan- the ESOP- was originally designed, like the federal higher education finance programs, with the federal home mortgage finance programs expressly in view.5 Like the home- and education-spreading programs, it spreads a seemingly new resource- newly issued shares- and so avoids the appearance of taking.6 Also like those programs, it ties benefit to toil- in this case, to work with the firm- and so avoids the appearance of unearned giving.7 But the ESOP ironically falls short of its home and human capital counterparts precisely by dint of the particular ways in which it replicates them. For it ties benefit to toil that is not always there to be had- employment with firms that sponsor ESOPs.8 And it concentrates risk of the sort that an "ownership society" should diversify: beneficiaries derive nonhuman and human capital (labor) incomes from the same source.9 Is there some way to keep what is good here while avoiding what is not?

It is tempting to think that there is. The key, I believe, is to fix on two facts: first, that the ESOP rests more heavily on firms' credit than on the public's much greater full faith and credit, the latter of which our home and higher education finance programs employ.10 And second, that employment is but one form of such firm-patronage as can ethically underwrite the reward that is ownership.11 So the ESOP is piecemeal indeed as a business capital analogue to public-credit-fueled, private home- and education-spreading. If we step farther out along both aforementioned dimensions- the credit and patronage dimensions- it would seem we might generalize the ESOP into a method of business capital-spreading on par with our present-day home- and education-spreading. Then our "ownership society" might stand on three legs, as it began to do in the nineteenth century homesteading and "land-grant" college era.12

Our plan in this Article, then, is as follows: Part I rehearses the workings and successes of the leveraged ESOP- the principal means, thus far, by which we have sought as a society to spread shares in firms.13 The aim here is first to show, mechanically, how publicly augmented firm credit actuarially underwrites employee share-acquisition, thereby augmenting nonowners' purchasing power for such acquisition. The aim is second to indicate, now more politically than mechanically, how employment as a salient form of firm patronage appears ethically to underwrite the benefit that ESOPs confer upon acquiring employees. The latter is important to show not only because the aforementioned benefit might otherwise resemble a politically contestable giving, but because it entails an ill-disguised taking as well: It dilutes the holdings of others who already own, yet is nonetheless acquiesced-in- in large part because it is publicly subsidized, we shall see. And patronage appears to explain public acquiescence in the subsidy.

Part II then turns to the deficiencies of ESOPs as share-spreading engines of a completed American "ownership society." These deficiencies are associated with the two aforenoted "dimensions"- those of credit and patronage. …

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