Does Employee Ownership Really Make a Difference?
Godfrey, Joseph E., The CPA Journal
The September CPA journal featured a panel discussion on the benefits of using ESOPs in succession and exit strategy planning in closely held businesses.As discussed in the article, the two major benefits Of using an ESOP are 1) the seller gets out tax-free and 2) the principal payments on debt created in the transaction are taxdeductible. Many financial or strategic buyers might still ask,"Does the cost of equity dilution justify sharing the future economic returns on the equity with employee-owners?"
The answer can be found in a study, done at Northwestern University IS J.L. Kellogg Graduate School of Management by Professor Hamid Mehran, now at the Federal Reserve Bank of New York. This study, done under the auspices of Hewitt Associates LLC, looked at both the quantitative and qualitative aspects of the "ownership dynamic. ' The CEO of a Fortune 500 spin-off summarized it best when he said, "Employee-owners see things differently, they take appropriate risks, they do what it takes to make the business grow, they are not satisfied with being average."
The quantitative study looked at the financial performance of 382 companies a period of two years before and four years after adoption of an ESOP. Three hundred three of the cony pines survived the full six-year period of the study.
The study found the following:
Return on assets (ROA) was 2 7')/,) higher for the 382 companies than their industry peers without ESOPs for each year in the four-year period. For the 303 "survivors," the return was 14% greater than the industry average each year over the four years.
Total shareholder return (TSR) in ESOP companies was cumulatively 6.9% higher over the four years than their industry counterparts. …