[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
FINANCING EMPLOYEE
OWNERSHIP PROGRAMS: AN OVERVIEW
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
FINANCIAL INSTITUTIONS AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
JUNE 10, 2003
__________
Printed for the use of the Committee on Financial Services
Serial No. 108-35
89-890 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
____________________________________________________________________________
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice JULIA CARSON, Indiana
Chairman BRAD SHERMAN, California
RON PAUL, Texas GREGORY W. MEEKS, New York
PAUL E. GILLMOR, Ohio BARBARA LEE, California
JIM RYUN, Kansas JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio DENNIS MOORE, Kansas
DONALD A. MANZULLO, Illinois CHARLES A. GONZALEZ, Texas
WALTER B. JONES, Jr., North MICHAEL E. CAPUANO, Massachusetts
Carolina HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois KEN LUCAS, Kentucky
MARK GREEN, Wisconsin JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona MIKE ROSS, Arkansas
VITO FOSELLA, New York CAROLYN McCARTHY, New York
GARY G. MILLER, California JOE BACA, California
MELISSA A. HART, Pennsylvania JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota RAHM EMANUEL, Illinois
TOM FEENEY, Florida DAVID SCOTT, Georgia
JEB HENSARLING, Texas ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey
TIM MURPHY, Pennsylvania BERNARD SANDERS, Vermont
GINNY BROWN-WAITE, Florida
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
Robert U. Foster, III, Staff Director
Subcommittee on Financial Institutions and Consumer Credit
SPENCER BACHUS, Alabama, Chairman
STEVEN C. LaTOURETTE, Ohio, BERNARD SANDERS, Vermont
Vice Chairman CAROLYN B. MALONEY, New York
DOUG BEREUTER, Nebraska MELVIN L. WATT, North Carolina
RICHARD H. BAKER, Louisiana GARY L. ACKERMAN, New York
MICHAEL N. CASTLE, Delaware BRAD SHERMAN, California
EDWARD R. ROYCE, California GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
SUE W. KELLY, New York DENNIS MOORE, Kansas
PAUL E. GILLMOR, Ohio CHARLES A. GONZALEZ, Texas
JIM RYUN, Kansas PAUL E. KANJORSKI, Pennsylvania
WALTER B. JONES, Jr., North MAXINE WATERS, California
Carolina NYDIA M. VELAZQUEZ, New York
JUDY BIGGERT, Illinois DARLENE HOOLEY, Oregon
PATRICK J. TOOMEY, Pennsylvania JULIA CARSON, Indiana
VITO FOSSELLA, New York HAROLD E. FORD, Jr., Tennessee
MELISSA A. HART, Pennsylvania RUBEN HINOJOSA, Texas
SHELLEY MOORE CAPITO, West Virginia KEN LUCAS, Kentucky
PATRICK J. TIBERI, Ohio JOSEPH CROWLEY, New York
MARK R. KENNEDY, Minnesota STEVE ISRAEL, New York
TOM FEENEY, Florida MIKE ROSS, Arkansas
JEB HENSARLING, Texas CAROLYN McCARTHY, New York
SCOTT GARRETT, New Jersey ARTUR DAVIS, Alabama
TIM MURPHY, Pennsylvania
GINNY BROWN-WAITE, Florida
J. GRESHAM BARRETT, South Carolina
RICK RENZI, Arizona
C O N T E N T S
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Page
Hearing held on:
June 10, 2003................................................ 1
Appendix:
June 10, 2003................................................ 47
WITNESSES
Tuesday, June 10, 2003
Adams, Frank, President, Southern Appalachian Center for
Cooperative Ownership, Asheville, NC........................... 13
Ceresa, Sherry, Statistical Analyst, Gardener's Supply Company,
Burlington, VT................................................. 37
Clem, Steve, Senior Program Coordinator, Ohio Employee Ownership
Center, Kent State University, Kent, OH........................ 9
Dines, Richard, Director, Cooperative Business Development and
Member Services, National Cooperative Business Association,
Washington, D.C................................................ 15
Keeling, J. Michael, President, The ESOP Association, Washington,
D.C............................................................ 7
McCune, David K., Chairman, United Steelworkers of America, Local
1124-01, on behalf of Massillon Stainless, Inc., Massillon, OH. 34
Megson, James, Executive Director, ICA Group, Boston, MA......... 11
Owenby, Larry, assisted on the employee buyout of RFS Ecusta in
Brevard, NC.................................................... 39
Payne, Monty, International Representative, PACE International
Union, AFL-CIO, CLC, Hattiesburg, MS........................... 40
Ray, George, Chairman and CEO, LeFiell Manufacturing Company,
Santa Fe Springs, CA........................................... 31
APPENDIX
Prepared statements:
Bachus, Hon. Spencer......................................... 48
Gillmor, Hon. Paul E......................................... 50
LaTourette, Hon. Steven...................................... 51
Adams, Frank................................................. 53
Ceresa, Sherry............................................... 57
Clem, Steve.................................................. 59
Dines, Richard............................................... 67
Keeling, J. Michael.......................................... 73
McCune, David K.............................................. 95
Megson, James................................................ 100
Owenby, Larry................................................ 106
Payne, Monty................................................. 108
Ray, George.................................................. 111
FINANCING EMPLOYEE
OWNERSHIP PROGRAMS: AN OVERVIEW
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Tuesday, June 10, 2003
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to call, at 2:02 p.m., in
Room 2128, Rayburn House Office Building, Hon. Spencer Bachus
[chairman of the subcommittee] presiding.
Present: Representatives Bachus, LaTourette, Royce, Lucas
of Oklahoma, Gillmor, Tiberi, Feeney, Hensarling, Brown-Waite,
Barrett, Sanders, Maloney, Watt, Sherman, Lucas of Kentucky,
and Frank (ex officio).
Chairman Bachus. Good afternoon. The Subcommittee on
Financial Institutions and Consumer Credit will come to order.
Today's hearing, which was requested by subcommittee ranking
minority member, Mr. Sanders, will provide an overview of
employee ownership programs. Employee ownership programs allow
employees to buy out their employer in response to an
announcement that the business will be closing its doors.
Employee buyouts are accomplished through the creation of
employee stock ownership plans, ESOPs, or eligible worker owner
cooperatives, EWOCs. Currently, there are about 10,000 ESOPs in
the U.S. While ESOPs are found in all industries, more than 25
percent of them are in the manufacturing sector. Employees own
a majority of the shares in about 2,500 of these ESOPs. There
are about 500 EWOCs. Unlike ESOPs, EWOCs are found in all types
of industries.
In some cases, worker buyouts using ESOPs and EWOCs have
led to the creation of successful employee-owned companies that
are profitable and thriving today. In fact, in Birmingham, my
hometown, the largest producer of cast iron pipe, ACIPCO, which
is a model company, is an employee-owned company and was bought
out from the original owner and has been a fantastic success.
In other cases, U.S. workers have failed in their attempts
to purchase businesses due to a lack of financing. This lack of
financing is caused by a variety of factors. For this reason,
this hearing will examine proposals to provide financial
institutions incentives to finance employee buyouts through the
creation of employee stock ownership plans or eligible worker-
owned cooperatives.
This hearing will consist of two panels. The first panel
includes ESOP trade association representatives and experts in
the field. During the second panel, we will hear from two
successful ESOP companies as well as two employees who failed
in their attempts to purchase their companies due to a lack of
financing. We will also hear from a union representative who is
currently involved in an attempted buyout.
I look forward to the witnesses' testimony on this
important topic and welcome the first panel. In closing, I
would like to thank Mr. Sanders, who is passionate about this
issue and who is a leader in the Congress in bringing this
matter to our attention. I want to stress that this hearing is
the result of his work and his dedication to bringing this
issue to our attention. I cannot stress enough his passion and
resolve to introduce and see meaningful legislation passed, so
I commend him on that.
Now, I will be on the floor of the House because our
Internet gambling legislation, which I have introduced, is
coming onto the floor I understand around 2:30 or 2:45. We have
anticipated this for about 2 days, and Mr. LaTourette, the
gentleman from Ohio, is going to take my place in the chair.
But he and other members are very interested in this hearing,
as I am, and I don't want my absence to mean anything other
than I will be on the floor and don't plan the agenda of the
overall Congress.
The Chair now recognizes the ranking member of the
subcommittee, Mr. Sanders, for an opening statement
[The prepared statement of Hon. Spencer Bachus can be found
on page 48 in the appendix.]
Mr. Sanders. Before you leave, Mr. Chairman, I do want to
thank you very much. While the chairman was very gracious in
mentioning that I had requested this hearing, this hearing
would not have taken place unless the chairman had wanted it.
And his staff has done a terrific job. And I hope very much
this is an issue we can work together on, but I do want to
thank you very much for allowing us to have this important
hearing.
Chairman Bachus. Thank you. Mr. Sanders and I pride
ourselves, and I think this entire committee does, on our
bipartisan work on issues, and I think because of our
cooperation we have had many successes in our committee and I
hope in addressing this matter we will have additional
successes.
At this time I will ask the vice chairman of the committee,
the gentleman from Ohio, to take the chair. And, gentlemen, I
have read some of your submitted testimony and look forward to
working with you on this issue.
Mr. Sanders. Thank you again, Mr. Chairman.
I recognize that today the NBC, CBS, and ABC Television
lights are not on us, and the New York Times is not here, but,
nonetheless, the way things work in the United States Congress
is sometimes you start off with an idea and that idea expands.
The fact that we are having this hearing, that Chairman Bachus
has called this hearing, is a huge first step in what I
consider to be the effort to make some fundamental changes in
the way our economy works and in protecting the livelihood of
millions of American workers.
Now, why is this hearing important and why is worker
ownership important? I think everybody here, and I will be
interested to hear what Mr. LaTourette has to say in a moment,
because Ohio is represented here and his State has shared,
along with Vermont, many of the same problems of
deindustrialization, but one of the least talked about and most
important economic issues facing our country is the collapsing
of our manufacturing sector. It is not talked about too much,
and yet in the last 2 years we have lost close to 2 million
manufacturing jobs.
I know that has happened a lot in Ohio, it has certainly
happened in Vermont, and it has happened all over this country.
We have lost, if you can believe it, over 10 percent of our
manufacturing sector in the last 2 years. We are now at the
same level, at 16-1/2 million manufacturing jobs, where we were
40 years ago. So I think it is terribly important that we
address that issue.
My own view is we have to take a very hard look at our
trade policies, which are putting jobs in China and Mexico. But
the bottom line is that we also have got to figure out a way
that we can protect and expand manufacturing in the United
States, and I believe that employee ownership can and should be
one of the essential strategies in combating the decline of
manufacturing in America.
Employee ownership has been proven to increase employment,
increase productivity, increase sales and increase wages in the
United States. Yet despite the important role that worker
ownership can play in revitalizing our economy, the Federal
Government has failed to commit the resources needed to allow
employee ownership to realize its true potential. On that
issue, what I want to say is there will be bipartisanship on
this. You will find some very conservative Members and some
progressive Members coming together and trying to expand
employee ownership.
Mr. Chairman, I am drafting legislation to create a U.S.
Employee Ownership Bank to provide loan guarantees,
subordinated loans, and technical assistance to manufacturing
employees who would like to purchase factories through an
employee stock ownership plan or an eligible worker-owned
cooperative to correct this problem. A lot of folks around this
country would like to move in that direction. They cannot get
the money, the capital they need, and they do not have the
technical expertise. We hope this legislation will be able to
do that.
In order for employees to receive this assistance, a
determination must be made that the factory they will be
purchasing will be profitable in the future so that they will
be able to pay back the loans and other financial assistance.
In other words, we just do not want to throw money out there.
We want to know it is viable. But what is interesting, and we
have seen this in Vermont, is that companies that are
profitable are still shut down because some of these owners
think they can make more money in China. So it is not a
question of being profitable or not profitable, it is a
question of how much profit you need. And if you have worker
ownership and people making good solid middle class wages and
benefits, they will be delighted to keep that plant going.
Mr. Chairman, we have a wonderful, just a terrific group of
panelists here, and I want to thank all of them for being with
us. This afternoon we will hear from many good people,
including Larry Owenby with the PACE International Union, and
we thank him for being with us. Mr. Owenby worked for the RFS
Ecusta mill in Brevard, North Carolina, for 30 years. Although
this mill was making profits of $1 million a month, the company
closed its doors, and we will hear about what they tried to do
and were not successful in doing.
Monty Payne, also a PACE Union representative, in
Hattiesburg, Mississippi, will testify today about profitable
factories that were shut down by International Paper in Mobile,
Alabama, and Moss Point, Mississippi, and we will be hearing
about what we should be doing in the South as well.
In addition, Dave McCune, a representative with the
Steelworkers, will be testifying about an employee buyout of
Massillon Stainless, Incorporated, in Ohio, that has not
succeeded due to a lack of financial support, and we will see
what we can learn from Mr. McCune.
Mr. LaTourette. [presiding.] That is Massillon.
Mr. Sanders. I wasn't even close. Massillon. All right.
Well, same company, different pronunciation.
Steve Clem, with the Ohio Employee Ownership Center, will
be testifying about three other factories that could have been
saved. And, Mr. Chairman, in Ohio I believe we have probably
more activity on this issue than any other State in the
country, so we have a lot to learn from people in your State.
So, Mr. Chairman, thank you very much and I look forward to
working with you. We are really excited about this hearing and
we thank all of the folks, including those from Vermont, for
being here today. Thank you.
Mr. LaTourette. Mr. Sanders, thank you very much for your
insightful remarks.
I want to take time to personally extend a warm welcome to
the two Ohioans that Mr. Sanders mentioned, Mr. Clem from the
Ohio Employee Ownership Center at Kent State University, and
Dave McCune, who of course is the President of the United
Steelworkers, and focusing on Local 1124-01 in Massillon, Ohio.
And if you ever come to Massillon, Ohio, is known as sort
of the birthplace of football coaches. They all started there,
Woody Hays and that bunch, and then they all went down to
Dennison, and then they all figured out how to lose to Michigan
until recently.
So this is an exciting hearing, Mr. Sanders. I thank you
very much for the suggestion that we have this hearing. The
idea of employee ownership is something in these changing
times, and you have cited the statistics relative to
manufacturing job losses, which I know concern us all. I saw a
forecast the other day that while certain sectors of the
economy may be recovering, it looks like manufacturing will lag
behind regardless of those other sectors.
The other thing that I thought was interesting, we had a
facility in a place called Garfield Heights, and for 50 years
the firm was engaged by contract with Rubbermaid in making
those dish drainers that everybody has on your drain board. I
think you can go to the store and buy them for $3.50. The folks
at Rubbermaid determined it was cheaper to outsource that work
to China for a $3.50 product than it was to continue to
manufacture it in Ohio.
So I congratulate you for your interest on this subject,
and I look forward, with Chairman Bachus, in working with you
on this, and with that I yield back my time and, Mr. Sherman,
ask you if there are any observations you would like to make?
Mr. Sherman. Oh, many. I share the concern of the gentleman
from Vermont about a loss of manufacturing jobs. I think it is
critical that the administration end its ineffectual and doomed
efforts to support a value for the dollar that is inconsistent
with our huge trade deficit. And of course the trade deficit is
a jobs deficit, and when the dollar adjusts, our manufacturing
companies will be able to deal with many of the problems, and
of course you have identified others that they face.
This committee focuses a lot of its time on encouraging
home ownership. Just as we want to be a Nation of homeowners,
property owners, we want to be a Nation in which there are
many, many people who own a share of enterprise, particularly
the enterprise in which they spend their time. ESOPs are an
extremely way effective way to achieve that. Another way to
achieve it, in a more limited sense, is broad-based, I want to
emphasize broad-based, stock ownership programs. So we want to
encourage ESOPs.
Of course we want to do that in a cost effective way,
because many of the programs, whether it be done at the
Committee on Ways and Means or this committee, will cost the
Federal Government money. I would point out that the chief
incentives have been on the tax side and they have been
unintentionally slated for repeal. I would hope that we would
get either testimony from the panel or perhaps more
authoritatively from Ways and Means and from the Joint
Committee on Taxation to tell us what is the cost to the
government of the ESOP incentives that are in the code today
and what would those costs be if you imagined an income tax
structure in which there was no estate tax and we had a 15
percent tax on capital gains, a 15 percent tax on dividends.
Under such a structure, all of the things written into the
code last decade and the decade before to encourage ESOPs
become less significant and, on the other side, less costly to
the Federal Government. So, then, unless this Congress wants to
diminish our efforts to encourage ESOPs, we ought to look for
ways to spend at least an equal amount encouraging ESOPs, and
that may be through the Tax Code or it may be through what the
gentleman from Vermont proposes.
He points out that he would focus on manufacturing
businesses. I do not know whether manufacturing businesses
should be targeted or whether we would go broader, but I would
point out that we do have a special reason to help those
companies that face foreign competition. Because if a
restaurant closes down in my district, it just means more
people eat at the restaurant across the street. If a
manufacturing company closes down, that just means we buy stuff
from across the ocean.
I am not sure we should have a bill in which government
employees are picking the winners and losers. I doubt that that
is what your proposal involves. I would prefer to see us
encourage banking institutions to evaluate lending
opportunities but to encourage them to do the right thing.
I think it is important that each person looking at their
own retirement, each family looking at their own retirement be
adequately diversified. And the downside of ESOPs is that we
encourage people to invest their career and their retirement in
one enterprise. That is why at a very minimum we have to
preserve Social Security as a guaranteed retirement and not
create a circumstance in which there are separate accounts,
which then could also be invested in the company's stock to
create a trifecta investment all in one company, which even if
employee run may not be profitable.
So I look forward to these hearings. I especially commend
our chairman, who is not here, but I will tell him how I waxed
eloquently in his praise for holding these hearings, and
especially for inviting Mr. Keeling to testify, because Mr.
Keeling had the incredible wisdom to cite the experience of
Chatsworth Products in his written testimony, which is in my
district, and is literally the poster boy or poster girl for
the success of the ESOP movement.
So I look forward to ESOPs playing an important role in our
surviving in world competition and look forward to
Congressional enactments that at least preserve and perhaps
expand our dedication to the ESOP movement.
I yield back.
Mr. LaTourette. I thank you, Mr. Sherman, and I will make
sure the next time I see Chairman Bachus to tell him of your
high praise.
I have been notified that Mr. Lucas of Oklahoma and Mr.
Barrett are going to submit opening statements for the record.
I would ask the other Mr. Lucas, the gentleman from Kentucky,
if he wishes to make any opening remarks before we begin?
Mr. Lucas of Kentucky. No.
Mr. LaTourette. Okay. And Mr. Watt, who has just come in.
Mr. Watt. No, thank you.
Mr. LaTourette. Excellent. With that, the hearing is
comprised of two panels and we will begin with the first panel
today.
Gentlemen, I want to thank you all for coming. We will here
from Mr. J. Michael Keeling, who is the President of the ESOP
Association of Washington, D.C.; Mr. Steve Clem, the Senior
Program Coordinator of the Ohio Employee Ownership Center and
Professor of Political Science at Kent State University; Mr.
James Megson, Executive Director, ICA Group, Boston,
Massachusetts; Frank Adams, President of the Southern
Appalachian Center for Cooperative Ownership, Asheville, North
Carolina; and Mr. Richard Dines, Director of the Cooperative
Business Development and Member Services, National Cooperative
Business Association, also in Washington, D.C.
Again, gentlemen, we thank you very much for coming and we
are looking forward to your testimony. The subcommittee, as do
most subcommittees and committees in Congress, subscribes to a
5-minute rule. We have received your written testimony and each
member, I would assume, has reviewed it, and so, without
objection, your written testimony will be made a part of the
record.
We are anxious to hear from you, but if you could, there is
a little box on the other side of the table. It will start out
green, and then will go yellow, and red will be the end of 5
minutes. Nothing horrible happens to you if you go beyond 5
minutes, but so that we can get through all the testimony and
members have ample time to ask the questions that are on their
minds, we would ask you to subscribe to that as closely as
possible.
Having said that, Mr. Keeling, welcome, and we are looking
forward to hearing from you.
STATEMENT OF J. MICHAEL KEELING, PRESIDENT, THE ESOP
ASSOCIATION, WASHINGTON, D.C.
Mr. Keeling. Thank you, Chairman LaTourette, Ranking Member
Sanders, and members of the subcommittee. I appreciate the
opportunity to be here, and I would tell you that I could spend
hours, Mr. Sanders, talking about why I think it is huge that
this particular subcommittee and committee of Congress is
looking at employee ownership. There are many interesting
reasons for that statement.
Before I give a little background and history of ESOPs, in
terms of ESOPs today, demographics, let me say that I believe
in the vision of the ESOP Association that employee ownership
increases productivity through greater employee participation,
creates a broader distribution of wealth in our Nation, and
maximizes human potential by enhancing the self-worth, dignity
and well-being of our people.
ESOPs are tax qualified deferred compensation plans that
are primarily invested in employer securities, and unlike other
tax qualified plans may use borrowed funds to acquire the
assets for the plans, which the assets are employer securities.
Of the 10,000 or so ESOP companies, I would estimate 96 to
98 percent are private companies. Federal law since 1990 has
promoted employee ownership in private companies but not in
large public companies. There is a general image in Congress,
that where employee ownership exists in a private smaller
company, a very special and magical environment can be created
that is up close and personal, but that is not necessarily true
in corporations with thousands and thousands of employees
throughout the globe. Let me quickly say many managers and
executives of large corporations would vigorously disagree with
that image.
The most common reason for creating an ESOP is to provide a
buyer for an exiting shareholder of a private company. Our data
indicates that 75 to 80 percent of the ESOP companies in
America were created in a so-called exiting shareholder
transaction.
The second most common transaction is the one that we call
the ESOP spin-off transaction. We have data that indicates
about 20 percent of the ESOP companies in America were the
result of an ESOP spin-off transaction.
An ESOP spin-off transaction often follows this scenario:
One day the plant manager gets a call from the home office of a
big corporation saying you don't fit into our plan, you don't
make enough money, or something similar, and we are going to
put you up for sale. After composing him or herself, the plant
manager calls in the bookkeeper or the comptroller, tells him
what is about to happen and says we are on the block. They
frequently then say to themselves, gosh, I wish we could
control our destiny, I wish we could buy the company ourselves.
And then somehow or another, often in cooperation with an
organized bargaining unit, the idea of an ESOP develops.
How do common ESOP exiting shareholder transactions get
financing? The financing for the vast majority of exiting
shareholder ESOP transactions is actually fairly simple.
Usually, the decision triggers an ESOP exiting shareholder or
the management of a company going to a regular bank, taking a
loan of less than $10 million, loaning that money to an ESOP,
and the ESOP using the money to purchase stock from the exiting
shareholder.
Since a spin-off transaction might involve a business that
is considered to be in financial difficulty, another source of
funds might actually be the senior management of that
particular division or plant taking a second mortgage on their
homes, borrowing on credit cards, sometimes they are able to
get financing from the State Economic Development
Administration or employee ownership center. Oftentimes, the
lenders will insist on wage and benefit concessions in a
situation like that. Sometimes the necessary due diligence and
feasibility funds are loaned by a State agency or an employee
ownership center.
Actually, there is two distinctions between the types of
ESOP loans and transactions. From the years of 1974 to 1984,
generally ESOPs were nonleveraged ESOPs, which meant the ESOP
itself was not part of the borrowing transaction. There will be
a witness on the next panel that has an older ESOP that engaged
in a so-called nonleveraged ESOP. There the corporation is
borrowing the money and the ESOP is not part of the
transaction.
In 1984-86, the Congress created a whole slew of tax
incentives for leveraged ESOPs. And since that time nearly all
the ESOPs created do involve leveraged ESOPs. So you would
estimate that those created from 1974 to 1986, 80 percent are
nonleveraged; since 1986, 80 percent are leveraged ESOPs where
the ESOP has actually participated in the loan process.
Is there money available for ESOP transactions? Please note
my vantage point. I deal with companies with ESOPs. They tend
to be very successful companies. Many were very successful
companies before or after the ESOP was created, and, candidly,
they do not have trouble getting commercial lending for their
transactions. I used to get a lot of calls saying where can I
get money for ESOPs in the early 1980s. I don't get those kinds
of calls anymore.
I do know, however, that in spin-off transactions one does
see particular problems in obtaining funding for the crucial
feasibility studies, the due diligence studies that will prove
the case that the company can afford to support itself with a
leveraged ESOP.
I want to touch on something. We think the existing
accounting standards impact the financing of ESOPs. We feel
that the accounting standards for ESOPs kind of distort the
balance in the income statements compared to the cash flow
statements. That can be a hindrance in doing ESOP transactions.
Also, I want to make it clear that financing of an ESOP company
is not just up front. ESOPs in the private sector have the
unique responsibility to buy back the stock from departing
employees, known as the repurchase obligation. Often that
involves the financing either through cash flow, borrowing the
money, putting cash into the ESOP, or even buying key man
insurance, employee insurance, which of course is a
controversial step in today's debates over public policy. But
that is another area of financing that I would welcome some
exploring by Congress, or someone.
Let me say this one thing in finishing and conclude why I
think that this hearing is huge. Think about it. Less than 160
years ago in our Nation, sadly and tragically the relationship
between owner and worker was often defined as owner/slave. At
the turn of the 20th century, if a man or woman belonged to a
labor union, often he or she were beaten or denied a job. Less
than 60 years later, in the mid-20th century, the relationship
between an organized bargaining unit and management often
defined benefits and wages in all American corporations. At the
turn of the 21st century, fewer than 11 percent of the private
sector of American workers belong to an organized bargaining
unit.
So what is the message? The message is anyone who thinks
the relationship of owner, employee and capital remains the
same, or that it can be reconstituted the way it was 25 years
ago, candidly, that person doesn't understand what is happening
in the world of work. Whether you agree with his politics or
his recommendations on tax policies and health policies, I
think Bill Thomas had it correct when he opened the debate on
the 2001 Enron ERISA legislation when he said in his opening
remarks, ``There has been a quiet revolution going on in the
United States. That quiet revolution that I am talking about is
the change that occurred over the last century, speeding
significantly in the last third of the 20th century, that there
is becoming less and less a distinction between workers and
owners and more and more companies are being owned by the
workers.''
So this subcommittee is right to say let us make sure that
the trend of more employee ownership is financed properly and
that everyone, not just the tax committees and the labor
committees, get with the trend of growing employee ownership
and let us have the legal, financial, and accounting systems
that make division of ESOP advocates a reality.
[The prepared statement of J. Michael Keeling can be found
on page 73 in the appendix.]
Mr. LaTourette. Thank you very much, Mr. Keeling, not only
for your testimony but your enthusiasm. The only thing you
didn't do so well on was the clock.
Mr. Clem, we are anxious to hear from you. Thank you for
coming.
STATEMENT OF STEVE CLEM, SENIOR PROGRAM COORDINATOR, OHIO
EMPLOYEE OWNERSHIP CENTER, KENT STATE UNIVERSITY, KENT, OH
Mr. Clem. Thank you, Mr. Chairman. The Ohio Employee
Ownership Center at Kent State University appreciates this
opportunity to present its views and your willingness to
consider them. First of all, though, I am not a professor at
Kent State; I am a Senior Program Coordinator at the Ohio
Employee Ownership Center.
The Ohio Employee Ownership Center is a nonprofit
university-based program established in 1987 to provide
outreach, information and preliminary technical assistance to
Ohio employees and businesses exploring employee ownership. We
provide ownership training to employee-owned firms. We are
partially funded by grants from the Ohio Labor-Management
Cooperation Program of the Ohio Department of Development. We
also receive funding from private foundations, dues from firms
belonging to the Ohio employee-owned network, income from
training contracts, donations, and we also administer for the
Ohio Department of Job and Family Services, a pre-feasibilities
study grant program.
In addition, we administer a program for the U.S.
Department of Labor called the National Steel/Aluminum
Retention Initiative. This is a national program to assist
durable manufacturing firms in dealing with the threat to steel
and other durable manufacturing industries. We partner in that
particular effort with the ICA, with the Center for Labor and
Community Research in Chicago, with the Steel Valley Authority
in Pittsburgh, and with the Washington State Office of Trade
and Economic Development.
We coordinate a Business Owner Succession Planning Program
in the Cleveland area. We work with about 60 small- to medium-
sized firms that are part of Ohio's employee-owned network. The
network provides these companies with an opportunity to meet on
a regular basis and learn from each other's experiences. We
also provide various types of training on a number of different
kinds of topics.
In addition, we have an annual Ohio Employee Ownership
Conference that provides a forum for discussion on various
issues relating to employee ownership. It is a one-day event in
Ohio and draws about 300 folks each year from Ohio and the
surrounding States.
Since the inception of Ohio's program in 1987, the OEOC has
worked with roughly 436 company owners and buyout groups
investigating whether employee ownership makes sense in their
particular case. These company and employee groups represent
83,000 employees. Of these, 63 firms, employing almost 13,000,
have implemented partial or complete employee ownership. Many
of these employees would have otherwise lost their jobs due to
plant shutdowns or some other sort of corporate downsizing.
Now, the cost of jobs retained, created, or stabilized
through the Employee Ownership Center at Kent State in calendar
year 2002, which is the latest information we have available,
in the firms that implemented ESOPs in that particular year, it
was $423 per job in Ohio Department of Development funds, a
very small number, I think you will agree, when compared to the
financial, physical, and psychological costs that are
associated with unemployment.
It is a highly cost effective program because essentially
we help people help themselves. Nevertheless, every year we
have lost at least one otherwise viable employee buyout because
of the lack of timely friendly capital. We have seen that
happen year after year almost since the inception of the
center.
You are going to be hearing from Dave McCune from Massillon
Stainless. Let me just say a couple of words about that. This
was a facility that could very well be a profitable facility
operating today. It had customers. It was mismanaged. A loan or
a loan guarantee from something like a U.S. Employee Ownership
Bank for a minority ESOP position could have positively
influenced some prospective equity investors. As I say, you
will hear more about this directly from Dave.
Another more recent instance took place in Youngstown at
Cold Metal Products, where 116 employees were given 10 minutes
advance notice of the shutdown of their facility. The next day
the company filed bankruptcy. Essentially, the banks were
pulling the plug. Just 6 months before, the company had
announced plans to expand that facility, spend money for new
equipment and hire additional employees. In exchange, the
county and the municipality had given them various kinds of tax
abatements, a $165,000 grant, and the State granted tax
incentives as well.
Given the uproar that came with that shutdown, the
employees put together an employee buyout group, petitioned the
OEOC for a pre-feasibility study grant, which we approved. The
study got underway and showed that a successful business could
be resurrected at that facility or restarted at that facility.
It would be restarted at a smaller manning level but restarted
nonetheless and it could be very profitable. Unfortunately,
they were not able to attract a minority investor. The plant
remains closed.
The folks there are putting together a very small
operation, which will continue on into the future. But had
something like the U.S. Employee Ownership Bank existed at that
point in time, we think that would have certainly helped to
have attracted a minority investor and the plant could have
continued in operation.
I see that my time is up as well. I would like to make just
one very quick comment. I believe the proposed legislation has
a provision in there for advance notice and essentially a right
of first refusal. In other words, the opportunity to buy should
be offered to the employees, and I think that is a very
significant part of this particular piece of proposed
legislation.
I am reminded of something called Brainard Rivet in Girard,
Ohio, which finally wound up employee owned and part of
something called Fastener Industries, which is 100 percent
employee owned, but it took a long roundabout way to get there.
This was a profitable company that shut down simply because the
company wanted to move that production to a non-union facility
in Virginia. That particular plant was making $2 million a year
on $14 million a year in sales. It was a very profitable
facility.
The only reason it survived was because of Congressional
pressure once it was found out that this company was sending
its customers to some of its competitors rather than trying to
produce the stuff in Virginia, while in the meantime it was
shutting down the plant in Girard. So we think this is good
legislation and we certainly would support it.
[The prepared statement of Steve Clem can be found on page
59 in the appendix.]
Mr. LaTourette. Thank you, very much, Mr. Clem, and my
apologies. Do you want to be a Professor of Political Science
at Kent State University?
Mr. Clem. No, sir.
Mr. LaTourette. All right. Because I think once it is in
the record, you probably are.
Mr. Megson, we thank you for coming and we look forward to
hearing from you.
STATEMENT OF JAMES MEGSON, EXECUTIVE DIRECTOR, ICA GROUP,
BOSTON, MA
Mr. Megson. Mr. Chairman, members of the committee, thank
you for inviting me today. I have worked in the field of
employee ownership for the last 16 years, 15 as Executive
Director of the ICA Group, a nonprofit organization dedicated
to creating employee-owned companies to save and create quality
jobs, and more recently as the Executive Director of ICA's
sister organization, the Local Enterprise Assistance Fund, or
LEAF, a CDFI that provides debt and equity financing to
employee-owned companies.
LEAF and ICA have been involved in the creation of more
than 50 employee-owned companies employing over 7,000 people.
Employee ownership is a powerful tool. It enables ordinary men
and women to share in the benefits of capitalism and links very
directly the rewards they receive with the efforts they invest.
But it is also a sound economic policy. A recent survey of
every significant study of employee ownership over the last two
decades showed that broad-based employee ownership boosts
company productivity by 4 percent, shareholder return by 2
percent, and profits by 14 percent over what otherwise would
have been the case.
Employee ownership also makes a significant contribution to
our economy by enabling employees to buy businesses that would
otherwise close with a resulting loss in jobs. These closures
occur when small or medium-sized closely-held businesses close
due to inadequate succession planning, or when large
corporations close divisions or factories. An employee buyout
of a company or division scheduled for closure is not easy.
However, when a company is saved, the return on investment is
spectacular.
Some years ago, we helped the employees of Market Forge, a
manufacturer of kitchen cooking equipment in Everett,
Massachusetts, buy their company when the parent decided to
close it. The State, the United Steelworkers of America, and
the parent company each contributed $10,000 to fund the
employee buyout effort. As a result, we were able to save 150
well-paying jobs with generous health and pension benefits, and
the company is returning over $500,000 each year to the State
of Massachusetts in various forms of taxes.
So given their proven benefits, why aren't there more
employee-owned companies in the U.S. today? I believe this is
due to a number of factors. First, the employee ownership
option is not widely known or understood. To my knowledge, only
two States, Ohio and Vermont, have organizations with proactive
outreach programs. At its first conference on employee
ownership, the Vermont Employee Ownership Center attracted more
than 90 businesses, of which 80 say they are now considering
this option.
Second is the cost of putting together an employee buyout.
This is beyond the resources of ordinary workers, especially
those who are about to lose their jobs. They need to hire
professional help to explore whether a buyout is feasible and,
if it is, to create the business plan and package the
financing.
Third, assembling the necessary financing to buy a
significant share of ownership of a company is extremely
difficult. A bank will provide senior debt, but only up to the
liquidation value of available assets. A limited amount of
equity can be obtained from senior managers and venture funds.
The employee group must seek subordinated debt to complete the
financing, and this is extremely difficult to find. My firm,
the Local Enterprise Assistance Fund, and other community
development financial institutions fill this gap for some
smaller transactions, but our resources are minuscule compared
to the size of the need.
In 1992, we worked with the employees of a mold making
factory in Pittsfield, Massachusetts, that was being closed. To
meet the need for subordinated debt in this transaction
required the participation of no fewer than four specialty
development lenders, all of whom were stretched to their
maximum capacity. The story has a happy ending. Since the
employees purchased the company, it has more than doubled in
size, increased its share price by an average of 20 percent per
annum, and returned more than $2 million to the State of
Massachusetts.
Not all employee buyout groups are so fortunate. In the
spring of 2002, the 350 employees of a machine tool
manufacturer in Vermont, a company with a strong brand name and
potential customers, failed to complete an employee buyout
largely because they could not secure the subordinated debt to
plug the gap in the financing package. As a result, 350 well-
paying jobs in Vermont were lost.
In summary, I believe that a Federal Government program to
encourage the expansion of employee-owned businesses through
the provision of loan guarantees, subordinated loans, technical
assistance and outreach programs will yield a very high rate of
financial return. Some of this return will come from the jobs
saved at enterprises that would have otherwise closed. The
majority will come from expanding the number of companies that
because they are owned by their employees will experience a 4
percent increase in productivity, a 2 percent increase in
shareholder return, and a 14 percent increase in profitability.
Thank you.
[The prepared statement of James Megson can be found on
page 100 in the appendix.]
Mr. LaTourette. Thank you, very much, Mr. Megson. Mr.
Adams, thank you for coming, and we look forward to hearing
from you.
STATEMENT OF FRANK ADAMS, PRESIDENT, SOUTHERN APPALACHIAN
CENTER FOR COOPERATIVE OWNERSHIP, ASHEVILLE, NC
Mr. Adams. Mr. Chairman, members of the committee, thank
you very much for the invitation.
The Southern Appalachian Center for Cooperative Ownership
is only 5 years old. Previously, I worked with the ICA Group
out of Boston, and prior to that I worked in eastern North
Carolina establishing worker-owned businesses in a very rural
and very poor part of the State. I am back in North Carolina
now and want to share with you some of the data that is related
to the latest collapse of another industrial sector in North
Carolina, and that is the forest products and allied paper
products industry.
Last year, there were about 440,000 persons still employed
in North Carolina's forest products and allied paper products
industry, and it was the second largest for-profit sector in
the State's economy, at a $20 billion a year business. But
furniture and fixture imports, mostly from Asia, along with
paper and allied products, mostly from South America, are
hammering the State's forest products businesses, leaving
apprehensive employees constantly wondering if their job is the
next to go.
Last Tuesday, a week ago, La-Z-Boy, Incorporated announced
job cuts at manufacturing plants in Morristown, Tennessee, and
Monroe, North Carolina, totaling 480 persons.
Since April 1995, the dreaded termination notice has been
handed out to 13,740 North Carolinians, 9,415 men and women
making furniture and fixtures, 3,315 working in lumber yards or
sawmills, and 1,010 making paper or allied products. Western
North Carolina's 23 mountainous counties, on average, since
June 1, have lost 144 employment positions in that region. That
is, since June of 2001, 144 men and women have lost their jobs
every month. This is a crisis in small rural communities of
dramatic proportions. For many people it is the loss of a third
or fourth generation way of making a living and living a way of
work.
What happens to these men and women after they are thrown
out of their jobs? Lori Kletzner, an economist at the
University of California, Santa Cruz, as part of a large study
on how American industries were affected by import competition,
found that of the half million workers who lost jobs in the
forest products industry in America between 1979 and 1999, 38
percent of them never found jobs again. Of those who did find
jobs, one in five took pay cuts of more than 30 percent. Today,
if you are a logging operator or equipment operator in North
Carolina, on average you will earn $11.58. Take a 30 percent
pay cut of that and imagine what it does to your pantry and to
your pride.
There are some bright spots, however, and I will mention
three. Number one was when Champion International Papers
announced in--I forget the date, it went on so long--in 1997
that the employees and the mill were nonstrategic assets and
that the mill was to be closed or sold at public auction. A
small handful of members of PACE Local 507 decided they were
going to try to buy the assets out. Two years later, after a
rocky, emotional, and draining experience, they were finally
able to find bankers, subordinated debt and purchase a 40
percent equity stake in this $253 million transaction that was
a division of Champion that it no longer wanted making
paperboard for milk cartons and orange juice cartons.
Today, that mill is the second largest producer of
paperboard for milk cartons and orange juice and other liquids
in the United States. It has grown from 1,600 employees to2,100
employees and it has never failed to make a stock distribution
in the years it has operated as an ESOP.
A second one, and a highly unusual situation, a mental
health institute in Asheville, North Carolina, where severely
handicapped individuals have learned how to operate not only
machinery but a business called Sparkling Clean Janitorial
Service. They are no longer entirely wards of the State, they
are making a living to the degree that Federal law allows
harmed individuals to make a living. That I would encourage the
committee to consider reviewing. That is to say, if you are on
the State, as we say down home, those persons should be allowed
to make a living wage and not be capped.
The other one that I would talk about is a cooperative yet
to get started at the initiative of the Blue Ridge Electric
Membership Cooperative in Wilkes County and the Wilkes County
United Way. Wilkes County is the largest in North Carolina and
it is the home of Lowes, which itself is an ESOP and has made
many people there in Wilkes County millionaires. We have been
trying to develop a workers and landowners cooperative to
harvest and produce timber for end users in the marketplace,
and we are stymied in our efforts by the lack of capital, even
though we have the support of the two institutional pillars in
that county.
So for our purposes, as a for-profit business, the
legislation that you are considering and its purposes stand to
serve North Carolinians well, and I wish it were in place today
to serve North Carolinians right away.
Thank you for your attention.
[The prepared statement of Frank Adams can be found on page
53 in the appendix.]
Mr. LaTourette. Mr. Adams, thank you very much. Mr. Dines,
you are the last witness on this panel, and we look forward to
hearing from you.
STATEMENT OF RICHARD DINES, DIRECTOR OF COOPERATIVE BUSINESS
DEVELOPMENT AND MEMBER SERVICES, NATIONAL COOPERATIVE BUSINESS
ASSOCIATION, WASHINGTON, D.C.
Mr. Dines. Good afternoon, and thank you, Mr. Chairman,
Congressman Sanders, and other members of the subcommittee for
the opportunity to testify on behalf of the National
Cooperative Business Association about the need for Federal
assistance to help the start-up and expansion of employee-owned
businesses. In particular, I will address the importance of
worker cooperatives as employee-owned businesses deserving of
incentives from the Federal Government.
I am Richard Dines, Director of Co-op Business Development
and Member Services for the National Cooperative Business
Association, or NCBA. NCBA represents cooperatives across all
industries, including agriculture, food retail and
distribution, health care, energy, finance, housing, insurance,
and many others. Our members include producer cooperatives,
consumer cooperatives, and worker cooperatives. NCBA has a long
and proud history of helping develop co-ops to meet people's
needs. NCBA is now working on an urban cooperative development
initiative that will demonstrate how cooperative businesses
meet the economic needs of urban residents and build wealth and
ownership.
There are thousands of credit unions, housing co-ops,
health care co-ops and others already meeting those needs, but
community developers and Federal agencies usually overlook the
co-op business model. We hope to change that thinking with our
initiative.
The first project of our initiative will be the development
of a worker cooperative. This project will demonstrate that a
worker-owned cooperative will be a critical tool to create jobs
that pay livable wages and offer solid benefits. I am sure that
my fellow witnesses will make the case that employee ownership
works and that Federal assistance to help start and expand
employee-owned businesses is in the best interest of the
American taxpayer. We at NCBA also support such Federal
assistance, but we do not want worker co-ops to be lost in the
discussion.
Employee stock ownership plans, or ESOPs, represent the
large majority of employee-owned businesses in the country. In
most ESOPs, employees do not own a majority of the company's
stock. In the ESOP companies that do give majority ownership to
the employees, only a small percentage give those employees
democratic control over the business. By contrast, all worker
co-ops are owned and democratically controlled by employees of
the business. Workers are members of the co-op, own shares of
the business, and elect a governing board according to one
member, one vote. In some smaller worker co-ops, every member
participates on the governing board. Also, in worker co-ops,
profits are received when earned, not at retirement, and those
profits are taxable.
In my written testimony, I present two excellent examples
of worker co-ops that are giving their employees ownership and
control: teamX, of Los Angeles, California, a manufacturing
worker co-op, and Cooperative Home Care Associates of Bronx,
New York, actually a service co-op. These cases demonstrate
that worker cooperatives can empower workers and perform well
in the marketplace.
NCBA believes that it is good Federal policy to help
develop more worker-owned co-ops. The worker co-ops benefiting
from Federal policy will generate more wealth and ownership
opportunities in some of our Nation's most distressed areas.
The small business community will be able to retain jobs and
productivity in businesses that might have otherwise shut their
doors when their owners retire. The proven business performance
results of employee-owned businesses also demonstrates that the
growth and expansion of these businesses are good for the
American economy.
While legislation to create new financial tools for worker-
owned cooperatives is needed, it is also important that
existing Federal economic development programs explicitly
include development of worker-owned cooperatives as eligible
projects. Any new legislation must tackle the issue of equity
capital for workers starting up cooperatives. This is no easy
task and would certainly require a substantial investment, but
the payoff would likewise be substantial.
The prohibition on lending to cooperatives at the Small
Business Administration should be eliminated and SBA should
even be mandated to offer its services to employee-owned
businesses. Funding should be made available to nonprofit and
cooperative organizations with expertise in developing
employee-owned businesses and worker-owned cooperatives. The
Employee Ownership Centers in Vermont and Ohio, the ICA Group,
the Southern Appalachian Center, and many universities have the
necessary expertise to provide this education and outreach on
worker co-ops.
Finally, caution should be taken in defining what a worker
co-op is. To truly be a cooperative the members must own and
govern the business and control a majority of the seats on the
board. While outside investors or the sellers of a business may
retain a financial stake, the workers must control the
business. If they do not, it is not a co-op.
Thank you again, Mr. Chairman and members of this
subcommittee, for the opportunity to testify.
[The prepared statement of Richard Dines can be found on
page 67 in the appendix.]
Mr. LaTourette. [presiding.] Mr. Dines, my congratulations
to you. That was exactly 5 minutes; we commend you.
At this time, the subcommittee will move to questioning
this panel under the 5-minute rule. And I will begin.
Mr. Keeling, I want to start with you, if I could, because
I was struck by the use of ``up close and personal.'' I think
that your observation was that there may be a perception here
in the Congress that employee ownership can create this sort of
up-close-and-personal relationship in smaller companies, but
perhaps--I thought I heard you to say that you may think some
of us are of the belief that it can't be replicated in larger
companies.
My question to you would be, what factors do you think lead
to that perception, if that is in fact your opinion; and what,
in your view, can we do to not only change that perception, but
to increase employee ownerships in some of the larger
corporations and companies in America?
Mr. Keeling. Oh, I could take a 5-hour rule to answer.
First of all, you are absolutely right that it is my view
that that is the view of Congress, in dealing 30 years with the
tax committees and the labor committees.
The idea that smaller units can create special bonding and
special cooperation is just not unique to employee ownership
critics and viewpoints. There is a view out there that once you
get more than 150 people in any unit--we have employee-owned
companies that won't have a factory or a plant with more than
150 employees; once they reach that level, they will go build
another one, so that they can maintain that 150 level. So
clearly it is something that I scratch my head about.
I didn't lose all of my hair scratching about this
question, because the vision of our association is that the
majority of American employees are significant owners in the
companies where they work. You eliminate the large public
companies, you are eliminating 50 percent of the workers in
America from participating in ``employee ownership.''
So I think it is a huge challenge for the employee
ownership world, to address the questions you raised.
I don't know if the employee ownership world has good,
simple answers to prove that in a large organization you can
have the same kind of synergy and magical kind of your work
that I know Congressman Sanders has seen in Gardner Supply and
King Arthur Flour and Carris Reels, and a lot of companies in
Vermont. But I think it is a challenge to those of us who are
advocates for employee ownership to address this very issue. I
don't think we give great answers right now.
I do know this. I have worked with a lot of large
corporations that have a lot of stock ownership, and I have
talked to the employees in those companies, both midlevel and
lower, and they do feel there is something special about their
company.
Of course, it has been crushing to see companies of that
size go through the turmoil that we have seen in the last 36
months, a la the Uniteds, the Enrons, the WorldComs, because I
can tell you, having visited with employees in those companies
during some of their great years, their belief and their
loyalty and their dedication to their companies was as strong
as what I would see in the smaller companies. So we see some
issues.
I don't come to you with answers, but I think it is an
imperative that we do get the answers, because I agree with
Congressman Sanders and Congressman Bill Thomas, this is
something that is not going to go away. I think in the 21st
century, more and more people will want to be stakeholders and
owners in the companies where they work, and we should get it
right.
Mr. LaTourette. I thank you for that answer. I think the
last couple of sentences of your answer really indicate why
this is an issue that can be addressed in a bipartisan manner
in the Congress, because you don't often hear Congressman
Sanders and Congressman Thomas' name mentioned in the same
sentence on an issue. I think that gives hope to the issue that
you brought before the subcommittee today.
Mr. Clem, in your testimony--and Mr. Megson might have
touched on it, Ohio is only one of 28 States that has passed
legislation encouraging the creation of employee-owned
businesses, and one of only a handful that has a State-
supported program to attempt to encourage that end.
Do you have an opinion as to what barriers or impediments
that are seen by other States that prevent them from following
the Ohio model? In your role, in your leadership role, even
though we have established you are not a professor at Kent
State, in your leadership role have other States or
organizations sought out what it is that Ohio is doing in an
attempt to recreate that in other places in the country?
Mr. Clem. Well, I am not sure that I can really speak to
the reasons why other States haven't followed the same path
that we have. Perhaps it has been the efforts of Professor John
Logue, who founded the Center in 1987, and has dedicated his
life essentially to growing the Ohio Employee Ownership Center.
It is one thing to pass some legislation saying it is good;
it is quite another to actually promote it to the businesses
and to the employees in the State. It takes an awful lot of
work and an awful lot of effort on the part of a number of
people.
Mr. LaTourette. If I can interrupt you for a second, I
didn't write down the number, but I know that Mr. Sanders was
impressed by it. Was it your testimony that the cost of each
job that had been preserved by your activities is $423,
thereabouts?
Mr. Clem. That is the calendar year 2002, yes. And
essentially what that boils down to, that was in the Department
of Development funds from the Ohio Department of Development.
We got a grant from there. If you divide, you know, the number
of jobs that go ESOP during a particular year into the amount
of funds, that is where we come up with that number. It is a
rough number, but it is a pretty good indication that had there
not been something like the Ohio Employee Ownership Center
around to provide technical assistance and so forth, some of
those facilities, at least some of them would not have been
employee-owned. They would have closed, and those jobs would
have been lost.
As far as--you asked about replication possibilities. I
think that the Vermont Center, for example, kind of has arisen
as a result of contact with the Ohio Employee Ownership Center.
Dr. John Logue has been working closely with the director of
that Vermont Center in more or less mentoring and helping them
get this thing off the ground up there. It has worked well.
And we think that the Ohio experience is a good one that
can be replicated throughout the United States, and this bill
would help do that.
Mr. LaTourette. Thank you very much. It is not only rough
numbers, but I think it is a pretty impressive number as well.
Mr. Sanders.
Mr. Sanders. Thank you, Mr. Chairman. And again thank you,
panelists, for, without exception, your extraordinarily good
testimony.
Let me start off with a simple question, and anybody that
wants to answer it can jump in. My experience in Vermont has
been that when we talk about employee ownership, it really
generates a lot of excitement.
When I was Mayor a long time ago in Burlington, we had a
meeting. Hundreds of people came out, including a lot of folks
who had started their own business, were now about to retire
and didn't just want to sell it; they wanted to know how they
could leave it to their workers.
What is your impression in terms of the kind of excitement
that worker ownership, or ESOPs, develop? Am I wrong in
assuming that a lot of people, when they hear about the idea,
are excited? One of you, I can't remember who, mentioned that
in fact not a whole lot of people know that that is an option
out there.
Who wants to speak to that?
Mr. Keeling. Two things. One, I think that the word
employee--the word ``worker'' is a wonderful word, it conjures
up positive images. And in Western society and in modern
society the word ``ownership'' is a positive word. So you are
combining two positive words, and you have a natural positive
reaction.
Having said that, I of course have pondered, as you have,
how could two really exciting words, powerful concepts, end up
being in the backwater of the American economy, in terms of
awareness and concern? And this is glib. But I think that we
have never had national leadership for this kind of policy. I
don't think that you have had your top executive branch
leadership ever say, This is my priority.
This is my priority. And I have a priority also to increase
the ownership equity in America and to increase employee
ownership.
And having said that, I think there are also some
intrinsic, built-in issues with the ESOP model that we should
all honestly look at and examine and talk about and not be
scared of talking about them.
Mr. Sanders. I am sorry to interrupt you.
Mr. Megson. What is your view on that?
Mr. Megson. Well, I would like to state that I think it is
not as widely known as it should be.
When you hold a meeting on ESOPs, a lot of people turn up.
Part of the problem, in my opinion is, short-termism. Outreach
programs need to operate for several years to be successful.
The reason that the Ohio Center has been so successful is
that they have been there year after year after year. My
experience is, based on speaking to people and owners, about
selling their business. We hold seminars every spring and fall
in the Boston area. Nobody sells their business to their
employees because they hear me speak. They think about it for 2
or 3 years and then come back.
So I think there is a lag of about 2 to 3 years. When
people first hear about the idea, they kick it around, and
think about it. It takes a sustained program and the
availability of the kind of resources they have in Ohio. Aftger
hearing about ESOPs, owners think about them and when they come
back the resources are there to help them proceed.
Mr. Sanders. Let me ask a self-serving question as the
sponsor of the U.S. Employee Ownership Bank. Do you think that
something like that would play an important role in addressing
the concerns that Mr. Megson and all of you have raised? Could
that be a real stimulus to employee ownership in ESOPs
throughout this country? Is that something that we need in
America?
Mr. Dines.
Mr. Dines. Sure. I would say that the proposed legislation
would definitely help create new institutions like the employee
ownership centers in Vermont and Ohio.
What we have seen at NCBA, when a grant program was created
at the U.S. Department of Agriculture, a rural cooperative
development grant--this was a grant program to help fund
technical assistance centers around the country-- once that
money was available, centers flourished around the country; and
all of a sudden we see lots of new co-ops being developed in
rural America.
This type of an idea, if it would provide grant funding to
technical assistance centers like the Southern Appalachian
Center, like the ICA group, we would see a lot more of them
popping up around the country.
Mr. Adams. I think it is both a question of long-term
support at the political level.
Certainly Senator Russell Long played a significant part in
bringing these ideas to public attention and giving them
credibility, ironically, as a Senator from the South. It is the
South, at least southern banking institutions, even through
consolidation, which is the least well informed or the least
supportive of this.
And having worked in the South principally since 1978
developing worker cooperatives or ESOPs on the scale of the
Champion International plant, I can say that we are often
greeted not with crowds of enthusiastic people, as I saw in
Vermont, when I worked up there with Bruce Seifer and others of
your staff, but we find no enthusiasm on the part of bankers.
I can tell you a story that came out of Rich Square, North
Carolina, that still gives me chilblains of anger. A zipper
company that had operated there for 20-some years, and Rich
Square closed its doors--this was long before Warren
Legislation--had been purchased by YYK Japan, and 80 workers
were out of work. And we were contacted with--I was contacted
by them.
I went through the process of getting a long-term contract
for industrial zippers for the furniture industry in North
Carolina, and developed a business plan, had a site ready. Went
to the bank with the business plan, went to the bank with the
contracts in hand for $250,000 worth of zippers a year, with
more promised if the product was serviceable.
The president of the bank was a high school classmate of
mine. And I will tell you in all candor in no disrespect to
anyone in this room, he told me and the president, who was a
woman, and the treasurer, who was a black man, that we don't
make loans to niggers and women. And that has been burned into
my consciousness ever since.
And there is a great deal of----
Mr. Sanders. I gather what you are saying is that something
like the Employee Ownership Bank could go a long way in
educating not only workers but financial institutions. I
appreciate that.
My time has run out.
Mr. Chairman, thank you very much.
Mr. LaTourette. Mr. Lucas.
Mr. Lucas. Thank you, Mr. Chairman.
What year was that, Mr. Adams? What period of time was
that?
Mr. Adams. That was in 1979.
Mr. Lucas. Well, I would hope that we have come a long,
long ways in a lot of attitudes since 1979 surely.
Mr. Adams. I hope so, too.
Mr. Lucas. Surely.
Mr. Keeling, for just a moment, it seems quite clear that
one of the common themes here is to get across the knowledge of
the options that exist and the potential that ESOPs present.
And in addition to--to Mr. Sanders' bill, I understand there
are a couple of other efforts out there to generate that kind
of attention, if I could deviate off of this particular bill to
that one.
But I understand one of my colleagues from the Carolinas,
Mr. Ballenger, has introduced a bill to create a presidential
commission on employee ownership. Can you offer me an opinion,
if you have one, about whether something like that would help
to enhance the visibility of these endeavors?
Mr. Keeling. Let the record show that Mr. Sanders is one of
the original cosponsors.
Mr. Lucas. A great American, Mr. Sanders is, all the way
through.
Mr. Keeling. So I am sitting before a friendly audience.
We feel very strongly about that legislation. We think that
the very essence of Mr. Sanders' question about, why isn't
there more attention, is because there has never been a high-
level dialogue. You can say ``debate,'' you can say
``dialogue,'' you can phrase it any way you wish. There needs
to be some attention focused on a trend that I think is not
attracting national attention.
There are many not-fitting-together policies out there that
we have developed over the last 30 years to promote employee
ownership; and I think we need to come to grips with that. We
need to come to grips with where we want to go with employee
ownership in this Nation. I think the presidential commission
could put us there. I think it could do a lot of answering the
questions that the panel--that the subcommittee has raised.
I think what is intriguing about it is, the makeup of the
commission would be dominated by nonmanagement employees and
management employees of employee-owned companies, and people
like the friends we have here on the panel, that are expert in
employee ownership, versus people that are looking at employee
ownership candidly from a very, very narrow frame of focus.
So I think it is very important. And I think what you are
doing here today is absolutely part of that very effort in H.R.
1778, to get a national dialogue going about employee
ownership, and that we should get it right for the 21st
century.
Mr. Lucas. Thank you.
Mr. Adams and Mr. Dines, talking about the co-op movements
in general. There are a variety of endeavors that are going on
out there. In the Third District of Oklahoma, we have a strong
tradition of agricultural producer cooperatives both in
providing resources to farmers and ranchers and in marketing
the results of their efforts.
But it almost seems in recent history--and if you have got
some opinions on this, I would appreciate it; it almost seems
in recent history like my co-ops in rural Oklahoma have gone
two directions. One, they have either become the very
successful multifaceted co-ops--the swine industry and certain
fruit industries--or they have gone the other direction, as it
tends to seem like some of my grain co-ops, that support grain
farmers and kind of wilted away.
The ones, I think, that have enjoyed tax exempt status
mainly were started in the beginning of the last century.
Are there trends like that across the country? Are ag co-
ops under greater strain perhaps than cooperative endeavors in
different parts of the country or in different parts of the
economy?
Mr. Dines. Yes. I would say that ag cooperatives are under
some very particular types of stress because of the farm
economy. But also because farmer cooperatives have a very long
history in the United States, and I think a lot of the older
farmer cooperatives have, quite frankly, managements that have
forgotten why they are cooperatives. And it is up to those
farmer members to remind them that they are co-ops.
And I think that is a very important message to all
different types of cooperatives, whether they be ag co-ops,
rural utility co-ops, which you also have a lot of in your
State, and worker co-ops, that the purpose of those cooperative
businesses is to serve their members. That is why they are
there. And what we have seen is a lot of larger agricultural
cooperatives and cooperatives in other industries forget their
purposes, why they came into being as cooperatives. And some
have even sold out to for-profit ventures.
But, fortunately, there is a lot of discussion and debate
within the cooperative business community about that, and a lot
of those larger and smaller co-ops are recognizing that there
is a good reason why they were founded as cooperatives; and
they will continue as such.
Mr. Adams. If I may add one thing, Richard is absolutely
right, that many people have forgotten the purposes, at least
in the worker-owner sector, which is growing rapidly enough so
that next year there will be a meeting in the Midwest, probably
in Minneapolis, to establish the North American Federation of
Worker-Owned Cooperatives.
Having said that they are growing, I fear that they may
suffer, the successful ones, and they have the same rate of
success as any other business, success or failure. I fear that
they too may forget their origins, because there is no single
academic institution that I know of in the United States, with
the exception of the University of California at Berkeley, from
time to time, that is offering sustained courses on management
of worker-owned cooperatives where the relationship between
capital and labor is significantly altered.
And I feel that without the development of informed and
educated young men and women to prepare themselves for
leadership in these worker-owned cooperatives, we will witness
a dearth of leadership and a return to normalcy. It is also a
very serious problem in the industrial sector.
Managers in this country are educated to represent the
interests of the capital investors. And that, for all intents
and purposes, means directing the lives of men and women in the
corporation that they are working for.
That said, when there is a transformation through a buy-out
or through a 1042 rollover into an employee-owned firm, the
managers are seldom prepared for allowing new owners to offer
up ideas that can genuinely improve the productivity and
efficiency of the corporation. And this has happened on several
occasions at Blue Ridge Paper Products, the name of the
corporation that resulted from the Champion buy-out. I would be
glad to share that with you later, but I don't want to take any
more of the committee's time.
But there are innumerable examples in that company alone
where good ideas have come up out of the work force and
management. Unless they were asked by the board of directors,
have you passed this by the joint labor-management committee,
have habitually--not out of maliciousness or out of mean-
spiritedness, but out of their custom--circumvented asking
employees how to get a better product and more efficiency.
Mr. Lucas. Thank you, Mr. Adams. You, too, are a great
American, for the record.
Mr. LaTourette. Thank you very much, Mr. Lucas, for your
good questions and kind comments.
Mrs. Maloney.
Mrs. Maloney. Thank you, Mr. Chairman, and Ranking Member
Sanders for holding this hearing. And I thank all of the
panelists. It is a very exciting idea as a way to expand jobs
and ownership and, really, capital in America. I think, if used
adequately, it could probably save many manufacturing jobs in
America, and other jobs, industrial jobs.
I found your remarks, Mr. Keeling, very interesting when
you referred to Dr. Kelso, who envisioned ESOPs not as a tax
incentive program, but more as part of the financial services
structure of our country; and it is has always been a tax
incentive program. So it is very interesting that it is here
before Financial Services where he envisioned it to be.
I had the opportunity to work with Dr. Kelso when I was a
member of the city council in New York, and tried to save a
steel manufacturing company in my district. And what happened
at the time we got involved, at the time that the workers came
to us and I reached out to Dr. Kelso to package it, they had
already sold the equipment, the buyers had gone elsewhere, and
we were just at the point where it was impossible to salvage
the company and to salvage the jobs.
And I feel that the proposal that my colleague from Vermont
has put forward, if we had had technical assistance, if we had
had a loan line, possibly that plant would still be in New York
providing services, paying taxes, with the employees with a
stake in the South Bronx there and still working and helping
the economy.
So I would like to join my colleague, Mr. Sanders, in this
effort. I think it is a very interesting proposal, and one that
could help expand the economy in our country and keep our jobs.
I would like to ask Mr. Keeling--I represent an urban
district, and really the backbone of many urban districts are
service jobs and small businesses. Most of the businesses in a
lot of urban areas are small businesses. And can ESOPs work,
say, with a real estate management program, or with a pizzeria
that does catering? Or how small can an ESOP be? Do you have
models of how it has worked with small businesses? Could you
comment on that?
Mr. Keeling. I also want to comment that, I appreciated
your reviewing your history with employee ownership when you
were on the city council in New York City. You may recall at
the time you came to Washington and worked very hard with the
New York congressional delegation to preserve a tax incentive
that was unique at that time to lenders, where they excluded 50
percent of their interest income for giving loans to ESOP
companies. And there was often a feeling that if that had been
preserved--we didn't succeed, but you certainly tried mightily,
along with others, to preserve it--perhaps some of the distress
loans would still be made.
I mentioned that in my written testimony, by the way, and I
am happy to hear you relive your experience with Dr. Kelso
during that time.
To answer your question, there is a general rule of thumb,
that a corporation should have a payroll of at least 20
employees to be viable for a leveraged ESOP.
Having said that, Congresswoman, in your Congressional
district, I think we have five or six smaller businesses that
are ESOP, and who belong to the association. They are in the
printing business, architectural firms and other businesses
typical of what you would see in some of the Manhattan office
buildings in your district.
The service industries are probably the fastest growing
group of companies, in terms of creating ESOPs, of any. I think
that is why we have seen a growth of the number of companies in
the mid-Manhattan, northern Manhattan areas that you are
representing in Congress.
I do believe, once you get below 20 employees it becomes
problematic. I think certainly at less than 20, at that size,
you are looking at your one person one vote worker co-ops. That
is an area that is not being promoted as well, because most
businesses are hiring more than ten or eight people.
The only final thing I would say is, some of our more
successful companies--Hot Dog on a Stick, Round Table Pizza--we
have a lot of restaurant, fast food, service provider-type
companies; and I can't cite one for you in New York City, but
we will certainly work on that.
Mrs. Maloney. I always thought that taxi companies would be
examples of what would really work for employee stock
ownership. I think it is a great idea. It is really a win-win
for the economy, for the workers, saving the jobs, saving the
businesses. And I really have been interested during my term in
Congress, to see really a lack of support or enthusiasm,
because if we put our tax incentives there, and our structure
there, the opportunity to grow jobs is tremendous, and it has
been successful.
I thank all of you for your work. And the inspiration of
Dr. Kelso. You bring back a lot of memories. He was an
extraordinary individual, and it was an honor to work with him.
Mr. Keeling. One tiny comment about what you just said.
The fact that I think you don't see the enthusiasm that you
would have anticipated before you came is that the people who
work on employee ownership policy in this nation, both in the
congressional committees and in the agencies, the ownership
piece is a subset of what they think about. It has not been
escalated to being Roman numeral I of the piece of paper of the
outline.
That is why it is so important that this committee is
interested breaking the barriers to getting another bigger
focus on ownership. I think that is why, as Congressman Lucas
mentioned, we need a national debate about employee ownership,
so it is thought of in grander terms than just being a detail
in the Tax Code.
Mrs. Maloney. I agree. Thank you very much. My time is up.
Mr. LaTourette. I thank the gentlelady.
Ms. Brown-Waite.
Ms. Brown-Waite. Thank you, Mr. Chairman. I am not sure who
to address this to. I recently attended a meeting with SCORE,
Service Corps of Retired Executives. They were presenting
awards to some of the SCORE members and also to one of the very
successful businesses that they helped.
While relating this to a cooperative, having employees who
may have built widgets and been darn good at it, then becoming
the owners of the company or participating in the cooperative,
what kind of support services are given to them so that we are
sure that the now employee-owned business or the cooperative is
truly a success?
Do you utilize SCORE? What kind of additional kind of
management services are available to help those businesses?
Mr. Keeling. Congresswoman, I sit here and I talk about
public policy. But probably the biggest thing that this
association, and the Ohio Center--and I think the Vermont
Center will do the same thing, and the gentlemen at this
table--is providing education and technical services on how to
manage an employee-owned company. It is not an easy task for
the very reasons you mentioned, because a lot of traditional,
the ways we used to do things, are being broken.
It is a very rewarding way to manage an organization if you
get there. But it takes a lot of education. And one of the
things that we preach, and I know all of the organizations
preach, it of course takes leadership and a commitment from the
executives of those companies--and I think you are going to
hear from some in a second--that they are committed to the
time, the energy and the effort to have their employees learn
about our capitalistic system, free enterprise, profit and
loss.
We certainly welcome any organization such as SCORE, or the
organizations we run dedicating time and energy, break-out
sessions, videos, pamphlets, booklets, we all have them, that
are designed to do exactly what you are talking about.
That is an essential piece of making employee ownership
work. Absent that, I am afraid that it may just flounder as
something that a few people put together for a service fee.
Mr. Megson. My organization helps groups, especially inner
city groups, start worker co-ops around the country. We do tap
SCORE, particularly for board members.
Part of the services we provide are, training and
education, SCORE can be extremely valuable in providing a board
member to worker owned companies. Outside resources who come in
and provide a larger overview, are very valuable. We do use
them and we appreciate them.
Mr. Clem. In Ohio, at the Ohio Employee Ownership Center,
we have an employee-owned network. And we provide about 18 days
of training each year on various topics, supervisory practices,
high performance workplaces, how to read your financial
statements, a number of things that they are involved with on
how to be an employee-owner.
But those are open to any employee-owned company--well, any
nonemployee-owned company, for that matter. But we primarily do
it for the employee-owned network. But as I say, others are
available or, you know, are certainly permitted the opportunity
to attend if they so desire.
And we coordinate this business succession planning
program, which tries to educate folks that are thinking about
retiring and don't want to see their facility liquidated, and
they don't want to see somebody else buy it, close it, send it
overseas whatever, and are willing to explore employee
ownership and let their employees have a shot at running it.
Ms. Brown-Waite. Just a follow-up question. Other than
money and maybe management skills, what would you say is the
third greatest impediment to more employee-owned business, or
cooperatives?
Mr. Keeling. Fear. Fear of letting go. Giving up.
Delegation. Losing control. That is a personal opinion of mine,
but I have been around ESOPs since 1982. I have been in over
300 ESOP companies in the last 10 years. And it does take a
certain set of core values to be willing to, ``lead from the
center'' versus being a top-down leader. And I think that we
see in management books and management training the last 25
years, more and more emphasis on that leading from the center.
I think there is a transformation going on. It is not as
fast as some of us advocates would like to see.
But I think it is a fear of losing control of something
that you created and nursed and grew yourself.
Ms. Brown-Waite. Thank you.
Mr. LaTourette. I thank the gentlelady.
Mr. Watt.
Mr. Watt. Thank you, Mr. Chairman. I don't think I will ask
any questions. I did want to come back and welcome Mr. Adams,
who is from my home State, and thank him for being here, and
apologize to the rest of the witnesses other than the first one
I heard. And then I had to run out the door to another
obligation and couldn't make it back in time to hear any of the
rest of their testimony.
But I think we are addressing some things that, especially
in North Carolina, are critically important. And if we can
figure out a way to make more of these things work, we would
solve some of the employment problems that we have had. And we
have certainly seen it in the--first, in the textile industry,
and now in the furniture industry, and some of the industries
related to furniture.
We are having some hard times in North Carolina. So if this
has some good possibilities and we can incentivize it to
happen, I am certainly going to try to be supportive of it.
So thank you again for being here, and I will yield back
and maybe we can expedite the next panel.
Mr. LaTourette. I thank you very much, Mr. Watt.
Mr. Sanders.
Mr. Sanders. Just very briefly.
Thank you, Mr. Chairman. I just again want to thank the
panelists. Also I have been very pleased by the number of
members from both sides, actually more Republicans than
Democrats who have been down here to listen to this. That
suggests to me that there really can be a bipartisan approach.
We are all losing good-paying jobs in our districts. We are all
searching for solutions to rebuild manufacturing and other
sectors of our economy.
And I hope very much that this is a start to a good
bipartisan effort to create legislation that will move us
toward ESOPs and worker-owned plants throughout this country.
So I feel very excited and look forward in a moment to
hearing the second panel.
Mr. LaTourette. I thank the gentleman very much. We are
going to be delayed a couple of moments for that.
Mr. Feeney, you are next.
Mr. Feeney. Thank you, Mr. Chairman. I will try to be
brief. And, really, I just wanted to throw out to some of the
panel members that have been advising some of the employee
groups in these situations, because I will tell you candidly,
it is not typically my party that is trying to protect people
from themselves in the area of investments and market
decisions. And we are very much, and I certainly am very much a
free marketer, and tend to be laissez-faire when it comes to
running one's own affairs.
I am also a huge advocate for anything that will help
encourage people to put a portion of their savings away for
retirement, for future needs for things like ESOPs and for
401(k)s. If everybody would save for retirement 10 percent of
everything they earned, I don't care how low their wage scale
was, we would be a much better country and they would probably
be much better off individually. But having said that, most of
those plans rely on professional money managers, and they also
rely on diversification.
My wife, for example, is an engineer. For quite a bit of
time, if she had lost her job, she would have lost her health
care. If she had lost her health care and her job, about 50
percent of her retirement savings, because of the way that
things were structured 15 years ago, would have been lost if
the company, for example, had gone bankrupt.
Having all of your eggs in one basket is almost always a
terrible idea, unless you happen to hit the one wheel on the
roulette wheel that finishes first.
And so it occurs to me that, to play devil's advocate for a
minute, I certainly am not opposed to ESOPs being given
favorable or at least reasonably fair treatment if there is a
considered reason and value for employees to go ahead and
purchase an employer. It seems to me that next to the employer
and his or her accountant, they are probably in the best
situation often to know about the future prospects of the
business. But it does also tend to have some incentives to put
all of your eggs in one basket.
If you are going to lose your job if the plant moves, it
may have been a perfectly reasonable decision to move that
plant elsewhere, but you are not able to make a reasonable
decision in the short run if it means unemployment. If you have
got a whole host of people that are incentivized to make an
unreasonable decision, it seems to me that what you do is, you
take people who are burdened by a potential plant closing or
downsizing and you incentivize them into a situation where they
have gone from a bad situation to a horrible financial
situation.
And then, finally--and I know there are some management
folks that advise these employees. But--and again to play
devil's advocate and throw it open to whoever would like to say
a few words--it occurs to me that a great wide receiver on a
football team is not necessarily the best coach. And the best
coach on a football team is not necessarily the best general
manager when all is said and done.
And it occurs, further, that to the extent that you are
going to democratize the process, that possibly the worst way
to run a football team is that on the 50 offensive plays or so
every game, and the 50 defensive plays, is to huddle up and
take a vote, six votes in each huddle wins on what the next
play is going to look like.
So, again, I love the idea of making every American a free
market capitalist. To the extent that is where we are going in
general, I am very sympathetic.
But if you can address some of my concerns.
Mr. Keeling. Let me jump in, because you just raised an
issue that I have spent the last 36 months discussing. And with
all due respect, I will probably say some things that you
totally disagree with, just as you said some things that I
don't agree with.
Number one, let me point out that 85 percent of the
companies in America with employee stock ownership plans have
other diversified plans. In those 85 percent companies, usually
their 401(k)s hold no company stock.
Number two, let me point out that in this Nation, oddly
enough, company stock compensation has been very normal since
the 19th century, long before the Income Tax Code, long before
the labor laws, long before Social Security. And, candidly, I
defy anyone to point me to a time in our society when there was
a significant number of Americans that were living in poverty
or near poverty because they had worked for a company that
engaged in company stock compensation.
Do I deny that there are exceptions to the rule? No, I am
not stupid. I don't deny there are exceptions to the rule.
Number three, I would point out that the concept of
diversification comes out of 12th century England, and it
arises from a common law concept that once you have something,
it is smart to diversify. Our ESOP laws, in essence, endorse
that. Lou Kelso endorsed that idea. You don't make a lot of
money from taking a little bit of money and spreading it around
in little bitty places. John Rockefeller didn't do that. The
duPonts didn't do that, et cetera.
Mr. Feeney. I am talking about the bout. That is where we
get into----
Mr. Keeling. Let me go to the next thing.
We had cited on the panel 60 studies in the last 20 years
that these companies that were employee-owned, in essence, did
better, et cetera. Now, those are average numbers. I accept
that. In the capitalistic society, people don't hit home runs
all the time; often they are lucky to get a bunt single. But
the track record is strong.
Finally, you think about the football team, that one is
right down my alley, because I like to give speeches about a
well-run employee-owned company being just like a good football
team. And probably the best example is to take what the tight-
end does. They give him a big playbook. But that tight end has
been given the tools and the knowledge and the study time to
recognize maybe 50 different defenses that he is going to see
when he steps up to that line of scrimmage.
Guess what? He doesn't run over to the coach every time he
walks up to the line, and say, coach, they are in this defense,
what in the world do I do now? The coach has delegated to him,
provided him the education, the tools, to recognize the
situation that he, as the tight end, is facing. And he makes
the decision, who is his primary blocking assessment on the
play--one of about a hundred in the playbook, by the way, to
decide.
So the well-run employee company, no, doesn't sit down and
have votes on each and every thing. But guess what? People are
given the tools to make the decisions right there in a
dignified self-sustaining, self-worth way that makes that play
work.
And that tight end made the right decision and didn't have
to run to the coach or to the quarterback saying, what do I do
now?
That is--an example of good employee ownership is a good,
well-run coached football team.
Mr. Adams. I would encourage the Congressman to look at
Springfield Remanufacturing in Missouri. It is a paragon of
exactly what our colleague is speaking about where employees
have been provided, instead of being excluded from information
that is needed to make an assessment about what assets they
need to produce Product A or Product B, they are incorporated
in the process and encouraged to make a decision about the
financial needs that they have, and the hours that they need to
do it, to produce a certain number of remanufactured diesel
engines.
And that company has spawned several dozen other companies,
including the company called the Great Game of Business. So I
think that there are examples, certainly in the United States,
and certainly in Spain, where the questions that you raise have
been answered, and are being answered daily by men and women
who are included in understanding the financials, understanding
the financial market, understanding their market, and
understanding what it takes to make their product or their
service competitive and profitable and efficiently done.
Mr. LaTourette. Thank you, Mr. Feeney.
Mr. Royce.
Mr. Royce. Well, I am going to wait until our next panel.
Mr. LaTourette. Well, gentleman, you go with our thanks. I
have been reminded that Chairman Bachus has requested that the
record of this hearing remain open for 30 days. If there is
additional information you wish the subcommittee to receive,
and it may have just been as desirous so Mr. Sherman can submit
more nice things about him, I am not so sure.
But if there are answers to questions you think need to be
supplemented based upon your oral testimony, please feel free
to do that. And on behalf of the subcommittee, we thank each of
you for your time this afternoon and your informative
testimony.
The second panel to come before the subcommittee this
afternoon will include Mr. George Ray, who is the CEO of
LeFiell Manufacturing Company in Santa Fe Springs, California;
Mr. Dave McCune, who is the President of the United Steel
Workers of America, Local 1124-01, on behalf of the Massillon
Stainless, Inc., in Massillon, Ohio, Ms. Sherry Ceresa is a
Statistical Analyst, Gardener's Supply Company in Burlington,
Vermont, Mr. Larry Owenby, who assisted on the employee bout of
RFS Ecusta, in Brevard, North Carolina, and Mr. Monty Payne,
the International Representative, Pace International Union,
AFL-CIO, CLC, Hattiesburg, Mississippi.
As with the last panel, we thank each of you for coming
this afternoon. And before we hear from you, a couple of
housekeeping matters.
We have been notified by the floor that the Internet
Gambling Bill, which has occupied the attention of our
chairman, there may be a series of votes between 3:45 and 4:15.
And if that is the case, we will take the necessary recess. We
apologize for that, but that darn voting thing sometimes gets
in the way of what we like to do in the committees.
Before listening to testimony, Mr. Sanders has asked to
make a few remarks about our witness from Vermont, and then Mr.
Royce also wishes to make some introductory remarks.
Mr. Sanders. I wanted to welcome all of the panelists, and
especially thank Sherry Ceresa for being with us. Gardener's
Supply is an outstanding business in Burlington not only in
terms of employee ownership, but in a million different
contributions to our city and our State.
So, Sherry, thanks very much for being here.
Mr. LaTourette. Thank you, Mr. Sanders.
Mr. Royce.
Mr. Royce. Thank you, Mr. Chairman. I want to take this
opportunity to introduce one of our witnesses, Mr. George Ray,
of LeFiell Manufacturing Company, which is an employee owned
ESOP in Santa Fe Springs, California. George is the chairman of
the board and a member of the board of governors of the ESOP
association.
But one of the reasons that I think it is important to have
him here today is because this has been one of the longest
operating ESOPs. I don't think we would find a better example.
And he began his career with LeFiell in 1962, working his way
to become CEO in 1987.
This is an aerospace firm. It became, as I mentioned about
30 years ago, an early ESOP. Under George's leadership, this
ESOP has grown to ownership of 60-some percent of the stock
from about 30 percent before his tenure. So this is sort of the
ambition of ESOPs.
At the same time, they have put about 15 million in cash
into the ESOP.
I am going to take the opportunity to commend you and also
our ranking member, Mr. Sanders, for the interest that you have
shown in this topic and bringing this issue to the
subcommittee.
And I think there is no question, but that ESOPs have
played an important role in the U.S. Economy and have allowed
thousands of employees to share in the benefits of their
respective firms' successes through stock ownership. And there
are no doubt ways that we can assist in this.
And so I look forward to hearing from our witnesses. Thank
you, Mr. Chairman.
Mr. LaTourette. Mr. Royce, thank you very much.
Once again, to all of our witnesses, welcome. I tried to
talk to the last panel about the 5-minute rule. They ignored me
and they kept talking anyway. But do your best if you can. And
the lights are in front of you.
And, Mr. Ray, thank you for coming. We look forward to
hearing from you.
STATEMENT OF GEORGE RAY, CEO, LEFIELL MANUFACTURING COMPANY,
SANTA FE SPRINGS, CA
Mr. Ray. Good afternoon, Chairman LaTourette, and Ranking
Member Congressman Sanders, and members of the Subcommittee on
Financial Institutions and Consumer Credit.
First, I would like to thank Congressman Royce for his kind
introduction. Back in California, we appreciate all of the good
work that he does for us and our communities.
I am here to talk about ESOPs. And the ESOP community,
first of all, we appreciate Congressman Sanders and the fact
that he has pushed open the door to review how this Nation can
finance more employee ownership.
I will tell you a little story about vision and sharing and
ESOPs. As Congressman Royce said, I started at LeFiell
Manufacturing in 1962 as a machine operator. And today I am the
Chairman and CEO.
LeFiell Manufacturing Company traces its roots all the way
back to 1930 when Mr. LeFiell began a small machine shop
business in southern California in Los Angeles. And from 1930
to 1954 its primary business was supporting the meat packing
industry, but in the 1950s, the company began to produce
structural parts for the aircraft industry. And when I joined
LeFiell in 1962, its primary work was in that industry.
At that time we had about 40 people. Today we have 110
employees, and they are all owners. And we are now the leading
supplier of precision tubular parts in the world. We make
aerospace assemblies. For example, we produce 6 miles of
hydrogen fuel lines for each Space Shuttle.
But in 1954, Mr. LeFiell incorporated to a privately held C
Corporation. And the reason he did that was so that he could
share the company with the employees, being able to give them
stock. And in 1974, when the legislation to allow creation of
ESOPs was enacted by Congress, LeFiell was one of the first
companies in the United States to form an ESOP. And from 1974
to 1986, the ESOP and the company growth was funded through
earnings, company credit, and the issue of new shares.
By 1986, the ESOP then had accumulated 30 percent ownership
in the company. With current retired employees owning the
balance of the company, there were no shares outside of the
company employees.
In 1987, a new strategy was initiated to purchase stock
from retired employees, because now the people that started
there in the 1940s were trying to retire and trying to get some
of their money back out, along with Mr. LeFiell. Today the ESOP
has 67 percent ownership. And now, there are over 250 owners of
the company.
In fact, it would take the 40 top owners of private and
ESOP shares to reach 50 percent ownership of the stock today.
And that is what I would consider to be broad-based ownership.
Today, we are also studying a plan to purchase the balance
of the shares so that in the next months we can become 100
percent owned by the ESOP.
It has been a wonderful journey for me and my family, and
all of the employee-owners of LeFiell, where each employee has
received a major benefit for retirement from the company that,
in fact, they helped build.
Has an ESOP been good for employees and LeFiell? You bet.
Yes, sir. Let me give you some examples. The average employee-
owner at LeFiell has an account balance of $129,000. 19
employees with 21 to 25 years of service have average account
balances of $217,000. And there are 11 employees who have over
25 years of service, and they have an average account balance
of $357,000. This will certainly contribute to a much happier
retirement for these employees and their families.
And one other thing. At LeFiell, we pass on the voting to
the employee-owners in the ESOP, and they elect the board of
directors each year. In fact, I was just elected to the board
again last Saturday. We also have pass-through dividends. So
the employees as LeFiell understand ownership while they are
working. Each year when we have a profit there is an ESOP pass-
through dividend.
As the President of The ESOP Association said earlier, 75
to 80 percent of the employee ESOPs created in America are the
result of existing owners trying to sell their stock exactly
like Mr. LeFiell did. Tax laws enacted in 1984 and 1986
triggered companies to leverage their ESOPs formally, where
debt is supported by the ESOP and the stock all goes into ESOP
suspense accounts; this is the method that LeFiell is currently
considering.
Being an employee-owned ESOP has had many benefits for us
over the years. In fact, our customers recognize the value of
our ESOP and the stability of working with a company that is 72
years in business.
I know that your full committee oversees the Nation's
accounting standards and has reviewed the work and proposals of
the Financial Accounting Standards Board, FASB. Oddly enough,
the manner in which the accounting standards treat ESOPs, in
some instances, healthy companies might be impacted as
employee-owned companies get financing more than money is
available.
There is no question in my mind that the 1993 accounting
standard hinders the creation of ESOPs. Now, I am not an
accountant, and today's hearings are not about accounting
treatment of ESOPs. I wish to make two comments, however. One,
our problems are not about reporting the ESOP stock
compensation as expense. In fact, ESOP contributions are
reported as expense.
In conclusion, let me summarize my statement. The
experience of LeFiell Manufacturing Company with employee
ownership through ESOP has been very positive for us. I would
state that LeFiell has not had significant issues in getting
financing because we have been an ESOP, and those of other
companies that I am aware of have not had a problem getting
loans. I think that, as President Keeling said, it might have
something to do later on with repurchase liability.
I do have a concern that recent accounting standards may
make it harder for companies to obtain financing from lenders
to execute an ESOP leveraged bout or raise capital for
expansion.
We believe that your hearing is sending a signal that
employee ownership is more important to the well-being of our
economy and our employees than the arcane tax laws or hard-to-
fathom retirement income security. Your hearing reveals areas
that need more review. I believe, however, that as the
Financial Services Committee commits to ownership, we will see
more financing available for those companies that might not
otherwise have been able to get it, and enable those employees
to be owned just like LeFiell Manufacturing Company.
Thank you very much for giving me this time.
[The prepared statement of George Ray can be found on page
111 in the appendix.]
Mr. LaTourette. Mr. Ray, thank you very much for your
testimony.
The bells that have just gone off indicate that we are in
the process of having a 15-minute vote. We are going to try to
get your testimony in, if we can, Mr. McCune. I see my tough
clock talk really had an impact on Mr. Ray. And let's see if we
can get you--we welcome you here, we are thankful you are here.
We look forward to your testimony.
STATEMENT OF DAVID MCCUNE, PRESIDENT, UNITED STEELWORKERS OF
AMERICA, LOCAL 1124-01, ON BEHALF OF MASSILLON STAINLESS, INC.,
MASSILLON, OH
Mr. McCune. Thank you, Mr. Chairman and Mr. Sanders and all
distinguished members of the committee. I am David McCune,
United Steel Workers Local 1124, unit 01, unit chairman.
I represent the employees of a long-standing stainless
steel cold rolling facility, last known as Massillon Stainless,
Inc., located in Massillon, Ohio.
Mr. McCune. I am here today to provide you a history of our
facility along with a brief summary of our ongoing efforts to
save and reopen the facility in which we worked. For, you see,
we have fought for the last several years to keep our facility
operational not only because of our jobs there but also because
we believe we fight for a piece of American history.
The facility in which we worked was originally part of the
old Republic Steel Corporation. At that time we were known as
the Enduro Division of Republic Steel. Our facility was the
first all-encompassing manufacturer of stainless sheet and
strip in the United States.
As I alluded to earlier, we consider our plant, our
facility, as being a part of the history of America. Much of
the product that was manufactured in our facility over these
past many years contributed to some of the most famous
landmarks of our Nation, has aided in the arming of our Armed
Forces during war, along with supplying normal everyday
businesses as well.
If you have ever had the opportunity to visit the former
World Trade Center, the Twin Towers, if you will, when you
stood in that big, shiny beautiful lobby, that shiny stainless
steel was produced in our facility.
If you ever visited the Empire State Building, again, the
shiny stainless steel trim, not to mention some of the unseen
heavy construction material was produced in our facility.
The same can be said in regard to the Chrysler Building,
for we produced the shiny ornamental stainless that you see on
and in that building as well.
These are just but a few examples of our contribution to
our Nation's history.
Our facility also contributed to the arming of our Armed
Forces in World War II, Korea, and Vietnam. We feel as workers
in this facility we have, through the production of high-
quality stainless armor plate, contributed not only to our
Nation's freedom but to the freedom of many other nations of
the world as well.
As I mentioned earlier, our product is seen by nearly all
of you, depending on your health and your eating habits,
possibly on a weekly if not daily basis. When you are sick,
need care, have to visit your physician, these patient care
facilities quite probably contain stainless steel produced in
our facility. Many, many of the hospitals and doctors' offices
east of the Mississippi River quite probably utilize stainless
steel produced in our facility in their patient care facilities
through many, many different applications.
The same can be said for those of you that might
occasionally eat at a McDonald's restaurant built prior to
1999. The stainless steel you see being utilized as countertops
in the serving area, anywhere you might see stainless in a
McDonald's restaurant east of the Mississippi was more than
likely produced in our facility.
So I believe you might understand, with our contributions
to our Nation's building history, our contribution in providing
armor plate to our forces in time of war, along with our
contributions to people's everyday lives, why we are proud of
and willing to fight for the continued existence of the
facility and our jobs there.
We--and by ``we'' I mean not only those of us that still
hold out hope of reopening the facility and working there
again, but also because so many of us are second- and even
third-generation steelworkers of the facility, we believe we
fight for our fathers and grandfathers as well. We believe we
fight not only for our manufacturing facility but also for a
piece of American history, a history that not only we but a
history that our fathers, grandfathers and, yes, even some of
our grandmothers contributed to through these many, many years
of stainless production in Massillon, Ohio.
It is because of our willingness to continue to fight for
survival that I am here today. For I truly believe that if a
vehicle such as The Employee Ownership Bank had existed last
year, when I was first made aware of the financial position of
the company, we would still be in operation today, rather than
hoping and praying that our last interested entity steps
forward, purchases the facility and, in the process, saves our
jobs and a piece of all of our American history.
I will share with you a brief history of our most recent
efforts to save the facility, along with why I believe we were
unsuccessful, at least to this point, in saving the facility.
Last April, through a joint Labor/Management Steering
Committee, the employees were notified that the company's
financial position was eroding and that cost-cutting measures
would need to be implemented. At this point, as I had nearly
since the initial purchase of the facility by Jindal Strips, I
inquired of their interest in a possible ESOP of the company.
But I believe, due to our cultural differences, the ownership
was unwilling to explore, as they had been unwilling before, a
shared ownership of the company with the employees. You see,
Jindal is a company from India, where employee involvement is
taboo.
Most people were amazed I was able to get management groups
to involve themselves in a team-based work system. No one was
surprised I could not convince them to share in the ownership
of the facility, until July of last year when management
approached me with their willingness to explore the possibility
of an ESOP. It was at this time we requested representatives of
the Ohio Employee Ownership Center to come to the facility and
explain the hows and whys ESOP companies make sense in today's
business world.
At this meeting, it was decided that pre-feasibility
studies should be performed and that its findings would
determine what course, if any, could be taken to save the
facility and our jobs. The pre-feasibility study rendered a
decision that the company had waited too long, the business was
now in dire straits, and that an ESOP was at this time not an
option. It was also at this time that our efforts became a
``save the facility'' effort through the hopeful identification
of a strategic partner.
We followed the guidelines set forth by the OEOC, and after
interviewing several firms it was jointly decided that Locker
Associates, headquartered in New York City, presented us the
best opportunity to identify a potential strategic partner.
Through the funding of the OEOC, along with the generous
donations by the City of Massillon, along with both the
district and local union, we were able to retain Locker
Associates to begin the search.
Locker Associates contacted many entities and were in the
process of identifying a potential partner when the owner/CEO
of Jindal Strips arrived at the facility and informed everyone
he no longer desired to be a part of the facility in any
capacity and shortly thereafter announced the impending
shutdown of the facility. This was last September.
At this point, the effort to save the facility by now
identifying a purchaser became an ``employee only'' effort.
Rather than bore you with all the many ups and downs we
have endured these past several months, I will give you but one
example of how, had an employee-ownership bank existed, why I
believe we would still be operational today.
Locker Associates identified a long-standing domestic
company that was willing to purchase the facility and in the
process include the employees in the ownership of. But because
of the financial climate not only in the country but in the
steel industry in general at the time, this entity was unable
to identify a lending institution willing to invest in a shut-
down stainless cold rolling facility.
Ladies and gentlemen, it is at this point that I truly
believe, had a vehicle such as the proposed Employee Ownership
Bank existed, we would have been able to jointly purchase our
facility in a partnership with this entity. But because no such
vehicle exists, I find myself out of work and hoping that, as I
indicated earlier, our last interested party will step forward
and purchase the facility and save our jobs.
But should they decide to not purchase, our jobs and a
piece of our American history will cease to exist forever. This
site will be razed, the equipment sold, most likely to a Third
World nation, and the machinery that has produced material that
has fought three wars, aided in the construction of some of
this Nation's most notable buildings and landmarks will be
producing stainless steel in another country only to be shipped
back into our country at the cost of American manufacturing
jobs.
I appreciate everyone taking the time here today to listen
to the story of our plant and of our most recent fight for
survival but, most importantly, that you are here today to
hopefully take a giant step in the direction of creating a
vehicle that will help workers of this Nation help themselves
now and into the future.
Mr. LaTourette. Mr. McCune, thank you very much for your
testimony.
[The prepared statement of Dave McCune can be found on page
95 in the appendix.]
Mr. LaTourette. As indicated, we are in the middle of a
series of votes. We have about 5 minutes to cast this vote. I
understand we have four votes.
The committee will be in recess for probably about half an
hour. We will come back as quickly as we can.
[recess.]
Mr. LaTourette. The subcommittee will come back into order.
Again apologize for the voting schedule getting in the way.
I have finished listening to Mr. McCune's remarks.
Ms. Ceresa, welcome to you; and we look forward to hearing
your testimony.
STATEMENT OF SHERRY CERESA, STATISTICAL ANALYST, GARDENER'S
SUPPLY COMPANY, BURLINGTON, VT
Ms. Ceresa. Thank you, Mr. Chairman and Congressman
Sanders.
As stated, I am here to tell the success story of
Gardener's Supply Company in Burlington, Vermont. I am a
nonmanagement member of our ESOP committee and also represent
all the employee owners on the company Advisory Board. We are
the largest mail order supplier of garden tools and equipment
in the country and last year purchased Dutch Gardens, a bulb
and perennial mail order business from Holland that is a
perfect complement.
Will Raap, our founder and CEO, started Gardener's Supply
Company in 1983 and our ESOP in 1987. As we celebrate our 20th
anniversary, we are stronger and prouder of our mission and
vision than ever. We have grown from 10 people working out of a
carpet factory to over 250 permanent employees, and we expand
to as high as 375 seasonally. We now have over 200,000 square
feet of office and warehouse space. In addition to our
catalogue and award-winning Web site, we have a destination
retail store and outlet and we manufacture many of our own
exclusive products. We are proud to say that we had our most
profitable year in the history of the company last year, and we
did it by pulling together all employee owners and having them
be proactive in anticipation of hard times ahead.
This could be the story of many companies, but why do we
feel ours is different? Because of the reason that we are
employee owned. Many ESOPs are started as a part of ownership
succession. Ours started for a very different reason. Our
founder, at age 35, felt that ownership was key to how
employees perceived their jobs. I would like to read from a
letter written by Will Raap that describes his philosophy.
``from our very conception, Gardener's Supply Company has
been a business that is about much more than just making money.
Our vision, mission, and business principles speak to our goals
to both create a profitable and sustainable business as well as
to make a positive difference for our employees, our community,
and our planet. We believe that the key to success to achieve
this complex undertaking would be involving employees in ways
that perhaps run counter to the conventional rules.
``we felt and still believe that the secret to unleash the
potential in our business and to figure out how to achieve what
at times seemed contradictory goals lies not only in the minds
of corporate management but as much in the insights of every
employee at every level. To unlock these insights, we needed a
way to help all employees understand our business in a deeper
and broader perspective beyond their individual positions and
departments. In addition, we needed to create a context of
trust and company loyalty and commitment so all employees would
see their future linked with Gardener's Supply's, be thinking
about these larger issues every day, and be eager and
enthusiastic participants in creating our company's success.
``finally, we wanted a way to allow all employees to share
in the company's success beyond their regular wage. Although
employees are not putting up the financial capital the business
needs, they are putting up the physical, intellectual, and
emotional capital that are equally important. Therefore, we
sought to create an organization and ownership structure to
serve our business vision and mission. We chose an open book/
participatory structure as the best way to give employees a
more complete sense of how we are doing, of what we saw as
opportunities and challenges, and of how they as individuals
could influence the results of the organization as a whole.
``we coupled that with employee ownership in the form of an
ESOP. Our ESOP supports this management philosophy and closes
the loop in terms of not only creating a mechanism for all
employees to participate in company ownership but to truly feel
and act like owners and share in the rewards of the capital
value that they are creating. Sixteen years later, we have
found the ESOP to be an integral element of our business
success. We have weathered the buyout of all outside minority
shareholders and the consequential debt burden we took on. We
have mastered the dynamics, flexibility, and challenges of
managing a fast-growing business, and we have bested an
onslaught of new, deep-pocket competition.
``we identify the strength and commitment of our employees
and the value of the input we get from each employee each and
every day, created through the organizational mechanism and
corporate culture of an alive and activist ESOP, as a key
sustainable competitive advantage creating our business
success.''
On a personal note, my official role at Gardener's Supply
and Dutch Gardens in Burlington is statistical analyst. My
employee owner roles are many. When our telephone sales
representatives are overloaded with customers calling in
catalogue orders, employee owners, all of us, get on the
phones. When our mail trays overflow, we help open mail so that
orders are fulfilled in a timely manner. When our warehouse is
behind, we pack boxes. It is common to be sitting or standing
next to the President, the CFO, perhaps the CEO during any of
these activities. We are all employee owners with the same
focus. You don't hear ``that's not my job.'' it is our job.
Those unanswered phones, that unopened mail, and those unpacked
boxes all add up to decreased profits and bad customer service.
It is our responsibility as owners to ensure we do all we can
to meet our goals.
A bank such as the U.S. Employee Ownership Bank would have
made our life much easier. In the earlier years of our ESOP,
having loan guaranties and technical assistance would have been
a blessing. But we did it alone. We have succeeded, but so many
other companies that would have provided much-needed jobs were
unable to wend their way through the complex ESOP world. There
are many choices to be made early when establishing an ESOP
that have long-term ramifications. I believe for those
companies that cannot obtain private-sector financing, this
would be a tremendous support system.
In closing, I must say that, prior to coming to Gardener's
Supply and Dutch Gardens, I had 26 years of working for
nonemployee-owned companies. At absolutely no point in time did
I feel the immense pride, fierce loyalty to my coworkers or the
desire to succeed that I feel now. As an employee owner I make
a difference in the life of our customers, our employee owners,
and our community.
Thank you.
Mr. LaTourette. Thank you very much, Ms. Ceresa.
[The prepared statement of Sherry Ceresa can be found on
page 57 in the appendix.]
Mr. LaTourette. Mr. Owenby, thank you for coming; and we
look forward to hearing from you.
STATEMENT OF LARRY OWENBY, ASSISTED ON THE EMPLOYEE BUYOUT OF
RFS ECUSTA, BREVARD, NC
Mr. Owenby. Thank you, Mr. Chairman, Mr. Sanders, and
members of the subcommittee. I thank you for the invitation to
be here.
In August, 2001, our mill was sold to a foreign entity that
immediately went into contract negotiations with plans to cut
wages and benefits by 30 percent. Throughout these times, we
were told by the owner that cuts had to be given in order to
maintain a level of business that we were accustomed to. Also,
we were told that these cuts would be rewarded back to us in
due time.
After some investigation of this new owner, it was learned
that not only were they trying to destroy our mill but were
also in court for spending pensions from another mill that was
previously owned by them.
In trying to save our jobs and the impact that would occur
should we lose the mill, we tried to raise money to buy the
now-struggling facility from certain doom. We learned the hard
way that when it came to finding investors who were willing to
put money up for a long term was nearly impossible.
Our argument was a very simple one: Who else but the people
that had spent 20 to 30 years inside the mill were capable of
carrying on a tradition that had been very fruitful for more
than 60 years? These people knew the markets, they knew the
machines, and they knew the customers.
This mill, through feasibility studies, was still a very
viable site and had potential for many types of new markets. It
was also turning $1 million profit every month.
Because of a term labeled ``labor dispute,'' the owner put
the mill into bankruptcy after raping all assets that could
possibly be sold. This created another problem for the workers.
How could we show the investors that knew nothing about the
business that it was still a viable mill?
We, through our local union, our national union, and local
politicians began the process of trying to find other companies
that had the same interest in business that we had. There were
two such companies that took notice of the situation. One was
our strongest competitor, and the other wasn't really sure
about the investment capital that had to be spent.
While all this was occurring, the site itself became more
involved in court litigations, while the important parts of the
operation were slowly wasting away. We began to lose customers
because they needed the security that we could no longer
provide. We lost important vendors that were not being paid. We
lost important staff that could not risk the loss of revenue.
And we began losing hope.
We were asked by media--and some of you may be wondering
the same--why didn't we try to settle instead of putting
everything in jeopardy? As I have already stated, after our
investigation, this was normal procedure for our new owner.
This put us back to square one with all the people we had asked
to help trying to find ways to get investors.
Because of the nature of the mill, this downtime put a
strain on all the environmental systems, causing some concerns
from the EPA, the North Carolina Attorney General's office, and
so on, therefore creating even more problems for potential
investors.
This brings to date what has happened now. We are currently
a dead mill with no hope of ever starting up again. We have,
over the last 3 years, lost more than 1,000 jobs in western
North Carolina. This could have been prevented had we had the
opportunity to find the funds to save our mill when we first
began to seek the assistance that was needed.
I urge you to take into careful consideration the bill that
you are discussing because we believe that it could become a
very important tool for our manufacturing community to ensure
health and stability in our economy.
I appreciate your time.
Mr. LaTourette. Mr. Owenby, we appreciate your time and
your testimony.
[The prepared statement of Larry Owenby can be found on
page 106 in the appendix.]
Mr. LaTourette. Mr. Payne, thank you for coming. Look
forward to hearing from you.
STATEMENT OF MONTY PAYNE, INTERNATIONAL REPRESENTATIVE, PACE
INTERNATIONAL UNION, AFL-CIO, CLC, HATTIESBURG, MS
Mr. Payne. Thank you, Mr. Chairman.
Good afternoon, Mr. Chairman and Representative Sanders. It
is a privilege and an honor to appear before this committee.
I have been an international representative for PACE
International Union for the past 15 years. My duties cover
large areas of Mississippi and Louisiana. Prior to that time, I
worked in a paper mill and made a very good living for over 20
years.
In the past 4 years, this country has lost many thousands
of high-paying manufacturing jobs. Our union alone has lost
over 20,000 jobs through partial plant closures or through
total plant closures.
Paper workers are the second-highest-paid jobs behind the
auto industry in this country. The loss of these high-paying
jobs has had an incalculable effect on the communities,
counties and States. Many companies look at the bottom line in
making decisions on whether to close a plant or sell a plant.
They do not look at the effect on employees, their families, or
the communities in which the plants are located.
I have personally been involved with several partial
closures since 1998 and a number of total closures. I am more
in tune with what goes on in the forest products and paper
industry. Many companies have purchased other companies and
then picked the best and most modern facilities of the two and
closed the unwanted facilities.
One company in particular, International Paper Company, has
purchased other companies such as Champion International, Union
Camp, Federal Paperboard, and then picked the best and most
modern mills and closed less profitable mills. Some of these
were making money, though not as much as the company wanted--
Mobile, Alabama; Moss Point, Mississippi; and, lastly, Natchez,
Mississippi, just to name a few.
Moss Point was a profitable mill, had top-quality
production, but it was closed, and the company refused to talk
with anyone about buying the mill and keeping it open. The same
with Mobile and several others. The reason being they did not
want competition from the mills.
Natchez, Mississippi, however, is unique in that it was the
only International Paper Company facility which made chemical
cellulose. Therefore, the company was agreeable to discussing
selling the mill. This mill is in a small southwest Mississippi
city and is the largest employer in the city and this area of
the State as well. It also has a large impact on the
southeastern part of Louisiana. In its heyday, this mill
employed upwards of 1,000 people. It has reduced the staff to
700; and now the plant will close production forever during the
week of July 15, 2003.
When the announcement of the decision to close this plant
was made by International Paper Company, there was a meeting of
many elected officials, including United States Representative
Charles Pickering. The community saw the urgent need to save
these good-paying manufacturing jobs. To say the least, there
was concern and panic among the employees and members of the
community.
PACE International Union stepped forward due to the success
of its ESOP effort with Champion International in Canton, North
Carolina, and pushed forward this concept. Starting from
scratch, the local employees and myself saw a need for large
sums of money to conduct feasibility studies, environmental
audits, and many other required things to make this happen.
We have received very little help from the government due
to the red tape, and banks do not take employees seriously in
the early stages of an ESOP effort. We have had to beg money
from every source. The employees have contributed several
thousand dollars. The International Union donated a matching
amount of what the employees could come up with. But it is
still a long way from what is needed. Even though in Natchez we
have had a unique but rare instance, due to the fact the
Natchez Chamber of Commerce president committed $30,000 to our
cause, it is still far short to get all done that is needed to
be done.
In closing, this legislation that you are considering would
be a great help to employees who have dedicated a lifetime to
an employer who does not want to continue in operation but who
would be willing to sell the plant to the employees. The
employees would have an option to save good- paying jobs in
their own communities so that they could continue to live where
they want to, raise their children in these communities, and
also help save the tax bases of the cities, counties and States
of this great country.
Thank you, Mr. Chairman.
Mr. LaTourette. Mr. Payne, thank you very much.
[The prepared statement of Monty Payne can be found on page
108 in the appendix.]
Mr. LaTourette. I was struck, I think, when you were
talking, Mr. Owenby, that one of the unique things about Mr.
Sanders' proposal is that we have a number of Federal programs,
like the emergency steel loan guarantee; and we had a situation
in Cleveland where people would go and talk to the board and
the answer would be, well, your company is not a good risk so
we cannot guarantee the money or loan you the money. It has
been my experience that if you are doing well and you have a
really thriving business you probably don't need a loan
guarantee.
So we sort of have it backwards, and that is I think one of
the good things about Mr. Sanders' proposal that he has brought
before the committee, and I would again commend him for that.
Mr. Ray, you talked about the fact that, prior to 1987,
employee stock ownership was 30 percent; and then in 1987, if I
have my dates right, that that jumped up to 67 percent. Can you
describe for us the strategy or from whom you sought guidance
and advice to go from that 30 to 67 percent figure?
Mr. Ray. Yes, sir. What we did was join the ESOP
association and we started studying our options. We have had
the same legal advisers since 1974, and so we leaned on them.
And, in our particular case, we have not leveraged the ESOP. We
have been able to use our corporate earnings and financing.
Like you pointed out, if you have a company with a strong
balance sheet, it is not hard to get those kinds of funds.
The point that was made by Congressman Sanders in the bill
is, okay, what about the companies that can't do that and how
does that work? And I certainly support the private sector
first, but, on the other hand, I also support H.R. 1778, to be
able to study the options where, as a last resort, there would
be help for these companies to create employee ownership.
Mr. LaTourette. Thank you.
Mr. McCune, Massillon Stainless, I think it is not over
yet, if I understood that right.
Mr. McCune. We have one remaining entity that we are
hopeful is going to step forward and save the facility. We are
still in the waiting period, and they are doing their due
diligence.
Mr. LaTourette. And are you able to, without revealing any
state secrets, give a prognosis? Hopeful? Not hopeful?
Mr. McCune. I met with the VP of acquisitions 6 weeks ago.
He requested I sit down with the management team and put
together a start-up-in-business plan to be submitted to them,
which we did 3 weeks ago. So we are waiting on their decision
now. Hopefully, it will be sooner rather than later.
Personally, most of my fellow employees have been out of
work since November of last year. I went out in March of this
year. So we hope to have it reopened by the end of the year. Do
we know that for sure? No.
Mr. LaTourette. I will ask Mr. Sanders a gratuitous
question so he doesn't have to--but, obviously, if an idea such
as his were in place, do you think that would have assisted
you?
Mr. McCune. I think it absolutely would have helped us when
we had the domestic entity that was interested this past
November. But because there was no lending institutions out
there that were willing to invest into a shut-down stainless
cold rolling facility, we were unable to. But if the bank
existed, as Mr. Sanders has proposed, I absolutely believe we
would be in operation today.
Mr. LaTourette. Let me just ask about traditional lending
institutions. Mr. Adams, when he was on the last panel, told, I
think, a rather disturbing story; and I trust most people in
the financial institutions don't respond the way his former
high school classmate did. However, did you and your group make
approaches to traditional lending institutions, and is there a
flavor as to how your endeavor, without a vehicle like Mr.
Sanders proposal being in place, how your group of employees
seeking to become employee owners was regarded by banks within
Massillon, or wherever you went?
Mr. McCune. We as an employee group never had an
opportunity to sit down with a lending institution. Had we, I
think possibly I could have convinced them we were worthy of
the risk. But the entity itself went to I know of at least
three institutions and was turned away.
Mr. LaTourette. Thank you very much.
Mr. Sanders.
Mr. Sanders. Thank you very much, Mr. Chairman.
I will tell you, this has been one of the more interesting
hearings that I have attended in a very long time. Both panels
have been fantastic, and we are just hearing many aspects of
what employee ownership is about.
It seems to me this panel is looking at two different
things.
The success stories that we heard from Mr. Ray and Ms.
Ceresa seem to indicate--and I want both of them to comment on
this--that when employees are involved in a worker ownership
enterprise it means more to them than just going to work every
single day.
We have millions of Americans who wake up at 8 o'clock in
the morning, they go to work at 9 o'clock, and they get their
paycheck, and that is about it. They disassociate the moment
they leave the plant. But what I heard from Ms. Ceresa and I
think from you, Mr. Ray, as well, that when you are involved in
an employee ownership effort your work means a lot more to you
than just working 9 to 5.
Why don't we start with Ms. Ceresa and then go to Mr. Ray
on that.
Ms. Ceresa. Absolutely. It is a feeling that is really hard
to describe. It is not only how you feel about your work but
how your other employee owners feel. You all have a common
goal, you all are there to help each other, and it is just a
really special feeling that Mr. Keeling was talking about in
companies. It is a cohesiveness. It is a just an amazing group
of people that are there for the same reason.
Mr. Sanders. Ms. Ceresa, would you suggest this has an
impact on absenteeism and turnover and so forth? Do you find
less of that?
Ms. Ceresa. Yes. Yes. We have a large seasonal population,
which, of course, is a great turnover, but I was thinking about
that the other day. In the area that I work in, which is
probably about 40 people on my floor, I can think of four
people that have come since I started 4-1/2 years ago. Everyone
else was there when I came, and I have not heard anybody
talking about leaving.
Mr. Sanders. That is interesting. That is interesting.
And, Mr. Chairman, I know Gardener's Supply very well. It
is about 5 minutes away from where I live, and not only do they
do a good job in terms of employee ownership, they have cleaned
up and improved what we call the Intervale, the largest
nondeveloped area in Burlington. Just tremendous community
efforts they have made.
Mr. Ray, do you want to respond to that? How is it
different from an emotional perspective working for an
employee-owned company?
Mr. Ray. Well, I have been there 41 years in August.
Mr. Sanders. You haven't left.
Mr. Ray. I haven't left, and I enjoy every minute of it.
On the absenteeism question, our absenteeism that we track,
because we reward people for being there on time, is less than
one-half of 1 percent.
Mr. Sanders. Wow.
Mr. Ray. Yes, less than one-half of 1 percent.
Mr. Sanders. Which I gather is a lot better than most?
Mr. Ray. Tremendously. And, frankly, we don't have to hire
as many people. Pretty simple.
Mr. Sanders. What about turnover?
Mr. Ray. Our on-time delivery to our customers is 98.8
percent. Our quality record with all of our customers is 99.8.
We are a silver supplier to the Boeing Company, which is only
one of 200 companies in the world that have that status. So
that takes a lot of tender loving care by a lot of people to be
able to do the incredible things.
Mr. Sanders. What about turnover? Do people stay on the
job?
Mr. Ray. Absolutely. Right now, we are at about--average is
about 15 years. We are in the aerospace industry, so we are
going through some really tough times and we are not immune to
that, unfortunately. So will we have layoffs? Yes,
unfortunately, Congressman, the toughest thing to do is layoff
an employee owner.
Mr. Sanders. Of course. Of course. But what is interesting
here, and perhaps, Mr. Chairman, an added benefit from this, is
without absenteeism or with much lower rates of absenteeism and
much lower rates of turnover and a dedicated work force, you
have a more productive work force, a more cost-effective work
force, a more competitive operation, it seems to me. And that
is an added benefit.
Now, those are the positives. We are hearing two really
wonderful stories, and then we have heard three stories that we
don't know the ending yet, and these are folks who are
struggling. I think the issue there at this point is financial;
and the issue is, as employees who are struggling to hold on to
their jobs and their plants, you have had a rocky road of it.
So my question for Mr. McCune and Mr. Owenby and Mr. Payne
is, if there was a Federal--if there was Federal help out there
providing the kind of technical assistance and these kind of
loans, how would it have impacted the struggles you are
currently engaged in?
Mr. Owenby, do you want to start on that?
Mr. Owenby. Be glad to.
I think an institution like that would have helped us
tremendously. Because when we did go out and try to find
investors, even with the feasibility studies that we did, it
was long term because of the damage that the previous owner
did. And he did it maliciously. So instead of him just saying,
okay, we will sell it to you, he kept things into litigation
and tried to destroy the mill. We were in a different situation
than most people. We had a vindictive owner.
But if we had had that opportunity, we could have, during
the process of the sale itself, when he finally did release it,
we could have stepped in and bought it. But at the time we did
not have the financing, and we could not make a bid, and they
sold it through auction.
Mr. Sanders. Mr. Payne.
Mr. Payne. Yes, sir. I think it would have helped us. It
would help us greatly in our effort because we could go
somewhere, get the money, spend the time on the feasibility
studies, the audits, things of that nature that are required
instead of out trying to raise money from individuals, from
Chambers of Commerce, from the city. We could spend our time,
and it would shorten this time span from start to finish.
Mr. Sanders. Which is very, very important, as Mr. Owenby
just indicated.
Mr. Payne. Absolutely, it is important. The longer that
time span, the more nervous the employees get. They get itchy.
And also the investors, when you have to go to them and they
see that, yes, you did this part and then you waited and you
did this part, if we could all be real consistent and flow real
good and shorten the span on these studies, it would just help
tremendously, I believe.
Mr. Sanders. Mr. McCune.
Mr. McCune. Our studies show that we had a solid business
plan in place; we had the ability to be very profitable; we had
a customer base that was very loyal, still is loyal. If we show
back up on the scene, they will come back. For whatever reason,
with all those things in our corner, because the steel industry
in general was and still is depressed, we could not get a
lending institution to step forward.
I really and truly believe if the Employee Ownership Bank
existed, that with all those things behind us and with an
entity willing to make a purchase and include the employees
within that purchase, as I said earlier, we would be in
business still today. But because we ran up against basically
the same thing Mr. Owenby and Mr. Payne did, with institutions
that would not listen to us or weren't willing to bankroll us,
so to speak, the facility shut down; and it shouldn't be shut
down.
Mr. Sanders. Mr. Chairman, I think this has been terrific
testimony, and I want to thank each and every one of the
panelists who have been with us today. You played a very, very
important role and I think have given us some energy to
hopefully go forward in a bipartisan way to do something which
I think will be extraordinarily important for the working
people of this country.
So I want to thank you; and, Mr. Chairman, I want to thank
Mr. Bachus, of course, and your staff. Your staff has done a
good job, and Warren Gunnels of my staff, in helping to bring
together these excellent panelists. So I thank you very much
for your efforts.
Mr. LaTourette. Well, first of all, I want to thank all of
you. It has been a long day, I know. I saw, Ms. Ceresa, when I
said we would be gone for half an hour, I got the feeling you
had a plane to catch and maybe were not so happy about that.
Thank you for being with us all day.
I want to agree with Mr. Sanders that this is one of the
better hearings I have been at all year, and it is because of
your willingness to share your experiences with us. I want to
thank Mr. Sanders again for the idea of the hearing.
If there is nothing else to come before the subcommittee,
we stand adjourned, and you go with our thanks.
[Whereupon, at 5:09 p.m., the subcommittee was adjourned.]
A P P E N D I X
June 10, 2003
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