1. Establishing a Legal Framework on ESO 

We should work to create an optional legal framework at the EU level that in particular would fa-cilitate cross-border ESO schemes. An EU framework is needed to establish a level playing field that would especially create opportunities for SMEs which are most affected by the consequences of the financial crisis. SMEs should receive more policy support, in particular considering the signifi-cant unexploited potential for ESO. In this context establishing a so-called 29th regime on Employee Financial Participation (EFP) appears a promising option. Hence, it seems justified that the Pilot Project should include a preliminary impact assessment of such a regime.

2. Promoting the exchange of best practice 

In order to establish a functioning exchange of best practice, systematic processing and editing of information is very important. Rather than producing “another study for the shelf”, we should look into the creation of one-stop shops. A “Virtual Centre for EFP” (as presented during the confer-ence) could be a first step in that direction.

3. Providing transparency with regard to fiscal treatment and tax incentives 

Tax incentives are not a prerequisite for successful implementation of ESO, but they do effectively promote such schemes. Therefore, while harmonisation is not a condition, transparency with re-gard to the different national fiscal treatment of ESO is key. In particular, an Effective Tax Rate Cal-culator (as presented during the conference) could provide a useful decision-making tool for com-panies with cross-border activities that plan to introduce EFP schemes.

4. Combining economic and labour market policies and reducing inequality 

ESO fits logically into the EU’s multi-dimensional approach of combing economic and labour mar-ket policies. ESO schemes may help to create and secure jobs, reactivate unemployed and facilitate business succession in SMEs. In order to establish equality of arms, we should develop recommen-dations at EU level for fiscal and other incentives for SMEs interested in implementing ESO schemes. In this respect, investigating and promoting the transferability of best practice ESO schemes like the Sociedades Laborales and Employee Stock Ownership Plans (ESOPs) is important.

5. Incorporating ESO into Corporate Governance and Long-Term Investment strategies 

Turning workers into shareholders of their employer company helps to improve corporate govern-ance by promoting transparency, sustainability and responsibility in corporate decision-making, which is one of the main objectives of the EU’s corporate governance policy. Therefore, integrating ESO into this policy should be strongly considered. Further, as ESO can foster growth of SMEs and facilitate business succession, financing ESO schemes should become one of the objectives of the Commission’s Long-Term Investment strategy. In particular it should be considered to integrate ESO in the EIB products for SME financing and incorporate ESO into the Commission’s proposal for the regulation on European Long-Term Investment Funds (ELTIFs).

In order to achieve these aims, social partners and all other relevant stakeholders should be closely involved in the process. Further, any promotion of ESO should respect the relevant fundamental princi-ples as identified by the 1992 Commission Recommendation on EFP and reiterated in the EP Own-Initiative Report of 15 January 2014. After many years of research and fruitful discussion the time has come for concrete actions: Let’s make ESO a positive priority in Europe!

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An increasing number of companies are turning to Employee Stock Ownership Trust financing as a means to simultaneously raise low cost capital and provide increased employee incentives and retirement benefits while reducing the cost of qualified plan benefits. The Employee Stock Ownership Plan is a qualified plan under Section 401(a) of the Internal Revenue Code. As such it is in the same family as pension plans, profit sharing plans and stock bonus plans. Nevertheless, The Employee Stock Ownership Plan (which together with the Employee Stock Ownership Plan, is referred to as the “Trust” or “ESOP”) is qualitatively different from other types of “qualified plans,” both in its concept and in its applications.

Because of its inherent flexibility, because of its ability to facilitate and enhance corporate growth and because of its separate status under the recently enacted Pension Reform Act, the ESOP possesses an assortment of unique advantages not possessed by other qualified plans. As a consequence the ESOP is destined to become an increasingly popular form of employee benefit plan. A general working knowledge of the benefits, advantages and uses of the ESOP is a “must” for corporate loan officers, trust officers, estate planners, deferred compensation specialists, employee benefit specialists, corporate financial consultants, CPAs, CLUs and other income tax advisors.

Advantages of ESOP

Inherent Flexibility

The ESOP is at one and the same time a plan of corporate finance, an employee incentive plan, an executive compensation plan, and an employee retirement plan. Moreover, the ESOP may be used by either a public or a private company and may be used either with or without financing. In addition, the ESOP creates a market, comparable to that of a publicly traded company, for the sale of a minority or controlling interest in a closely-held company. By using an ESOP a company also avoids the funding problems inherent in certain other types of qualified plans. Because 3n ESOP can be designed to simultaneously serve all of these functions, the ESOP is inherently more flexible than other types of qualified plans.

Facilitating Corporate Growth

Today’s capital starved economy has created a host of problems for the growing company. In addition to the unprecedented need for additional capital for corporate growth and expansion, the corporation of today is also faced with increasing demands of employees for greater employee benefits, with declining employee incentives and productivity, and with a newly enacted Pension Reform Act, which substantially increases the costs of funding conventional employee benefit plans.

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Born in a suburb of Denver in 1913, Kelso’s childhood was characterized by the rural lifestyle, receiving his education from the catholic fraternity “Christian Brothers”. Having spent his teenage years during the Great Depression, the experience of the collapse and the search for its causes accompanied him through his entire life.

But before that, there was Pearl Harbor. Kelso was commissioned in the U.S. Naval Service and assigned to intelligence duty in the Canal Zone. Working tropical hours, Kelso used his free afternoons to work on his seminal manuscript “The Fallacy of Full Employment”.  In 1946, the completed manuscript in his footlocker, the Navy sent him back to civilian life. But 1946 was also the year Congress passed the Full Employment Act which defined economic policy in the United States 170 years after the birth of the Industrial Revolution as the right to a job. Kelso concluded that the time for his ideas had not yet come.

Only in the mid 1950s when he met the philosopher Mortimer J. Adler, he took a new step to publish his ideas. Together they wrote “The Capitalist Manifesto”, published in 1958 by Random House.

Two years before, Kelso had already done a first concrete step in practice. In 1956 he enabled the employees of the closely-held newspaper chain Peninsula Newspapers Inc. of Palo Alto, California, to buy out its retiring owners through a new financing concept: Kelso created the “Employee Stock Ownership Plan” (ESOP). Thanks to this financing technique working people without or with only little savings are enabled to buy stock in their employer company and pay for it out of its future dividend yield. ESOP was thus the prototype of the leveraged buy-out which was embraced enthusiastically by the later emerging private equity funds (KKR, Blackstone, etc. who Kelso knew all personally) – although aiming at different objectives.

Soon after, in 1958, Kelso innovated a related financing concept, the Consumer Stock Ownership Plan (CSOP), to enable 5.000 farmers in California’s central valley to become successful owners of Valley Nitrogen Producers, the fertilizer processing plant of which they were the principal customers. With the CSOP he created a low-threshold participation concept for citizens and consumers which today could change i.e. the market for renewable energies fundamentally.

What Kelso was aiming for, was to democratise access to capital credit, as Patricia Hetter Kelso summarised the idea behind the ESOPs in 1989 in The New York Times. She had met Kelso in 1963 and later became his joint publisher and second wife (1968: “How to Turn 80 Million Workers Into Capitalists on Borrowed Money”, Random House).

Kelso considered the ESOP and CSOP as pragmatic proof that his revolutionary revision of classical economic theory, and the financial techniques he derived from this new perspective, were sound and workable in the economic and business world. As a corporate and financial lawyer, and later as senior partner in the law firm Kelso&Company which he founded in 1971, Kelso well understood this world.

He was motivated by his conviction that lawyers had a special responsibility to maintain and improve society’s institutions in the light of its democratic values. He further believed that the business corporation was society’s greatest social invention and that its executives had a fiduciary responsibility to exercise its vast power.

Louis O. Kelso died in 1991 with 77 years of heart ailment in San Francisco.

Click here to see pictures of the celebration of Louis O. Kelso’s  100th Anniversary at the Europa-Universität Viadrina (Frankfurt/Oder).