The time may have come to rethink the concept of an ESOP, a seemingly inefficient method of wealth accumulation by employees because of the underdiversification to which it conduces (though remember that what is important is the diversification of the employee’s entire asset portfolio, including his earning capacity, rather than whether an individual asset is diversified). The tax advantages of the form do not represent a social benefit, but merely a shift of tax burdens to other taxpayers. Nor are we aware of an argument for subsidizing the ESOP form, as the tax law does, rather than letting the market decide whether it has economic advantages over alternative forms of business structure. As for the notion that having a stake in one’s employer will induce one to be more productive, the evidence for such an effect . . . is weak and makes no theoretical sense. An employee has no incentive to work harder because he owns stock in his employer, since his efforts, unless he is a senior executive, are unlikely to move the price of the stock. Nor is employee stock ownership likely to forge sentimental ties between employees and employers that might cause the former to work harder, although it may alleviate union pressure for wages or benefits that would jeopardize solvency.
Thus opined the 7th Circuit, clearly less than enamored with employee stock ownership plans, although that overall negative appraisal was at most only indirectly on point to the particular ESOP case before the appellate court in this instance. In which the 7th decided that an ESOP’s directed trustee is not required to second-guess market valuation of the company’s stock for purposes of diversification against the ESOP’s stated policy of exclusive investment in that stock. [Summers v. State Street Bank & Trust Company and UAL Corporation ESOP Committee, Nos. 05-4005, 05-4317]
Pointing back to its 2003 ruling in Steinman v. Hicks the court observed that fiduciary prudence might require diversification of ESOP investments if the ESOP were employees’ principal retirement asset and if the company’s debt-to-equity ratio made its bankruptcy risk greater. In this case, however, that line of reasoning had not been explored by the ESOP participants. Rather, the participants merely argued that the plan’s directed trustees failed to anticipate UAL’s bankruptcy sufficiently early to spare the ESOP from major losses. The court found that argument unpersuasive, stating, “A[n ESOP] trustee is not imprudent to assume that a major stock market . . . provides the best estimate of the value of the stocks traded on it that is available to him.”