Practical Aspects of Governance in an ESOP Company

1. Practical Aspects of Governance in an ESOP Company ESOP Association Two-Day ConferenceNovember 20 and 21, 2003Las Vegas, NV Ron Ludwig Bill McIntyre, Ohio Employee Ownership Center Loren Rodgers, Ownership Associates, Inc.

2. Employee Ownership and Involvement • Reasons to Involve Non-Managers in Governance • Psychology of Ownership • Mini Case Studies

3. -1-Reasons to Involve Non-managers in Governance

4. Reasons to Involve Non-Managers in Governance 1: Legal Requirements • Voting on major corporate decisions • Liquidation or dissolution • Sale of substantially all assets • Recapitalization • Reclassification • Merger or consolidation • Required communications • Possible Role re: trustee, administrator

5. Reasons to Involve Non-Managers in Governance 1: Legal Requirements • Congress set the “floor”the regulations that set minimum requirements for participation. • You set the ceilingas participatory as you want to be

6. Reasons to Involve Non-Managers in Governance 2: Philosophical Commitment Bill Carris, President, Selling Shareholder of Carris Reels The company will be “employee owned and governed” in order “to improve the quality of life for our growing corporate community.” The company will create “a new style of corporate governance, one characterized by community, trust, and inclusiveness.”

7. Reasons to Involve Non-Managers in Governance 3: Educational Experience • Information about the CompanyKey strengths, threats and issues • Trust in the CompanyOpening some “closed doors”

8. Reasons to Involve Non-Managers in Governance 4: Bottom-Line Results • ESOP companies, on average, outperform non-ESOP companies by approximately 2.3% on a number of measures. • ESOP companies file for bankruptcy less often than non-ESOP companies. • On average, ESOP participants have approximately 2.5 times more retirement assets than non-ESOP participants, with no loss in income.

9. Reasons to Involve Non-Managers in Governance 4: Bottom-Line Results

10. Reasons to Involve Non-Managers in Governance 4: Bottom-Line Results

11. Reasons to Involve Non-Managers in Governance 4: Bottom-Line Results

12. Reasons to Involve Non-Managers in Governance 4: Bottom-Line Results

13. Reasons to Involve Non-Managers in Governance 4: Bottom-Line Results

14. -2-Psychology ofOwnership

15. OCS Data from an anonymous company “How much do you feel like an owner of this company?” 60% 50% 40% 30% 21% 18% 20% 13% 13% 11% 8% 7% 10% 3% 3% 3% 0% 1 2 3 4 5 6 7 8 9 10 not at all very much

16. Ownership Expectations Involvement is not inevitable. Expectations about involvement are inevitable.

17. Research Results Roots of psychological ownership • Means-of-Acquisition • Control • Attachment • Rudmin and Berry, 1987, “Semantics of Ownership,” Psychological Record, Vol. 36 pp.257-268.

18. Rights and Responsibilities

19. Management versus Governance • What KIND of involvement creates psychological ownership? • Autonomy (management) • Participation (management) • Influence (management and governance)

20. Is it an ESOP? Or is it ownership? • Legal definitions of ownership versus “cultural” definitions of ownership • The emphasis is up to you • But perception is a large part of reality

21. -3-Mini Case Studies

22. Standard List of Corporate Decisions 1. Physical Working Conditions 2. Election of Employees' Committee 3. Speed of Production 4. Job Assignments 5. Safety Rules and Practices 6. Quality Standards and Measurement 7. Hiring 8. Promotions, Job Evaluations 9. Equipment Layout 10. Asset Purchases 11. Employee Compensation & Benefits 12. Firing 13. Marketing & Advertising Strategy 14. Raising Capital, Relationships with Banks and Investment Groups 15. Product, Technology, and Investment Strategy 16. Lay-off Policy, Employment Levels 17. Selection and Compensation of Senior Management 18. Distribution of Profits (dividends, reinvestment, debt reduction, etc.) 19. Corporate Strategy 20. Constitutionalism: Setting & Moving Decision-Making Boundaries 21. Selection of Board of Directors 22. Fate of the Company: merger, sale, major location change

25. Case Study 1: Carris Reels • About 800 employees at 8 locations. • 100% family-owned until 1995. • 47% ESOP-owned; committed to 100%. • Manufacturing. • Self-Designed ESOP. • Corporate Steering Committee.

27. Robert Frost – Mending Wall • “Good Fences Make Good Neighbors” • “Something there is in us that does not love a wall.”

28. Review / Approval by Steering Committee • Organizational Assessment • Company-wide “Ownership Culture” Training • Review / Adaptation by Steering Committee • Pilot Site • Develop Guidelines for Categories of Decisions • Training for Supervisors; Training for Workforce • Begin Using the Guidelines • Future: General Rollout

29. Case Study 2 • Over 1,000 employees at 12 locations. • Public Company. • Minority ESOP Ownership. • Financial Difficulties. • Recent Rescue by Outside Investors. • Multiple Unions.

30. E m p l o y e e s a t [ O u r C o ] h a v e r e a l i n f l u e n c e o v e r c o m p a n y - w i d e d e c i s i o n s . 5 0 % 4 0 % 3 0 % 2 0 % 1 0 % 0 % 1 2 3 4 5 6 7 D i s a g r e e N e u t r a l A g r e e

31. Company Response • Establish Steering Committee • Organizational Assessment • Convene “RapidResponse” Conferences • Task Teams: Analysis and Recommendations • Decide on Recommendations and Report Back • Evaluate the Process

32. E m p l o y e e s a t [ O u r C o ] h a v e r e a l i n f l u e n c e o v e r c o m p a n y - w i d e d e c i s i o n s . 5 0 % 4 0 % 3 0 % 2 0 % 1 0 % 0 % 1 2 3 4 5 6 7 D i s a g r e e N e u t r a l A g r e e

33. Questions and Answers