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The August 14, 2008 Employee Ownership Update is online and discusses the following:

  • Cost Accounting Standards Board Finalizes ESOP Rules for Government Contractors
  • Study Finds Broad-Based Options in Venture-Backed Companies Both Common and Effective
  • ESOP-Owned EBO Group Creates Model for Engaging Employee Owners in Innovation
  • Winning Workplaces and the Wall Street Journal in Host Conference Celebrating 2008 Top Small Workplaces

Using Innovation and Employee Ownership to Achieve Continuous Success, Diversify Lines of Business, Retain Employees, and Address Succession Planning Objectives

The Update discusses how EBO Group, a Sharon Center, Ohio based ESOP holding company, engages their employees to be innovative, enabling them to enter new markets and constantly redefine themselves. EBO Group, or Excellence By Owners, defines their company structure and ownership culture on their company website:

EBO Group, Inc. is an innovative employee-owned company structure comprised of subsidiary companies that develop and commercialize products for a variety of markets.

As its name suggests, EBO Group, or Excellence By Owners, is dedicated to the concept of employee-owners working towards a common goal of continuous success through Excellence at every level of the operation. All EBO Group employee-owners share in the rewards of the success enjoyed by each of the subsidiary companies. This structure motivates the organization to flourish in a culture of teamwork and inter-company cooperation. Resources shared across the entire EBO Group create a unique agility, promoting rapid reaction to market opportunities and is the basis for exceptional customer service.

Employee-ownership is a valuable long-term benefit which attracts and keeps talented individuals at all levels of the organization; it fosters creativity and a spirit of entrepreneurial innovation in a vibrant work environment. It is a roadmap for succession planning, offering a long-term business stability that is a key to building lasting relationships with suppliers and customers.

From concept to design to manufacture to quality assurance and ultimate customer satisfaction, the employee-owners of EBO Group take pride in living up to their name, Excellence By Owners.

2007 eVolution of Manufacturing: EBO Group Inc., Leading the brainstorm provides more details by exploring how the company identified two risks, having a product line in a single industry and a lack of ownership transition and management succession planning, and responded by using the above-mentioned innovation and employee ownership to expand into other industries and have systems in place to continuously implement change. As part of this effort, they require each employee to submit a one-page EBO – Excellence By Objective Form:

"Every quarter, each employee turns in a one-page EBO form to his or her supervisor that includes ideas for change or projects they want to pursue in addition to their normal duties... "The best ideas in your company come from the people that actually are doing the work," says President Keith Nichols. "Every company's got to go through some constant change, be it major or minor, to keep up with whats going on in their industry and what's going on in the general marketplace. If they don't do that, eventually they'll become a dinosaur. Its a necessity for long-term survival."…Nichols believes in giving employees the freedom to come up with their own ideas and giving permission to pursue them. "A lot of companies make the mistake that they don't allow people to pursue what their passions are," he says. "If we can pursue somebody's passion, and it fits our business model, that's what we'll do."

Final Cost Accounting Rules

The Update revisits the final rules for Accounting for the Costs of ESOPs Sponsored by Government Contractors, noting how they have removed most of the uncertainty of how the costs of funding an ESOP would be reported:

Under these rules, reimbursements will be for the market value of the shares at the time a contribution is made. In a leveraged ESOP, this means the cost basis of the shares when purchased, not the accounting value under the American Institute of Certified Public Accountants' Statement of Position (SOP) 93-6, which requires a compensation charge based on the value of the shares released at the time they are released. Under the new rules, the cost will be assignable to a cost accounting period only to the extent an allocation is made to participant accounts by the tax return filing date, including any permissible extensions. For leveraged ESOPs, the allowability of the costs will follow Federal Acquisition Regulation Part 31, which allows companies to charge the costs of principal and interest on an ESOP loan provided the stock is acquired at fair market value.

It also recognizes some uncertainty about dividends used to repay a loan:

The rules also state that dividends used to repay a loan are allowed as a cost. However, there is some uncertainty about this as a Boston office of the Cost Accounting Standards Board recently denied reimbursement for dividends.

Broad-based Equity Awards

The Update discusses Give Everyone a Prize? Employee Stock Options in Private Venture-backed Firms, a 2005 study that found that broad-based equity awards in venture-backed companies are common and effective:

This study investigates the impacts on the equity values of private venture-backed firms of the organizational depth to which they grant employee stock options. I develop two hypotheses. First, applying the reasoning of Demsetz and Lehn (1985), I propose that firms’ equity values will be unrelated to the optimal component of stock option grant depths. Second, I hypothesize that firms’ equity values will be more negatively related to the suboptimal component of stock option grant depths when options are not granted deeply enough than when they are granted too deeply. The latter asymmetry stems from the differential contribution of senior versus junior employees to equity value. Using the fitted and residual values from a model of stock option grant depths in private venture-backed firms as proxies for the optimal and suboptimal stock option grant depth components, I find evidence consistent with these hypotheses.

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