that has the potential to ESOB the stock ownership pl revolutionize the structure of the United States'economy

By Gage McKinney MacBeath Hardwood Co.

1r HREE years ago the directors of I MacBeath Hardwood of San Francisco ventured into an almost uncharted area of corporate finance when they established an Employe Stock Ownership Plan (ESOP) for their workers. According to Robert A. Manley, the investment banker who organ2ed MacBeath's ESOP, "it was an act ofreal courage."

In those days no legislation had been passed governing ESOPs, and the IRS had set few guidelines for them. Only during the past two years have ESOPs received considerable attention in the Congress and Treasury Department, and several large corporationsincluding Mobil Oil, Hallmark Cards and Atlantic Richfield-are now takins advantage of them. Fortune magazin! recently esEimated that more than 200 corporations have established ESOPs in the past 12 months.

Basically ESOP is a deferred-compensation program which facilitates corporate finance. Through an ESOp a corporation bestows stock on its employees in exchange for tax benefits, low cost capital and, in theory, greater productivity and stability. The most idealistic proponents hail ESOP as the dawn of "people's capitalism," while conventional investment bankers call it just too risky.

MacBeath's case specifically shows the potential of ESOPs for regional or privately held companies in the lumber and building material industry. Nevertheless, chairman of the board K. E. MacBeath, who believes in the ESOP concept, remains sceptical about the long-term advantages. "It's no damned panacea," he warns.

At its best ESOP works like a financial charm. For example, Mac Beath's ESOP trust (technically called an ESOT) borrowed a substantial sum last year with which it purchased newly issued stock in MacBeath hardwood. The hardwood company guaranteed the loan and committed itself to make annual contributions to the ESOT sufficient to cover principal and interest payments. As the debt is paid, the shares held by the ESOT are allocated to individual employe accounts for distribution upon retirement.

Since the company contributes to its ESOT before corporate taxes and the ESOT itself is tax exempt, the loan is paid with pretax dollars. In other words, estimating corporate taxes at 50%, a corporation without an ESOP would have to gross 950 thousand to repay a $25 thousand loan. But through its ESOp Mac Beath would need to earn only half that amount and could repay such a loan in half the time. Thus ESOP irnproves cash flow in ways that even the most sceptical lending agencies cannot ignore.

Theoretically ESOPs also help companies to attract and keep competent personnel by grving each employe a stake in the company. "This ownership stake tends to align the employe's self-interest with management's and gives employees a measure of direct control over the enterprise," says Manley. K. E. MacBeath says simply, "ESOP helps workers understand capital."

ESOP could also increase productivity because each year the company,s success is reflected in the size of the contribution made to employees, ESOP accounts. After a successful fiscal'75, for example, MacBeath contributed an amount equal to 15% of its payroll to its ESOT, the maximum legally allowed. Other com-

Story at a Glance

How a Western hardwood wholesaler established an Employee Stock Ownership Plan (ESOP) for their workers . . what an ESOP is and how it works some see it as the "dawn of people's capitalism," others consider it f ar too risky.

panies with ESOPs have reported decreases in labor turnover and absenteeism, but no statistical data are available.

An ESOP also gives majority stockholders in closely held corporations an alternative to merging or to being swallowed by a conglomerate. Potentially employees can purchase a company on a pretax basis through an ESOP and avoid disruptions in personnel and philosophy.

By the same principle, of course, majority stockholders can have their percentage of ownership reduced as the number of outstanding shares increase. The prospect of losing control of MacBeath Hardwood has not, however, diminished' its owners' belief in ESOP. "I like our employeesl and this program is set up for them," notes president Bill MacBeath. "I'd much rather see our employees run the business than see it managed by a probate court or lose its identity in some other way."

Consultants differ as to whether ESOP is primarily an employe benefit plan hitched to a vehicle for the ac(Please turn to next page) cumulation of new capital, or whether it is primarily a means through which corporations gain tax privileges. Legislation governing ESOPs, however, insists that they must exist for the exclusive benefit of participants and their beneficiaries.

Studies show that emPloYees covered by an ESOP receive greater monetary benefits than emPloYees covered by conventional profit sharing programs. Specifically it works like this: an employe earning $1200 per month at MacBeath could have $2160 contributed to his ESOT account annually. After I I Years, the time when an emPloYe can become fully vested, his emPloYer's contributions could value nearlY $24 thousand. Beyond that the emPloYe would realize any aPPreciation in the value of the shares of company stock in his account.

An employe's shares are distributed to him when he retires or should he become permanently disabled or die.

(Should an employe leave the company before I I years of continuous service the percentage of his account he receives is determined by a simple formula). Before distribution the employe's voting rights are held bY a three-man committee that administers the ESOT. After distribution the ESOT has right of first refusal over the purchase of the employe's stock should he want to sell.

Like his emploYer, the emPloYe gets tax benefits from ESOP. When the employe's shares are distributed the employe is taxed on the amount of the original cost of his shares to the trust. No tax is PaYable on any appreciation in the value of his shares while they were held bY the trust. The rate of tax the emPloYe finallY pays is based upon a l0-year average, a tax procedure that can Place the employe in a low tax bracket.

An ESOP differs from a conventional profit sharing Plan in that funds contributed to profit sharing are lost from the capital surplus of a company forever. Further, employees can do nothing to make their profit sharing funds more valuable-a fact emphasizedby the beating that the profit sharing funds of even successful companies took in the bear market of '73-'14. As one long-time MacBeath emPloYe said, "it would be crazy for the company to put our retirement contributions into GP or Bendix when we can use that money for the growth of our own company."

The primary pitfall of ESOP for the employe is that the value of his ESOP account would plummet correspondingly with a drop in the value of his company's stock. ESOP turns workers into capitalists, and capitalism requires investment risks. Some experts fear that shaky corporations will unduly jeopardize their employees' security in order to raise quick cash.

(Continued next month)