Interview with Roland Attenborough

Roland Attenborough, ESOP Lawyer


How did you meet Louis Kelso?

When I was at UC Berkeley, around 1959-60. In the summer of that year I read the "Capitalist Manifesto." As a result, I became very interested in this concept. The book was written by Kelso and Mortimer Adler; at that time, Adler was very well-known, and Kelso was not. I attempted to contact Adler, and, after several attempts, his office told me to talk to Kelso. I did, had a meeting with him, and after a number of discussions I became very interested in the Capitalist Manifesto concept of broadened capital ownership.

At that point in the course of my various academic activities at the Berkeley campus, I invited Kelso to speak at a number of meetings of different organizations. This is how I became acquainted with him and helped to spread his ideas.

I was still an undergraduate, and I went to Hastings Law School. During those years, I stayed in contact with him, and he told me that, when I was ready to practice law, he would attempt to get me into his law firm (called, at the time, Kelso, Cotton, Seligman and Ray), which he ultimately did.

In the meantime, I went to Hastings in San Francisco, and then got my LL in taxation at NYU (I passed the CPA exam along the way). After that, I put in three years of experience with the accounting firm Lybrand, Ross Brothers and Montgomery, which was the predecessor to Coopers & Lybrand, and later, Price Waterhouse. After that – this was in 1969 – I contacted Kelso, and he arranged for an interview with his partners. I was accepted and joined the firm on May 1, 1969.


What about the Capitalist Manifesto really fired you up?

It was the obvious validity of the idea that there are two factors of production – human and non-human – and that the process of technology is to shift the burden of production from labor to capital. If you're utilizing a system for allocating income in society, then if everybody is not participating in production as we move to a capital or technology-based system of production, and the mass of people don't have any ownership of capital, then we have an inherently unstable situation, and we are forced into the process of redistributing income from the owners of capital to the people who contribute only their labor.

That seemed like such an amazing revelation, that our whole system was predicated on something that was inherently unstable, I thought this could be, at the risk of sounding dramatic, a major contribution to humanity.


What types of organizations did you invite Kelso to at Berkeley?

At the time I was very active in the Model UN, as well as other organizations. I had opportunities to invite him to a number of places in campus. Not much came of that in the end, but this was my attempt to spread his ideas on campus.

Ultimately, this made an impression on him, and led us to keep in touch over the following years. He had written many articles, and was involved in different activities; after the Capitalist Manifesto came out in1958, he wrote another book called the New Capitalists, which saw light in 1961. The former talked about the general concept of broadened capital ownership, with some specifics in terms of implementation of the concept in the United States. But it was in the New Capitalist that the "second income plan," which is how the ESOP concept was first labeled by Kelso, was described.


When you first joined Kelso's firm, what was your role?

I was an associate. They were in the process of adopting the first real "classical" leveraged ESOP, for, as I recall, Sullair Corporation. The plan document had been started and I came in and finished it, and did the trust agreement for the plan. It was basically a million dollar financing that purchased newly issued stock from the company – a classic financing of new capital to be owned by the company employees. This was my first ESOP project.


Is there any story you can share about Kelso?

We never really got very close on a personal basis, and of course, there were many times over the years that we had interactions on developing these ideas. He was very sure of himself on his ideas, and usually turned out to be right. Of course, not only me but many other people had questions and objections about his theories, but he had thought about it for so long and explored so many angles, that he had it all worked out and turned out to be right most of the time. He was very strong in his opinions and didn't change his mind very often.

One thing I always remember was, in the law firm, not all the people were as dedicated to his theory as he was. However, many of us were working on ESOPs, and he had a phrase he liked to say, that we were "doing well doing good." This was one of the things he would emphasize, to motivate people to channel their self-interest into the greater good, which I generally think was an effective approach.


What were some of the other ESOPs you did in the first 5 years, till '75 or so?

There was the Cats agency in New York, I believe it was an advertising agency. At the time, it was a major company.

The ESOP with the most exposure was probably the Brooks Cameras one. The company was located in San Francisco, they had a profit sharing plan and a money purchase pension plan, which got converted to an ESOP. Up to that point, the ESOPs were, from a structural point of view, essentially what we would call today a defined contribution plan in the profit sharing format, and they didn't have any of the stock and cash accounts that ESOPs subsequently became known for. Initially, we just took a standard profit sharing plan, where each participant had an account and that was it, the leveraging went on within the trust, but the allocation of stock and cash that we did later had not been developed at that point.

With Brooks Cameras, we initially adopted the plan in that format, except when we submitted it to the IRS in San Fransisco – and I was dealing with them at the time, the agent's name was Joe Gaspari – in the early days, in addition to the plan and trust documents, we submitted, more or less as an addendum to the application, all of the transaction documents. While the IRS would never actually issue the determination letter based on those documents, we submitted them anyway, so they would know what was going on in the company. We took an aggressive point of view with regards to this, that if we submitted the documents, they would have the opportunity to object, and we would receive the determination letter with the IRS being aware of the information.

In those days, there was no way to get advance approval of the transaction, and there still isn't today. Because we were on the cutting edge of this whole development, we decided to submit all the transaction documents in connection with the application for a determination letter, as a means of preempting and getting advance notice of any problems down the road.

The reason I emphasize this is that, in this case with Brooks Cameras, Gaspari took me to task about how the transaction would be dealt with internally, with respect to the ESOP's participants' interests. He pointed out that, since the biggest part of the contribution would be used to pay down interest, in effect the participants' account balance would reflect only the amount that actually went to pay off stock or the principal portion. Even though the contribution that went into the ESOP annually would be the same, an employee's interest would be vastly different depending on whether he was in the early part of the loan or the latter part of the loan.

From that analysis came the principal and interest formula for allocating stock. He got me to develop a system that would be fair to all the participants on a year to year basis. Out of that line of questioning came the idea of putting all the stock into a suspense account, and then, on an annual basis, as the debt was amortized, capitalizing the interest portion of the debt service, so that the amount of stock that would be allocated would be in proportion to the amount of contribution and not just the amount of principal that was paid down each year.

Out of that process, we developed a structure, as we revised the Brooks Cameras plan to incorporate a stock and cash account. At that point, we called the cash account the "other investments account," and the stock account was called the "company stock account." We provided for a suspense account, and as the principal was paid down, the stock would be released from the suspense account and allocated to the participants' company stock accounts in proportion to compensation, in the same way that the contribution would have been allocated to participants' accounts in a conventional profit sharing format.

That was the beginning of the principal and interest concept for allocating stock in a leveraged transaction.

Were you involved in picking the name ESOP?

I remember it very clearly. In the New Capitalist, the concept of employee ownership through a qualified plan was described, it was titled the "second income plan." The idea was that, by employees being participants in the plan, they would derive a second income, and that would be the source of capital, ownership. This was the theory behind the "second income plan" label.

Originally, Kelso was the senior partner in a law firm called Kelso, Cotton, Seligman and Ray. In 1970-71, he broke off and started his own law firm, called Louis O. Kelso, Inc.

The people involved in ESOPs went over and practiced with him in that law firm. At that time, he also became associated with Harold Bangert. He established Bangert & Company, which was an investment banking company. It had a loose affiliation with Louis O. Kelso Inc.; Bangert was the chairman, and he had been with the Statesman Group insurance company, which had also put in an ESOP that we did.

During the course of putting in that plan, Kelso assigned it the name "second income plan." Harold Bangert didn't particularly like the sound of that, and came up with the idea that this was really an employee ownership plan. So, after discussions, Harold said: "It's an Employee Stock Ownership Plan, this is what we want to call it."

Actually, at the time, Kelso himself resisted the name, since the name "second income plan" was so tightly tied into his theory... but the client was Bangert, and he prevailed, and from then on, the plans were called ESOPs. This was one difference of opinion Kelso didn't prevail on, and he was not happy about that; but as it turned out, it became accepted, and the term "employee ownership" came into its own. This was around 1971.


Did you ever work with R.K. Schaaf?

Going back, around 1971-2, Rainer Schaaf was with Union Bank in Los Angeles, and their head of the trust department was Gene Ford. Gene came into contact with the ESOP idea and became very interested in ESOPs from the point of view of the trust department. During that time, I went down to L.A. from San Francisco and had several meetings with Gene. Rainer was working in the trust department, and we became acquainted. I assisted them with understanding the ESOP concept and administering it and so on; Rainer eventually left Union Bank and started his own firm, R.K. Shaaf and Associates. From that time on, the firm did exclusively ESOPs, at least in the beginning.

In the early days, I was the only one who was really involved in the internal structuring and operation of the plans. It was during this time that the concept of the principal and interest release and allocation formula had been developed, and there was no real precedent for that kind of structure and administration of a plan. I wrote an accounting procedure manual that went into a considerable amount of detail on how to set up all the ESOP accounting, how to calculate the number of shares to be released and allocated, and other administrative issues.

That was also included in our applications to the IRS for the determination letters, and eventually became an addendum to the plan itself. In the early applications, we appended the manual to the plan, to let the IRS figure out how it's supposed to be administered.


Were you involved in ERISA in 1974?

Not specifically... I remember it well, since ERISA was initially going to be adopted in 1973, and it had blanket prohibitions against any kind of loans in a qualified plan. It was at that point that we became very aware of these issues, and Kelso somehow was introduced to Russell Long, who was chairman of the Senate Finance Committee at the time. They had a meeting in Washington DC sometime in 1973, and Russell Long became a real believer in the employee ownership concept and Kelso's other ideas.

As a result, Long got an exception into the ERISA list of prohibited transaction rules, and that is actually the origin of the ESOP in the Internal Revenue Code – it started out as an exception in the prohibited transaction rules that came with ERISA in 1974.

In fact, much of the regulatory framework is still in the regulations under Section 49'75, which is the prohibited transaction section. There was also Section 409 of the Code, that was adopted initially to create an ESOP tax credit, though the credit has been since eliminated. It included a lot of provisions relative to the types of stock voting rights and distribution rules, and all the things that are currently in Section 409.

At the time, the Tax Credit Stock Ownership Plan ("TRASOP") existed, and it provided a credit, but it was eliminated from the law. Section 409 remained, but it was amended so that it just provided a lot of rules that regulated the ESOP, which was established as an exception in ERISA. Most people think of Section 409 as the main section of the  Code that governs ESOPs. That is correct, except that a lot of the rules dealing with leveraging and the fiduciary rules related to leveraging are in the regulations under section 49'75. Operating the plan is mostly covered by rules in Section 409.


In 1977, ESOPs came under legislative attack. What was your involvement?

At that time, I had left Kelso, moved down to Los Angeles in 1976-7 and had my own firm. Those rules came out in response to criticism that has cropped up from time to time. They initially incorporated a lot of the principle/interest and fiduciary responsibility rules that had been discussed and incorporated in a lot of the things we had done even before ERISA. In ERISA, many of these things were pulled together and refined in what became Section 49'75, pretty much as they are today.

We were not actually involved with the people who wrote the regulations themselves, but we supplied the information to them.


If ESOPs had not come about, how much worse off would we be, in depending on redistribution?

The unfortunate truth is that we haven't made much progress in this regard. As you look at the political and economic situation today, we have a play-out of exactly what Kelso's theory implicitly forecast – that more and more of the burden of production is shifted to capital, and the number of people that participate in the ownership of capital is an insignificant portion. You have the classic situation of the 1% and 99% - this is a perfect play-out of what Kelso's theory called for. The 99% are people who predominantly don't own capital and depend on redistributive techniques that society has implemented to redistribute income from the 1% that own most of the capital, so that we can have a viable economy.

For anyone who has read and understood the Capitalist Manifesto, what's happened over the past 50 years is just the play-out of what the theory described, without society acknowledging that this has happened and responding.

Unfortunately, it's not what you would call a reader-friendly book. If more people read and understood it, there could be an overnight change in our dynamic, and in fact, with the Occupy Wall Street movement and the references to the 1% and 99% are such a classic illustration of Kelso's theory, that if the concept had gotten out in that process, there could have been such a transformation in the thinking of so many people. And it may not be too late, since the dilemma is still on the table for most Americans. It's not too late.