All posts in Management Transitions

ESOP Fact Sheet from Ann Kim

Katten Muchin Rosenman advisor and ESOP law expert Ann Kim has contributed a new article to ESOP Marketplace, called “ESOP Fact Sheet”. The article is designed as an in-depth introduction to ESOPs, and, aside from clear explanations of the plan’s nature and tax benefits, includes a preliminary checklist that can show, in no-nonsense terms, whether an ESOP is right for your company. The article also includes case studies of ESOP transactions and the impact they can have on company cash flow, vs. other types of buyouts.
Click to read the article today!


Comparing generations of business owners


Continued from Fostering Sustainability at ESOPs

We usually relate these generational issues to observations found in the history of Westvaco Corporation.  By the year 2000, Westvaco was the OLDEST and LONGEST LIVING company to provide consistent dividends to their shareholders EVERY YEAR.  It was also led by the Luke family since its inception, and was always a well regarded, well managed company.  Of importance to ESOPs and sustainability, the continuation of the business and the risks the Luke family took to grow and expand are the hallmark of great governance and succession planning.  To help with understanding the generational issues, we are providing what we think illustrates the behaviors by management as each generation unfolds, in family business jargon:


A)    Grandparents (1st Generation) did not go to college, they worked their tails off fixing customer problems, risking everything to meet payrolls, vendor demands; they signed personal guarantees for bank financing, and later retired from the business by being paid off, usually over their remaining lives, by the second generation; when they sell the company, the 1st generation is commonly worried about their employees and family members, as well as having the funds for retirement.  The story of Westvaco is as follows:  “Born into a Scottish papermaking family, Westvaco founder William Luke came to theUnited States in 1852. Ten years later he began running a plant for Jessup & Moore Paper Company in Harper’s Ferry,West Virginia. Although employed by Jessup & Moore until 1898, he set up a small plant of his own with his two sons (John and David) in 1889.”  In ESOP terms, the next generation needs to have the same commitment, passion and risk taking ability as the Lukes!


B)    Parents (2nd) went to State Universities, had tough jobs during their early years in the business, that is doing “dirty work,” because the grandparents needed cheap but dependable labor and wanting their children to know the value of “hard work;” learned the essential values of working with others and treating people well, be it customer, vendor or employee;  express appreciation for those who helped build the business which created the wealth to allow them to buy second homes, new cars, and a better life style their parents never had;  Family dysfunctions form in this generation, and show up in conflict, accepting mediocrity, incompetence, avoiding the difficult issues, and power plays that create “us versus them” working environments.  Of concern is when these dysfunctions show up at board meetings with siblings as directors, and one of them is the CEO!  Grand parents rarely have siblings telling them how to run the company, now the next generation does!  When the next generation begins their discussions of succession, and they look at maximizing their wealth, they do so because of their belief their next generation will not achieve the values they now have.  For Westvaco, their story was: “In 1904 William Luke relinquished the presidency of the company to his son John Luke, who held the position until 1921. William Luke died in 1912, at which time the company had four mills operating inWest Virginia,Pennsylvania,Virginia, andNew York.  While white paper production volume remained relatively constant, diversification accounted for virtually all growth.”  In ESOPs, strategic planning must be about changing the company during the transition.


C)    Grand Children (3rd) were born into, and did not earn wealth, raised with second homes, country clubs and private schools; during their student years, they worked in the office with easy jobs, avoiding hard work in the field; as a result, their expectations included being CEO because of ownership not performance and experience; without developing the successful values of leadership and entrepreneurship their prior generations had to suffer through and learn.  This generation usually views the business as an investment and people as expenses; since their value is based on prior generations success- not their own.  The 3rd Generation also loses sight of the people, customers, or relationships with each other as being the foundation of an effective company.  In many cases, 3rd generation peers and school friends were members of other wealthy families, so did not appreciate rank and file employees as people of value.  When thinking of succession, those non-employed family members, who do not work in the business, regularly look at the stock’s value to determine if they should harvest (sell) to maximize the value.  As a result, they will also focus their attention to dividend payments versus business reinvestment; resulting in concerns their prior generations never considered.  While we describe the 3rd generation as the generation that starts the slide to “shirtsleeves,”  The Luke family was able to avoid these characteristics for over 6 generations.  The Westvaco story for this generation is: “Ascending to president in 1945, David L. Luke, a grandson of the founder, established the company’s modern growth pattern. He immediately began the first of many expansion programs, spending the $17.5 million the company had accumulated during the war. The company also used some of its cash surplus to acquire more land, selling the trees too mature for papermaking to provide additional financing.”


The Great Grandchildren (4th and beyond) many times found themselves skipping college, starting their own business, working in fields far from the business such as social or political work, engaging in the fine arts or non-profit communities, sitting in a staff or shop floor job, or like their parents, enjoyed the experiences of unearned wealth.  They went to exclusive schools, drove the best cars, treated people badly, and behaved arrogantly.  These people rarely are criminals, or incompetents; they just have different choices to career development due to their wealth. One Harvard business school study determined that wealthy people develop a lack of care in others (please see  In some cases, these grandchildren build their own entrepreneurial opportunities and use the family wealth to create new wealth, becoming the next founders. In other words, they sell off their ownership shares to fund their own growth elsewhere.  For Westvaco, the story continues this way: “Hesitant to join his family’s company at first, David L. Luke’s son David L. Luke III became CEO in 1963, after working 11 years for WVPP. He maintained the product development momentum initiated by his father and continued to upgrade efficiency with frequent spending programs. Nearly half of sales in 1967 came from products introduced in the previous ten years.  In 1962 the Luke family controlled 30 percent of the company’s stock; by 1984 it controlled only two percent.  During David Luke III’s 24 years as CEO, Westvaco did more than most papermakers to free itself from the cyclicality of commodity production. His program that accomplished this, “differentiation,” continued under his successors–his brother John A. Luke, who became CEO in 1988, and John A. Luke Jr., whose attainment of the CEO position in 1992 represented the fifth generation of Lukes at the company helm.  In 2002, MeadWestvaco was formed as the result of a merger between The Mead Corporation and Westvaco.”


We provided the above paragraph to help illustrate some of the anecdotal behaviors of each generation.  Before we go further, we want to emphasize that these observations are neither consistent nor predictable.  Many companies avoid these descriptions.  Companies like Wal-Mart, Ford, Dow Jones, and Comcast are/were publicly held companies with family dynamics that show various stages in different ways.  For the Ford Motor company, their history of having family members in the CEO position is well documented.  While Henry Ford (1st) formed the business, his son Edsell nearly killed it, only to find Henry II to fill in for his dead father and rebuild the company.


Fostering Sustainability at ESOPs

Business Life Cycle: ESOP Sustainability – Succession

Shirtsleeves to Shirtsleeves in three Generations

By Jack Veale, President, PTCFO, Inc

The Business Life Cycle of a company involves not only an internal organization’s evolution, it also involves the company’s ownership transition and governance dynamics.  The title of this article is about an “American proverb” that shows up in other countries and cultures.  When Andrew Carnegie coined the term in the late 1800’s, he was describing the actions and behaviors of a typical family owned business with high wealth.  Almost every language has a common philosophical view of wealth and enterprise.Italy’s translation, for example, is “from barn stalls to the stars and back to barn stalls.” Great Britainhas the phrase: “from clogs to clogs in three generations.” For ESOP companies, we describe it as “from nonexistence to nonexistence in 3 generations.”

What these phrases mean is the founder of a successful business started “in shirtsleeves” or a nonexistent business, and by the time the third or last generation of owners finished their ownership, the ensuing generation ended up in “shirtsleeves” or “nonexistence” with the company.  Statistically, less than 15% of Family-owned and/or ESOP companies survive the passing of the torch three times.  Family businesses describe these transitions from one generation to the next as a “family business legacy.”  For ESOPs, the word is “Sustainability.”  The “typical” generational transition profile for any company is usually described by the following: “first generation starts the business, second generation builds the business, and the third generation harvests the business, so their offspring are back to “shirtsleeves” again.

In the ESOP world, the word “Sustainability” reflects the same condition as family businesses; ESOPs do not survive many years or generations after the debt of the founder is paid off.  Statistically, in 1995 there were 9232 ESOPs filing 5500’s in the US.  By 2010 there were 6,664 ESOP filings.  In other words, the number of companies forming a new ESOP was less than the number of ESOP companies no longer filing tax returns as an independent ESOP. Why?  ESOP companies usually falter during the transitions to a new management team or style with a new vision that doesn’t work.  In some cases, the value driven by management is less than what the market will pay.   What these ESOP’s lost was the ability to grow in new directions and increase stock value.

In my next post, I’ll discuss aspects of each generation.