Dear Dave
Is there an ideal number of owners to have in an engineering firm? Are more owners better than fewer owners, or are we better having fewer owners?

We are just over 150 staff members in size and currently have 18 shareholders. Of the 18, a group of four owns about 75% of the total stock, with the rest of the stock more or less equally split between the others. We historically have had only two or three owners. We expanded the ownership ranks 5 years ago with the idea that providing access to stock would be welcomed as a motivational benefit for our staff, but also to create a pool of potential buyers for stock as our older principals were ready to retire from the firm.

We’ve had a mixed result and are somewhat disappointed. We thought more people would buy more shares then has occurred, and the staff members who have bought seem kind of ambivalent about their ownership positions.
CF NE

Dear CF
Generally speaking, I prefer seeing fewer owners than more owners.
This is particularly so for small to medium sized firms (less than a few hundred staff size) where management and ownership typically tend to be thought of as synonymous. Wherever that link exists, you are better off to keep the stock tightly confined within the entrepreneurial oriented management and leadership personalities within the firm—or as I like to call them, The Empire Builders. That is not to say other, non-leadership individuals are not vitally important, because they are. It is just that there are so many non-equity ways to engage and reward key everyday individuals without confounding the governance and efficient management of the firm.

Firms with too many owners, who have not made a clear and distinct separation between management and ownership, tend to get bogged down by having too many people involved in too many decisions. Decision making can become time consuming and difficult as management feels obligated to gather input from all owners, and when decisions are finally made, run the risk of only taking common denominator actions that can be universally supported. The extra time can grind the management process to a crawl, and consensus decisions are often not the best.

Even when the line has been supposedly drawn between ownership and management, it is not uncommon over time for the minority investment owners to begin to feel second-class or shortchanged in some fashion as a result of not being consulted by the majority. This could be a factor contributing to the lack of more takers for your firm’s shares and the general ambivalence you are concerned about.

In larger firms, where management and ownership expectations are clearly de-linked by sheer size alone, I have no real issue with making some shares available for purchase as an investment opportunity and reward for those individuals who via their service and performance are offered the chance to participate in the financial success of the firm. This can be through direct share ownership or indirect ownership through vehicles such as an Employee Stock Ownership Plan (ESOP).

ESOP’s are a form of tax qualified defined contribution profit plans that differ from conventional profit sharing plans in that they invest in the company’s own shares. Within the allowable rules, the company elects from one year to the next how much of its profits it wishes to contribute to the plan. The plan uses the tax deductible contributions to buy company stock, and the stock is proportionately distributed to all qualified plan participants. When employee participants leave the firm, they are entitled to a distribution based on the then value of the shares credited to their account within the plan, less any forfeitures if they happen to be less than fully vested when they leave.

As a result of a number of significant tax benefits associated with ESOP’s they have become increasingly popular as an ownership transition tool in engineering firms in recent years. ESOP’s do have their shortcomings however. They can be time consuming and expensive to administer. Firms with ESOP’s are required to obtain regular independent valuations to determine the fair market value of company shares. These valuations tend toward the higher, nosebleed-end of the price spectrum when compared to the values typically used for buying and selling stock when no ESOP is involved. While this may be good news if you’re a principal heading for retirement and selling your shares to an ESOP formed to facilitate your buy-out, high share prices can saddle the firm with a heavy drain on the future cash flow of the company as it routinely operates its ESOP and buys and sells stock.

ESOP’s are often promoted as being good for morale as it's thought employees will take a heightened interest in the firm because they are now owners and will begin to think and act more like owners and become better employees as a result. While I’m sure this does happen to some extent, my experience has been that the indirect nature of owning stock in an ESOP is often too abstract for the typical employee to take the ownership linkage to heart. And in today’s post Enron, World Com and Arthur Anderson environment, you really have to stop and ask yourselves if you wouldn’t be better stewards of employees’ best interests by contributing instead to a conventional profit sharing plan where retirement investments could be broadly diversified and not risk-concentrated in the single stock of the company sponsoring the plan. In recognition of this risk, regulations do allow older employees to begin to diversify their individual ESOP accounts to other investments as they approach retirement age.

While there are firms who are 100% owned by their ESOP, it’s more common to see the ESOP owned portion of the firm held be below 50%. For control and reward reasons, the majority of shares continue to be owned directly by key principals and selected others.

HOME   BACK