Last week, the National Center for Employee Ownership (NCEO) hosted its annual conference in Pittsburgh. An estimated 1,700 people were in attendance, a number that grows annually. Employee Stock Ownership Plan (“ESOP”) sustainability is quickly becoming one of the most discussed topics at this conference--many ESOPs are mature or maturing as shares have been allocated to participants and the debt used to purchase those shares has been satisfied.
 
To remain sustainable after the initial transaction, successful organizations must develop succession plans while simultaneously generating enough funds to grow the business and also buy out retiring employee-owners. All three areas must be thoughtfully planned for the business to thrive.
 
In March, Cornerstone celebrated 2 ½ years of being an ESOP-owned organization, and we have already made decisions with long-term viability in mind. One of our objectives was to remain independent and build a multi-generational advisory firm aligned with the needs of our clients. Previously, I have written about several of our next-generation team members who already have substantial leadership roles at Cornerstone. Of our 30 people, 9 are principals who, in total, have 125 years of experience working with us and leading our team. The average age of our principals is 43. Following them, we have a group of team members with more than 100 years of experience and an average age of 34.
 
Recruiting, developing, and empowering talented people is one of the most important and challenging functions we have as leaders of the organization. Doing this well, however, has been one of the keys to our success and is why we were selected by Pension & Investments Magazine as one of the Best Places to Work in our industry for the third year in a row[1].
 
The financial planning required for a smooth transition to the next generation is no less important than recruiting quality employees. There are many characteristics unique to ESOPs, one of which is management’s responsibility for providing funding to buy shares from participants who leave the organization. Unlike for other qualified plans, ERISA does not require mandatory funding for ESOPs. However, corporate success creates higher share values and therefore greater future liabilities.
 
The nature and magnitude of liabilities are unique to each company, as they are based on the demographics and assumptions used to calculate them. As a result, repurchase obligation funding has become a popular topic. It is important for decision makers to understand that slight differences in assumptions, when compounded over time, can create a wide range of outcomes that require proper planning.

Cornerstone is well positioned to work with companies in developing repurchase obligation funding strategies. Our team has more than 30 years of experience working with all forms of retirement plans, including more than 20 years working with ESOPs. Many of the concepts we have developed have their origins in other qualified plans. These include capital market assumptions and discounting, calculation of a normal cost, identification of a liquidity ratio, and the creation of an interactive model to run what-if scenarios.
 
In addition, we are recognized industry leaders and have extensive experience implementing custom investment and insurance strategies--we know when to properly use each. In most situations we have been involved in, funding has either been inadequate or improperly allocated. Understanding the pros and cons of various financial instruments is critical to making appropriate funding decisions.
 
Most importantly, we are an ESOP. We don’t just work with them; we are one. Being “part of the club” gives us tremendous insights into the issues that ESOPs face in all these areas.
 
We chose to become an ESOP-owned firm because we felt it was an excellent cultural fit for our company and in the best long-term interest of our clients. Thirty months later, we can confirm that it was absolutely the right decision. We always welcome you as “part of our club” and look forward to seeing you all again soon.  
 

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[1] Details of inclusion in rankings here:
https://www.pionline.com/specialreports/best-places-to-work/20181210
https://www.pionline.com/specialreports/best-places-to-work/20171211
https://www.pionline.com/specialreports/best-places-to-work/20161212