Employee ownership has a good name in our country. There is something satisfying about giving employees a stake in the company they contribute to. Many a time, that is achieved through an Employee Stock Ownership Plan, or ESOP.
ESOPs are really a kind of pension plan. Like other pension plans, they are actively administered by managers (and ultimately the employer), who have a fiduciary duty toward the participants. On the other hand, ESOPs are different from other pension plans in some respects, because they are meant to invest solely, or at least mostly, in the employer’s stock.
This creates one major distinction between the duties of an ESOP manager and those of other pension or retirement plans. Namely, because ESOP are meant to hold the employer’s stock, their managers’ duty to administer the plans properly does not include a duty to diversify, which other plans must do because it is a recognized strategy to minimize risk.
But the difference stops there. Managing an ESOP, the U.S. Supreme Court has held, is not a license to fall asleep at the wheel and stop administering the plan in a prudent and professional manner. In short, ESOP managers will be held to the same standard as managers of more general plans. So if the employer’s stock is tanking, the managers’ fiduciary duty of prudence may well require them to sell, or at least stop investing further in, that stock.
On the flip side of the coin, ESOP managers are not judged by a harsher standard either. Like their brethren running conventional plans, they are entitled to rely on market valuation. They are not expected to commit insider trading, which is a crime, by acting on non-public information simply because the main stock is inside stock.
Companies of many sizes have set up ESOP as a fair combination of employee motivation and generous benefits. But when things go wrong, lawsuits may still ensue, and when that happens, the stakes being significant, appeals often follow.