Webster’s dictionary defines a "fable" in several ways: 1. a feigned story or tale, intended to instruct or amuse; 2. a fictitious narration intended to enforce some useful truth or precept; 3. the plot, story or connected series of events forming the subject of an epic or dramatic poem; 4. any story told to excite wonder; 5. fiction, untruth, falsehood. The title of this article is a play on the venerable Aesop, whose musings turn out to be highly relevant to world of ESOP oversight and valuation. Mercer Capital renders services for ESOP fiduciaries that cannot remotely be characterized as fable. In over twenty years of providing valuation services in connection with ESOP installations, plan year updates and plan terminations, we have assisted many victims of bad advice and misinformation.
In recent years, Mercer Capital has seen a significant increase in the scrutiny of process and the propriety of conduct concerning ESOPs and their fiduciaries. In turn, Boards of Directors and ESOP Trustees (both inside and third party) are seeking more skilled and experienced service providers to enhance their understanding of the valuation process and to improve the credibility of their valuations. If you are an ESOP Trustee or a Board member of an ESOP-sponsor company, the ante for prudent decision-making continues to rise rapidly.
There are many reasons that ESOP valuation is an increasing concern for sponsor companies. Much has been written concerning Enron and other egregious cases of corporate malfeasance. As if greed was not bad enough to bring the hammer down, the demographic tsunami of plan participants requiring diversification or retirement is contributing to an inescapable tide of emerging liability issues. Compounding these concerns are the competing liquidity needs of non-ESOP shareholders who may be calling on finite resources to address their own needs. Last, but certainly not least, the economy is yawing and pitching in a storm of cyclical and fundamental waves which we have arguably never experienced. In the midst of all this turbulence, a strong dose of examination is required:
Revisiting some of Aesop’s fables, we can find many relevant morals concerning the structuring and planning of an ESOP.
This brief article cannot possibly provide a complete inventory of items and issues that may be important to assessing the health of an ESOP or the prudence of its sponsor company and fiduciaries. If your answers to some of the above questions have you concerned or curious, take action to prevent or correct potential problems. Mercer Capital has been providing valuation services on behalf of ESOP Trustees for over twenty years. Contact us to discuss a valuation need in confidence.
Reprinted from Mercer Capital's ESOP Valuation Advisor- Volume 13, No 1, 2004.