EO History

How Louis Kelso Invented the ESOP

Ever wonder how ESOPs came to be? Here’s the full story:

“All truth passes through three stages,” wrote the nineteenth-century philosopher Arthur Schopenhauer. “First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.” The idea that employees should own a good part of the company they work for was indeed both ridiculed and opposed before it became the quasi-mainstream notion that it is today. But it didn’t proceed smoothly through Schopenhauer’s stages. It has regularly cropped up and faded away. It has undergone periodic reinvention. Today’s most common form—the employee stock ownership plan, or ESOP—owes its existence not to any deep historical roots but to a small band of devotees who rallied around the ideas of an iconoclastic lawyer and self-taught social theorist named Louis Kelso. Thanks to their efforts, the ESOP is now well ensconced in the United States, both in policy and in practice.

Louis O. Kelso, 1913-1991

Louis Orth Kelso was an American original, the kind of grand contradictory character who crops up repeatedly in the history of the United States. Born poor, he made good. A successful lawyer and investment banker, he sought to transform the economic system that had been so rewarding to him. His several books are by turns inspiring, illuminating, impossibly grandiose, and utterly impenetrable. The economic world view he espoused attracted that band of devotees and generated a good deal of attention from pundits and politicians, yet was ignored or dismissed—indeed, ridiculed—by conventional economists. A charming, witty, persuasive man, he was also single-minded and opinionated. He suffered fools poorly—and “anybody who disagreed with him was by definition a fool,” as one erstwhile colleague remembers. A 1970 article in the Nation by the journalist Robert Sherrill, though generally admiring, was headlined “Louis Kelso: Nut or Newton?” Like Sherrill, much of the world didn’t quite know what to make of him.

As with many minor luminaries, what we know of Kelso’s early life was what he himself told us. He was born on December 4, 1913, in Denver. His grandparents on both sides were of pioneer stock, but his father, a musician, was not of a practical turn of mind, and it often fell to his mother to support the family with the little grocery store she managed. (As best she could: “The railroad tracks ran alongside the store and the hobos dropped off at night and robbed the place too regularly to permit profit,” wrote Sherrill, presumably reporting Kelso’s recollections.) Kelso was going on sixteen when the stock market crashed in October 1929, and he came to adulthood in the heart of the Great Depression. Bright and inquisitive, he wondered how on earth this catastrophe could be happening. Why were factories running at half speed, their unused machinery rusting?

“Why were millions of threadbare and ragged people foraging in garbage cans or standing in soup lines,” he wrote, “when farmers could grow mountains of food and fiber on land now lying idle and manufacturers were as eager and able to make clothing and every other useful thing as storekeepers were to sell them? Why did growers saturate entire orchards of sweet ripe oranges with gasoline before throwing them into rivers to float past starving children? Why did trains meant to carry people rattle along with coaches almost empty, while freight trains were loaded down with homeless, jobless vagrants?”

His elders weren’t much help: “They took it for granted that a capitalist economy would sooner or later collapse.” President Hoover counseled patience, reminding the nation that the country had been through fifteen major depressions in the last century. Kelso was like an ambitious young scientist who learns that the authorities have given up on the single most important problem in his field. “Brash young man” that he was, he recalled, he decided he would figure out the answer.

So Kelso read, worked, and put himself through school. Landing a scholarship to the University of Colorado, he presented himself to the chairman of the economics department and said that he planned to study the causes of the Depression and what could be done about it. It was a touchy subject—economists didn’t really know what was responsible for the Depression—and the chairman didn’t take kindly to the cheeky fellow who figured he already had the inkling of a solution. (“He said, ‘You’re just the type of young man we don’t want,’ ” recounts Kelso’s widow, Patricia Hetter Kelso. “‘You are a troublemaker.’ So he kicked him out.”) Instead of economics Kelso studied business and finance, earned a law degree, and began practicing. When war broke out, he enlisted in the navy and was commissioned as an officer in naval intelligence. “He was trained for a secret mission behind Japanese lines,” writes Stuart M. Speiser, a lawyer-turned-author who is as close to a biographer of Kelso as we have, “. . . but he was shipped to the Panama Canal Zone and put in charge of processing counterespionage information from Latin America.” That undemanding job gave him the opportunity to produce a book manuscript, which he titled The Fallacy of Full Employment.

The “theory of capitalism” and The Capitalist Manifesto

But when the war was over, Kelso decided against trying to get his new book published. He needed to earn a living. Maybe he was even a little uncertain as to whether he was on the right track. “I said to myself, ‘Louis, you’d better settle down and practice law, which is what you’re trained to do, and let the country recover from the war,’” he remembered later. “‘Stick your manuscript in the closet, and if after 25 years you still think the thesis is valid, dig it out, update it, and publish it.’” The “closet” was a bank vault, and there the manuscript stayed until 1955, when Kelso happened to get into a discussion with the philosopher Mortimer Adler.

That year, Kelso had been attending a series of lectures by Adler on the Great Books. Great Books was a popular reading program that Adler had helped to develop and that had made his name about as close to a household word as most philosophy professors ever get. Now, invited to a weekend party by a mutual friend, the two men were arguing about what they called the “theory of capitalism.” Kelso charged Adler with ignorance of the theory. Adler suggested there was no such theory and that he of all people ought to know. Kelso responded that Adler may have thought he had read everything in the field, but he hadn’t—the manuscript in his closet, for example. Irritated—and worried that this mouthy amateur would now present him with a huge dog-eared manuscript—Adler asked for the “five-minute version” of Kelso’s ideas. Kelso began expounding. When he had finished (again, by Kelso’s account), Adler “jumped about 12 feet off the ground. ‘There’s no justice!’ he said. ‘I’ve spent 22 years studying this subject, and you stumble across the answer with no effort at all.’” In just a couple of years, the two men had written a book they titled The Capitalist Manifesto, based partly on Kelso’s unpublished manuscript. They sent it off to four publishers. All accepted it; Random House published it in 1958. Thanks in part to Adler’s name, the book promptly made the best-seller list—though the “academic economics establishment,” as Speiser notes, “practically ignored it.”

To read this modest-sized volume today—and not many people do, since it is long out of print—is to step back into another era. That sense of time warp stems partly from the book’s cold war–inspired title and language, and partly from its 1950s-style technological innocence (“It seems certain that atomic energy will be the basic source of industrial power for the production of wealth in the future”). It also stems from the presentation itself. The Capitalist Manifesto’s arguments are abstract and almost startlingly dry (“Concretely stated, if A, B, C and D are four persons or families in a society having only four independent participants in the production of wealth; and if, through the use of the productive property they own, A, B and C contribute to the total wealth produced in the ratio 3, 2, 1, then the distributive shares they should receive, according to their just deserts, should also be in the ratio of 3, 2, 1 . . .”). Its proposals are laid out in mind-numbing detail (“Effective security flotation procedures during the transition period may require the establishment of preferential opportunities for investment by households whose aggregate capital interests are subviable”). A cynic might suggest that not everyone who bought the book actually plowed his or her way through it.

But the reviews were favorable, and there was a powerfully simple idea lurking amidst the verbiage. It was an idea that defined the book’s appeal and that would eventually make Kelso into a nationally known figure.

In the 1950s, Americans were worried not only about the Russians but about being thrown out of a job. Unemployment wasn’t unusually high, to be sure. But the nation’s economic future seemed uncertain. Automation was making its way into industry. Economists and others were arguing that machines would eventually take over nearly all manual work. What were people to do? The Depression was fresh in every middle-aged adult’s memory; equally dismal times might lie ahead. But wait—here was this smart guy Adler (and somebody named Kelso) with a solution! Yes, these authors said, the pace of automation was likely to increase. But no one should fear it, because it held the potential of releasing everybody from mind-numbing manual work. The key was to break the link between a person’s income and survival on the one hand and his or her job on the other. No one should have to live on labor income alone. If more people enjoyed what the rich already enjoyed, namely ownership of capital and the income that flowed from that ownership, they would get along just fine. If you have enough stock, after all, you don’t worry about unemployment. And if everyone had an income regardless of whether or not they were working, they could continue to buy things. The economy would be that much less likely to collapse.

Could the idea be implemented? Sure, said the authors. The rules governing ownership and capital accumulation are just social inventions. Social inventions can be changed. If we really want a just, democratic society—not to mention an economy that isn’t prone to depression—we can create mechanisms by which ordinary people can build up capital and eventually live off it. We can figure out policies that enable the process. We can write tax laws that facilitate it. Indeed, we can begin right now, with the “transitional programs” that the authors spelled out in so much detail. The programs’ objective was simple, they said: it “should be to maintain a steady decrease in the proportion of households that are entirely dependent on wages and a steady increase in the number that are able to live on capital earnings.”

That, so it seemed, was an idea that anybody could get behind. Forget socialism, Adler and Kelso were arguing. Let’s turn everybody into capitalists.

Kelso’s plans and programs

Capitalism in Kelso’s view had always been marked by a maldistribution of income. The rich got richer because they enjoyed the fruits of capital ownership. The not-rich struggled to get along, because they lived only on the fruits of their labor. With automation, the return to capital could only increase, and workers could lose what little income they had. Governmental attempts to redistribute income through social programs were ineffectual. The only solution was to broaden the base of capital ownership.

As to how that might be possible, Kelso’s brilliant insight was to see that individual savings alone would never be sufficient—especially if, as he predicted, real wages began to stagnate. Few wage earners could ever hope to accumulate enough capital to replace their labor income just by stashing a little away each year. That was the trouble with the stock-ownership plans of the 1920s: they expected workers to buy stock, albeit at a discount, a little at a time, through payroll deductions. Kelso had another idea. Look at what happens, he suggested, when a company owner wants to expand his business. The owner borrows money, buys physical capital such as machinery or buildings, and pays off the loan with the profits that the new capital generates. Every year U.S. businesses added billions of dollars’ worth of new physical capital. Suppose the laws were changed, suggested Kelso, so that people with no ownership got a chance to buy shares of stock representing that new capital. They could borrow the money to buy the shares and pay the loan off over time with the dividends from the stock. To ensure that dividends would be sufficient for this purpose, Kelso advocated a law requiring corporations to pay out all their earnings as dividends and to raise new capital through debt (which in turn could be funded by an ESOP).

Presto—the rich would still get to keep what they had, but now the not-rich would be able to accumulate capital of their own as the economy grew. And nobody would be getting a handout, because all the stock would be paid for through future earnings.

In his books, Kelso spelled out only some of the practical details as to how all this could be accomplished. He left many others to be worked out in the future. But he was very much proposing a broad-based governmental initiative, open to all needy citizens, and very much not proposing shared ownership at the company level, which by definition would be open only to that company’s employees. The ESOP—mentioned only briefly in The Capitalist Manifesto and not at all in Kelso and Adler’s next book, The New Capitalists—was at first a bit player on Kelso’s grand stage. Oddly, it wound up as the star of his show and was arguably his greatest legacy.

How that happened reflects one more contradiction in Kelso’s multifaceted character. A determined visionary and big-picture thinker, he was at the same time a practical lawyer and an opportunistic political operator who never let his theories get in the way of what could be done right now. In 1955, for example, he was a junior partner in a San Francisco law firm. One of the firm’s clients was part owner of a company called Peninsula Newspapers, Inc. (PNI), which published several small papers. Kelso learned that this client and the other owners of PNI wanted to sell the company to its employees. He also learned that the employees liked the idea and were working hard to make it happen. A man named Gene Bishop, who coincidentally had been Kelso’s commanding officer in the navy, was now second-in-command at PNI and was spearheading the effort on the employees’ behalf. The parties had engaged Crocker Bank to scrutinize the relevant finances. Could Bishop and his colleagues put together the capital they needed to buy the paper through savings, payroll deductions, second mortgages, investments from relatives, and so on?

Alas, the bank’s conclusion was negative. There just wasn’t enough money to be found. If the employees borrowed what they needed, they could afford to pay only the interest, not the principal. “When Gene Bishop passed my office that day,” Kelso remembered, “I said to him, ‘Hey, Gene, are you a newspaper owner now?’ He said no and told me the story. I said, ‘Gene, I think it’s very possible you were given bad advice.’  . . . He said, ‘Listen, this is a life-and-death matter for me. I’m not going to stay with this newspaper if it’s going to be sold to Hearst or some other chain. I like it the way it is.’” So Kelso said he would look at the file and see what he could come up with. Next day he reported his conclusions to Bishop. “‘Gene,’ I said, ‘this thing will fly like a birdie. You don’t have to take anything out of your pockets or out of your paychecks. You don’t have to mortgage your house. You don’t have to do any of those things. Five or six years downstream, the employees will own the business free and clear. And the present owner will have his money and his interest.’ Gene thought I was kidding, but I was not.”

The secret, of course, was for the buyers to pay for their ownership out of the company’s future earnings. It is a familiar principle today, since it is the basis for most of the leveraged buyouts (LBOs) that have taken place in the last few decades. But in the mid-1950s it was an astonishing notion. Kelso set up profit-sharing trusts to borrow the money to buy the business from the retiring owners. Employees’ individual accounts were credited with share ownership as the trusts paid off the loans. “Kelso’s blueprint was a smashing success,” reports Speiser. The newspaper company prospered. The trusts paid off the original owners even faster than Kelso had allowed for. By 1974 PNI’s balance sheet showed shareholders’ equity of more than $6 million. When the employees did finally sell to another newspaper publisher, they realized a huge return on their minimal investments.

So Kelso spent the 1960s and early 1970s organizing more such buyouts. (They came to be known as Kelso Plans, a label he found distasteful.) He also continued with his contradictory life. He was a successful San Francisco lawyer and later an investment banker. He was a member of the best clubs, a director of several companies, a frequent attendee at the annual summertime Bohemian Grove retreats, known for attracting the cream of the (male) establishment. His habitual dress included a well-tailored suit and a blue bow tie with white polka dots. On the other hand, he was devoted to spreading what he was ever more frequently calling his “revolution.” He wrote more books, collaborating now not with Adler but with his young research associate Patricia Hetter, whom he later would marry. He gave numberless speeches and wrote (again with Hetter) many articles. He whispered in the ears of powerful businessmen, believing he could persuade them to implement his notions. “His idea was to start the capitalist revolution through the business system,” says Patricia Hetter Kelso. But the ears, however attentive to Kelso they might be at the moment, were seemingly deaf to what he was arguing for.

So Kelso decided to launch an attack on Washington, hoping there might be a way to line up political leaders behind his ideas. Granted, he had had only spotty success with this approach so far. Barry Goldwater, the Republican candidate for president in 1964, “listened politely” to Kelso at the Bohemian Grove that year, but deferred judgment on the ideas to his economic adviser, Milton Friedman. Like nearly all academic economists, right and left, Friedman thought Kelso was far more nut than Newton. Gerald Ford, then a congressman, got excited about Kelso’s ideas and set up a meeting in 1965 with a Republican task force; later that year, Kelso spent several hours with Richard Nixon, who declared himself “no economist” but added, “politically I could sell this to the American people in six months.” Neither meeting led to anything. Undaunted, Kelso in 1968 set up a Washington-based organization he called the Institute for the Study of Economic Systems and hired an idealistic young attorney and civil rights activist named Norman Kurland to head it.

Kurland and Kelso put together a board for their institute, making a point to include representatives from the left (longshore union leader Harry Bridges, future D.C. mayor Marion Barry) and from the right (the chairman of Arthur Andersen, actress Shirley Temple Black). They set about raising money, though without much success. (“By 1970 Kelso could no longer pay me,” remembers Kurland.) Kurland began casting about, both for receptive ears and for legislation that he could push in a Kelsonian direction. Sen. Paul Fannin of Arizona was intrigued enough to sponsor Kurland’s “wish list” legislation, dubbed the Accelerated Capital Formation Act, and invited Kelso to make a presentation to several members of the Senate Finance Committee. But the legislation went nowhere. In 1972, Kelso and Kurland testified on legislation to save the financially troubled railroad system in the eastern United States, proposing that it should be owned by its employees. Sen. Mark Hatfield of Oregon liked the idea, agreed to sponsor legislation to this effect, and was joined by four other senators. But it was still a rearguard action unlikely to garner much support.

At that point Kelso tried a different tack. He wanted more than anything else to get to Russell Long, the Louisiana senator who was chairman of the Finance Committee and one of the most powerful men anywhere in government. Long, he thought, not only might be receptive, he also was in a position where he could get something done. So Kelso began nosing around to see who might know him. Kelso’s friend Henry McIntyre, a fund-raiser for Planned Parenthood, had an idea: his organization’s national chairman, a Louisiana physician named Joe Beasley, might know Long. Sure enough, Beasley did. But he recommended that they approach Long by way of his legislative assistant, Wayne Thevenot.

Beasley called Thevenot—the name is pronounced TEV-uh-no—and sent him a copy of a 1968 Kelso and Hetter book called Two-Factor Theory: The Economics of Reality. (The original and much better title of the 1967 hardback edition had been How to Turn Eighty Million Workers Into Capitalists on Borrowed Money.) Then Beasley started calling. Had Thevenot read it? When he still hadn’t, some months later, Beasley said he was flying to San Francisco and invited Thevenot to join him, at Beasley’s expense. Thevenot agreed: “It was the last part of that proposal that caught my attention,” he said later. He took the book with him to read on the plane. He didn’t like it. “There was obviously something wrong with it. It was too damned easy,” he told Speiser. But after two days of listening to Kelso’s persuasive voice, he changed his mind and suddenly had all the passion of the newly converted. “I just became totally sold on the idea,” he recalled. He went back to Washington to try to persuade his boss, Russell Long.

Long was the son of Huey Long, the legendary Louisiana “Kingfish” who wanted to make every man a king. More than just Finance Committee chair, Russell was a brilliant politician in the mold of Lyndon Johnson, both well liked and well respected by senators on both sides of the aisle. What he supported tended to get passed. What he didn’t support tended to get buried. As for his politics, Long wasn’t the soak-the-rich radical his father had been—indeed, he was often perceived as just another southern Democrat whose prime concern was the health of the oil and gas industries—but he still had several populist bones in his body. So Kelso’s ideas didn’t require a hard sell from Thevenot. “I didn’t have to go very far because Long started tracking on it right quick,” remembered Thevenot. “. . . He said, ‘I’ve got to meet this guy Kelso.”

On November 27, 1973, they met. Kurland had picked Kelso up at the airport the day before. On the way in, they had heard the well-known newscaster Eric Sevareid supporting Sen. Hatfield’s Kelso-like proposal for the railroads. It seemed a favorable omen. Next day, they went to the Senate, where Long was engaged in a debate on campaign reform, and waited in the gallery. At seven o’clock Long sent for his limousine. The four men—including Thevenot—went to the tony Montpelier Room in Washington’s Madison Hotel for dinner.

Dinner lasted three or four hours. Kelso outlined his ideas. Long listened and then began to talk. He told anecdotes about Huey. He expounded notions of his own. His father had been a “Robin Hood” populist, he said. He himself wasn’t a Robin Hood populist, but he liked the idea of more people becoming capitalists. Of course, he had questions and concerns. If everyone was an owner, would they be like the idle rich, never working? And if this was such a good idea, why hadn’t it already gone further? Who was against it? Kelso’s answers are lost to history. But they were evidently satisfactory, because a couple of hours into the conversation, Long’s tone changed. “Louis, you’ve made your sale,” Thevenot recalls him saying. “Now, what can I do to help you?” Kurland promptly interjected that they already had a bill, introduced by Sen. Hatfield, to apply Kelso’s ideas to the railroads. “I said, ‘We need somebody with guts to take this and make it into law,’” remembers Kurland. “He looked at me and said, ‘You bring me something tomorrow morning.’”

From that moment forward, Kelso’s ideas were a live issue in Washington and would be written into a series of legislative initiatives over a period of many years. But there was a twist: what Long had fastened onto, ironically, was the idea that workers in a company should share ownership, through ESOPs, not that the government should somehow make ownership available to citizens in general. Speiser asked him why he focused on ESOPs rather than on the more general thrust of Kelso’s writings. Long replied that ESOPs were a stepping stone, a device that “starts people thinking about the idea.” Eventually, people would have to figure out how to redistribute all the new wealth that the nation created every year, but not right away. “He doesn’t have the whole blueprint drawn up yet,” observed Speiser, whose book appeared in 1977, “but he’s going to keep on writing ESOP into every tax law in which he can find it. He’s going to try to force corporations to broaden the ownership of new capital, even if he has to do it all by himself.”

The ESOP turning point

The history of ESOPs since that time reflects, in no small measure, Long’s efforts to do exactly what Speiser predicted. He began by trying to get employee ownership into the Railroad Reorganization Act. But other senators were leery because the rail unions weren’t on board, and Congress ended up deciding only to sponsor a study of the idea. Long then inserted provisions regarding ESOPs into the Employee Retirement and Income Security Act (ERISA), the landmark legislation that has governed company-sponsored retirement accounts ever since its passage in 1974.

This was a turning point. Until then, Kelso and his associates had been setting up legal entities known as stock bonus plans, which then borrowed money to buy stock from retiring owners. They argued that the law permitted this. But most lawyers disagreed, so Kelso found it difficult to sell his ideas to many companies. ERISA—which happened to be the bill that was moving through Congress and that Long felt he could use to make such transactions legal—finally put the government’s imprimatur on Kelso’s ideas. “Before ERISA passed, you were dealing with a much higher degree of skepticism,” explains Ron Ludwig, an attorney who worked with Kelso at the time. “You had to show people and their lawyers that this was in fact legal. Once ERISA passed it became easier. They were still skeptical . . . but it was easier than dealing with no law at all.” Of course, it was simply historical coincidence that ERISA was the first law governing ESOPs. It was the “tax train leaving the station at the time,” as one expert puts it, and Long’s expertise and inclination naturally pointed him in the direction of supporting ESOPs by writing them into tax law.

At any rate, ERISA was just the start. Over the next dozen years, Long was instrumental in passing numerous pieces of ESOP-related legislation. (Many would be amendments to ERISA, while others were amendments to the tax code.) He didn’t have to do it all by himself, as Speiser had suggested he might; on the contrary, he was already inspiring a band of devotees who—if they hadn’t done so already—were now deciding to commit their lives to furthering employee ownership. Kelso, Thevenot, and Kurland, the triumvirate that had started Long down this path, continued their efforts. So did Jack Curtis, a staff member of the Senate Finance Committee, and Kelso associate Ron Ludwig. NCEO founder Corey Rosen was a staffer for the Senate Small Business Committee at the time; a young academic named Joseph Blasi was working on the House side as an aide to a newly elected representative. “The House and Senate staffers started meeting for lunches,” Blasi remembers, “and we started cooperating on bills and discussions. Out of those meetings came a lot of things . . . [including] a lot more obvious House support for Russell Long’s initiatives in the Senate.” When Jack Curtis went on to practice ESOP law, a lawyer named Jeff Gates, who had worked with Ludwig in San Francisco, took Curtis’s place on the Finance Committee staff. Gates, who later would be recognized as a leader in the field of employee ownership, liked to work on a dozen different possibilities at once. “I’d come up with fifteen ideas,” he recalls. “He [Long] would go with ten of them into the Finance Committee, hope to get eight of them out of committee and maybe three out of conference. And the last time I looked, we had twenty-five separate pieces of federal legislation.”

Today, much of that legislation has come and gone, amended beyond recognition or simply allowed to expire. The Tax Reduction Act of 1975, for example, created the Tax Credit Stock Ownership Plan, known as TRASOP, giving employers a 1 percent tax credit on certain capital investments if they contributed a corresponding amount of stock to an ESOP. In effect, the government was paying companies to print shares and give them to employees. The provision was popular with large companies, but it didn’t in fact get much stock into employees’ hands. In 1981 the Economic Recovery Tax Act phased out TRASOPs in favor of a new device known as the PAYSOP (payroll-based stock ownership plan), in which the government effectively bought a company’s stock through tax credits and gave it to employees. That, too, was popular, but it expired at the end of 1986. Meanwhile, employee-ownership provisions were inserted into various bits of special legislation. The Chrysler Loan Guarantee Act of 1979, for instance—otherwise known as the Chrysler bail-out—required Chrysler to create an ESOP and provide it with 25 percent ownership of the company over four years. Meanwhile, too, large public companies that felt themselves vulnerable to hostile takeover realized that a large block of stock held by “friendly” owners—their employees—might keep the corporate raiders at bay. ESOPs proliferated among large businesses for that reason alone.

They also proliferated for a reason Kelso had never imagined. In 1979, when Corey Rosen was working for the Small Business Committee, a man named Ed Sanders came into the office. He owned a twenty-employee plywood distributor in Alexandria, Virginia, called Allied Plywood. He wanted to sell the business to those employees through an ESOP, but he wasn’t happy with one part of the deal. If another corporation bought his company and paid him in stock, he noted—John Deere and others had made offers—he could defer capital gains tax on the proceeds. But if he sold to the ESOP, he’d have to pay the taxes right away. That didn’t seem fair. He himself would sell to the ESOP anyway, he said, but he thought that other company owners should get a better deal if they did the same.

So Rosen drafted a bill allowing for deferral of capital gains taxes for company owners who sold a certain percentage of their stock to an ESOP. Long and his staff didn’t think the provision was important. Rosen’s boss, the liberal senator Gaylord Nelson, feared it was too socialistic. (Rosen reminded Sen. Nelson that Barry Goldwater, Russell Long, and Orrin Hatch, a conservative from Utah, all backed employee ownership.) But another committee member, Donald Stewart, a liberal senator from Alabama serving out the remains of a fill-in two-year term (he was not reelected), did introduce the bill and got Long, Nelson, and a bipartisan group of House and Senate members to go along with it. And though it didn’t pass right away, the provision survived; in 1984, almost as an afterthought, it was tossed into a late-night conference-committee agreement on a tax bill that contained a number of ESOP amendments, including eliminating the PAYSOP. In fact, Long made the requirements even more lenient than Rosen had suggested. That provision—deferring taxes on the sale of private-company stock to an ESOP—has been a key incentive for the creation of thousands of such plans.

So ESOPs spread, and the community of people interested in them grew in number and in influence. Kelso himself continued to lead the charge. He gave more speeches, wrote more books, and coauthored more articles. He was admiringly profiled on television by Mike Wallace on 60 Minutes in 1975 and by Bill Moyers on World of Ideas in 1990. (The 60 Minutes profile included scornful comments from the noted economist Paul Samuelson, who thereby seemed to be ridiculing just about the best idea to come down the pike in a long time.) A trade organization, the ESOP Association, came into existence. Rosen left the government and, with Karen Young, created the National Center for Employee Ownership (NCEO) as a center for research, information, and advocacy.

To be sure, the spread of employee ownership provoked some opposition. Labor unions strongly disliked the idea at first, perhaps wondering whether workers who were also owners would really need a union. Some Reagan administration officials also wanted to get rid of ESOPs. Most people, of course, just ignored the whole thing—or if they knew about it, wrote it off as of marginal importance. It continued to grow, nevertheless. Over time, law firms, consulting firms, and business-valuation firms began to specialize in ESOP work. Banks learned how to do ESOP-related lending. Articles began to appear on companies that were owned by their workers; the companies themselves began mentioning their ownership in their ads. By 1990 thousands of companies had ESOPs covering millions of employees, a constituency that Congress was loath to antagonize. To all appearances, employee ownership in this particular guise was here to stay.

Excerpted from Equity: Why Employee Ownership Is Good for Business (Harvard Business School Press, 2005), copyright © Corey Rosen, John Case, and Martin Staubus. Sources can be found in the book.

  1. Cecile Betit

    01/07/2019 at 4:08 pm

    The Kelso Workshop at Rutgers this week makes this article an especially timely one. The helpful synthesis of events and players, several of whom continue to be involved in promoting ESOPs and capital ownership, brings the program’s underpinnings to life. Hopefully, the article will be broadly distributed to encourage owners looking for succession planning to consider an ESOP. Thank you for this well-written dynamic read.

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