Comment: In a recent Business Opinion piece (April 12th, 2004), the author states that employee share ownership is a good thing, but concludes that the Eircom employee share ownership trust (ESOT) is not the model.
Presenting his own analysis of some failings of the trust, the author gives little consideration to the merits of the Eircom ESOT model. Such an analysis can best be challenged by a proper consideration of the facts.
In May 1999, the trustee of the ESOT bought a 9.9 per cent stake in Eircom for cash. It used €127 million (paid by the firm in recognition of the employee pension contributions) and €121 million borrowed under a 10- year, commercial loan. When added to a 5 per cent stake received for the transformation agreement negotiated with the unions, it brought the ESOT's stake to 14.9 per cent. The trustee also had the right to nominate one director to the company's board.
Less than five years on, the trustee has doubled the ESOT's stake, trebled its board representation and cleared the €121 million 10-year loan. It is worthy of note that the ESOT is now by far the largest single shareholder. In addition to the current 29.3 per cent stake, worth approximately €335 million at the IPO, the ESOT holds convertible preference shares worth €173 million and 68 million Vodafone shares worth approximately €130 million. The ESOT also has a new loan of €70.5 million. In that five-year period, the 14,500 participants of the Eircom ESOT have also benefited from tax-free distributions of shares and cash amounting to €268 million.
The reality is that the wealth distributed to the participants already substantially exceeds the original investment by the ESOT. In individual terms, a person with full participation will, by the end of this month, have received over €26,350 tax-free from the ESOT. This equates to €42,000 of taxable income for an employee who pays the higher rate of tax or, to put it another way, more than a year's take-home pay for an ordinary worker in Eircom.
Those who would argue that the ESOT should be wound up and its proceeds distributed immediately owe the participants a fuller explanation. Why would participants be in a better position if the significant tax-free benefits of the ESOT were set aside and instead a large amount of their investment was surrendered to the Exchequer in the form of capital gains tax, income tax, PRSI and health levies? It is indisputable that the ESOT is a highly complex legal and financial structure, made even more so by the various corporate transactions over the past five years. This perhaps explains why so few commentators fully understand the roles of the ESOT or the trustee.
The ESOT has given the participants a measure of influence over the company. It was, after all, the ESOT participants who, in August 2001, effectively decided that Valentia would succeed over eIsland in their bids to buy out the firm. Rarely is credit given to the ESOT for holding out for improved terms for all shareholders and, indeed, for not trying to block a buy-out that would have irreparably damaged the share price.
It is also the fact that it is the role of the unions, and not the trustee, to look after the interests of the ESOT participants as employees of Eircom. Instead, the ESOT trustee's role is solely to look to the interests of participants as the ultimate recipients of the economic benefit of the shares. It is for this fundamental reason that the trustee does not, and cannot, distinguish between the interests of employees and former employees when making shareholder decisions.
In relation to the Valentia takeover in 2001, it is again important to understand that on a ballot of participants, 92 per cent of those who voted supported the Valentia buy-out.
Views expressed recently suggested that the trustee board, chaired by Con Scanlon, holds the 29.3 per cent stake to guarantee Mr Scanlon's appointment as vice-chairman. In fact, the ESOT has the right to nominate any of its nominee directors to be the vice-chairman for a period of three years from admission and thereafter has the right for so long as it holds not less than a 10 per cent stake. In reality, the trustee board, which includes directors drawn from three different unions and appointed by the elected employee representatives, two senior company executives and a senior corporate lawyer (as an independent director), has always been unanimous in all its decisions.
Mr Scanlon was not appointed as vice-chairman in November 2001 because he was ESOT chairman or CWU general secretary. He was nominated because of his extensive knowledge of the firm and the industry and his business acumen. It was no less a journal than The Irish Times which, in its business and finance pages, acknowledged his ability when it awarded him the accolade of 'Businessman of the Year' for 2001.
Maoilíosa Ó Cúlacháin is ESOT manager with Eircom
