Because Trump Administration officials’ conflicts of interest have dominated the recent headlines, it’s time for the President to heed the Wall Street Journal’s pre-inauguration advice to liquidate his business holdings to avoid being “accused of a pecuniary motive any time he takes a policy position.” The paper’s editorial board asserted that “one reason 60 million voters elected Donald Trump is because he promised to change Washington’s culture of self-dealing, and if he wants to succeed he’s going to have to make a sacrifice and lead by example.”
He can change Washington’s self-dealing culture without sacrificing his own interests by selling his company to his employees through an employee stock ownership plan (ESOP). An ESOP would benefit him, his family, his employees, the local communities where his businesses operate and all Americans. Here are several reasons why an ESOP makes good business and political sense:
- The company will be sold at fair market value, not a liquidation price.
There likely would be many buyers for Trump’s various enterprises. If forced to sell them quickly, it will be difficult for him to realize the full value of his businesses; he may lose some of the value created by years of hard work. That’s unfair to him and un-American. Implementing an ESOP eliminates the need to liquidate his holdings at “fire sale” prices.
Best practice in an ESOP transaction is hiring an outside, independent, trustee to negotiate the deal in the employees’ best interests. The trustee hires an independent, qualified financial advisor to help determine the company’s value. Trump, his family and his employees will benefit from this arms-length, fairly negotiated, non-fire-sale process.
- The transaction can avoid self-dealing though innovative financing
An ESOP purchases a company via a leveraged buyout. It borrows the funds from a bank, and, often, other sources, and repays the notes with interest out of the company’s future profits. Unfortunately, any private lender that finances Trump’s ESOP transition will be perceived as providing loans because it wants special favors in the future. These questions are currently being raised about the financing of Jared Kushner’s businesses.
Trump can avoid the appearance of any conflict by implementing an innovative financing strategy: having all of us, “we the people,” finance the Trump ESOP through the Federal Reserve Bank (using the Federal Reserve to help create more employee-owned businesses is an idea first suggested more than half a century ago by ESOP creator Louis Kelso). In fact, Senator Bernie Sanders proposed something similar (i.e., a U.S. Employee Ownership Bank) in legislation he introduced to Congress in 2014. Proceeds from the sale could be transferred to a blind trust and held against the ESOP loan. The funds would become unencumbered as the note is repaid. We the people would be guaranteed repayment of the loan by our president.
- Trump’s children can continue their involvement with the business.
Trump wants his children to run his businesses while he is president. This could also be accomplished under an ESOP structure. In fact, ESOP transactions value and promote management continuity. In almost all of them, the current management team continues operating the business as an employee-owned company. President Trump can eliminate the appearance of conflicts of interest by following this practice. In contrast, if forced to sell to a competitor, customer, or outside investor, there would be no guarantee the new owners would retain his children or continue operating the business in a fashion that President Trump desires.
The key to a successful ESOP sale would be that President Trump, his immediate and extended family do not own any stock in the new company. For true independence, 100% must be owned by the employees through the ESOP trust. Some of President Trump’s policy positions — like the recently passed tax reform plan — benefit his business holdings. In the ESOP case, those benefits will accrue to all his employees, not himself or his family. They will also benefit all Americans as the new ESOP enterprise earns the profits that enable it to repay its Federal Reserve note.
- Trump embracing the ownership solution will help “make America great again.”
One of the things that makes America great is our free enterprise system. Ownership is a key component in the success of our economy. By selling his firm to the employees, President Trump will demonstrate a clear commitment to keeping and growing American workers’ jobs. Employees will gain the opportunity to earn shares in the business with no out-of-pocket investment on their part.
Recognizing the value of ownership, Congress has created tax incentives to encourage more employee ownership in America. President Trump, his company and employees will all benefit from those incentives. Moreover, more than thirty years of research demonstrates ESOP companies outperform their conventional competitors in terms of productivity, profitability, employee wages, job creation, job retention and retirement benefits. The American economy benefits when there are more ESOP enterprises and when more citizens have an ownership stake in their companies’ success.
This ownership solution will restart and re-energize the Ownership Society discussion introduced by former President George H. W. Bush. And an ESOP will be concrete validation of the promise made in the 2016 Republican Party platform to create more ESOP plans that “enable workers to become capitalists.”
Clearly, an ESOP doesn’t eliminate every possible conflict of interest. It, however, offers a pragmatic, middle-ground solution to a thorny issue that doesn’t appear to be going away any time soon. It’s time for President Trump to lead by example and share the opportunity of ownership with all his employees. Seizing the ownership solution will benefit him, his family, employees, customers, suppliers and, most importantly, all Americans.
Jim Bado is the founder of Workplace Development. He has provided successful, field-tested communication, education, and organizational-development services to ESOP firms for more than 25 years, including communicating an ESOP’s benefits in non-technical terms, building effective ESOP committees, developing an engaged ownership culture, and linking ESOP ownership to employee performance and stock value. Jim coauthored the book Open-Book Management and also provides business literacy education to Fortune 1000 companies across the world.
Jim Bado, Workplace Development