ESOPS And The Irish Crisis Bernard Daly ESOP Director and Trade Unionist

What is an ESOP ? ESOP is the common term used to describe an all employee share participation plan which is made up of a combination of two Revenue approved share schemes ESOP is the common term used to describe an all employee share participation plan which is made up of a combination of two Revenue approved share schemes The Employee Share Ownership Trust (“ESOT”) and the Approved Profit Sharing Scheme (“APSS”) are the two schemes in question. The ESOT typically acquires and holds shares before appropriating them to for employees through the APSS. The Employee Share Ownership Trust (“ESOT”) and the Approved Profit Sharing Scheme (“APSS”) are the two schemes in question. The ESOT typically acquires and holds shares before appropriating them to for employees through the APSS. Whilst in the ESOT the shares are owned, managed and controlled by a Trustee company Whilst in the ESOT the shares are owned, managed and controlled by a Trustee company

TransformationPurchase 5% Stake 9.9% Stake Individual Employees APSS ESOP Structure ESOT

Why ESOPS ? Different to other schemes Different to other schemes Long term and collective Long term and collective Role on Board of Founding Company Role on Board of Founding Company Influence on Founding Company Influence on Founding Company Similar terms Similar terms Anti-dilution Anti-dilution Financial Reward for Employees Financial Reward for Employees

Corporate Governance Typical ESOP Trustee Company Board- Typical ESOP Trustee Company Board- –4 elected or nominated employee reps –2 nominated by founding company –1 independent professional director Management delegated to Secretary/administrator

Corporate Governarnce ESOPS very successful until current crisis in protecting the interests of employees ESOPS very successful until current crisis in protecting the interests of employees Some ESOPS had increased their stake beyond 14.9% Some ESOPS had increased their stake beyond 14.9% ESOPs highly influential in blocking unwelcome takeovers ESOPs highly influential in blocking unwelcome takeovers Other ESOPs not so influential Other ESOPs not so influential Difficulties for ESOPs in particular sectors Difficulties for ESOPs in particular sectors

Trade Union Analysis EFP should fit in with TU analysis of good sustainable companies EFP should fit in with TU analysis of good sustainable companies Need for long term investors and stakeholder participation in times of change Need for long term investors and stakeholder participation in times of change Traditional I.R. structure not capable of coping with delivering the scale of change in the timescales required. Traditional I.R. structure not capable of coping with delivering the scale of change in the timescales required. New Partnership model required to deal with current crisis. New Partnership model required to deal with current crisis. Opportunity at present for employees to invest on favourable terms Opportunity at present for employees to invest on favourable terms

Irish Crisis Global crisis gave rise to Irish banking crisis Global crisis gave rise to Irish banking crisis Irish banks engaged in irresponsible lending to housing and property sectors Irish banks engaged in irresponsible lending to housing and property sectors Lack of regulation, poor corporate governance Lack of regulation, poor corporate governance Rise of crony capitalism Rise of crony capitalism Property bubble created giving illusion of wealth Property bubble created giving illusion of wealth Collapse of banking nearly lead to collapse of state as state guaranteed private bank debt Collapse of banking nearly lead to collapse of state as state guaranteed private bank debt IMF/EU bailout of €85 billions necessary to cover bank bail out and government spending following the withdrawal from the markets IMF/EU bailout of €85 billions necessary to cover bank bail out and government spending following the withdrawal from the markets Major austerity programme to reduce fiscal deficit from 30% to less than 3% of GDP by 2015 Major austerity programme to reduce fiscal deficit from 30% to less than 3% of GDP by 2015 National problems exacerbated by Eurozone crisis National problems exacerbated by Eurozone crisis

Facts on Irish Economy Growth rate has been negative and economy will grow only very slowly over the next 3 years Growth rate has been negative and economy will grow only very slowly over the next 3 years Unemployment is high at 14.5% and is not projected to decrease very much Unemployment is high at 14.5% and is not projected to decrease very much Population increase of 8% between 2006 and 2010 Population increase of 8% between 2006 and % of population born outside the State 10% of population born outside the State Emigration has recommenced but our well educated workforce is now more mobile Emigration has recommenced but our well educated workforce is now more mobile National debt to peak 118% of GDP by 2013 with strong possibility of second bailout National debt to peak 118% of GDP by 2013 with strong possibility of second bailout Fiscal deficit of 8% of GDP Fiscal deficit of 8% of GDP One major positive is the continued strong performance of the export sector One major positive is the continued strong performance of the export sector

Problems for ESOPS and Share Schemes Generally Downsizing and restructuring of companies Downsizing and restructuring of companies Collapse in share values Collapse in share values Reduction or non-payment of dividends Reduction or non-payment of dividends Changes to tax incentives Changes to tax incentives Financial problems for individual schemes Financial problems for individual schemes Most ESOPs have borrowing commitments Most ESOPs have borrowing commitments Greater need for Trade Unions to prioritise jobs and pensions Greater need for Trade Unions to prioritise jobs and pensions

Employee Questions Where were the regulators ? Where were the regulators ? Where were the rating agencies ? Where were the rating agencies ? Where were the auditors ? Where were the auditors ? Where were the institutional shareholders? Where were the institutional shareholders? Corporate Governance failure ? Corporate Governance failure ? Concern for Future Employee participation? Concern for Future Employee participation?

Lessons of Current Crisis Need to manage the Eurozone and Global Economy better Need to manage the Eurozone and Global Economy better Markets are not always self-correcting Markets are not always self-correcting Unregulated markets may reduce and not improve social efficiency Unregulated markets may reduce and not improve social efficiency Maximisation of shareholder value can be no longer the sole way to guide business Maximisation of shareholder value can be no longer the sole way to guide business Sustainable companies funded by long term capital is the way to go Sustainable companies funded by long term capital is the way to go Current crisis has been a setback for EFP generally and ESOPs in particular but should not necessarily be so Current crisis has been a setback for EFP generally and ESOPs in particular but should not necessarily be so

ESOPs as a Response 1980s experience very valid in the context of the current Irish crisis 1980s experience very valid in the context of the current Irish crisis Similar economic difficulties overcome Similar economic difficulties overcome Economy prospered until the excesses of the Celtic Tiger Economy prospered until the excesses of the Celtic Tiger ESOPs became a feature of the privatisation programme in Ireland and will do so again ESOPs became a feature of the privatisation programme in Ireland and will do so again

Benefits Creates a relationship beyond the wage relationship Creates a relationship beyond the wage relationship Behaviour modifications Behaviour modifications Aligns stakeholder interests in productivity and performance Aligns stakeholder interests in productivity and performance Long term loyalty and commitment Long term loyalty and commitment Spill over into IR environment Spill over into IR environment Gains for society in general are significant in terms of redistribution effects and social cohesion generally Gains for society in general are significant in terms of redistribution effects and social cohesion generally

ESOPs And Europe Set to become a feature of EU economies due to the aging of Europe’s population resulting in problems around business succession Set to become a feature of EU economies due to the aging of Europe’s population resulting in problems around business succession In France and Germany it is estimated that 33% of owner entrepreneurs will retire in the next 10 years In France and Germany it is estimated that 33% of owner entrepreneurs will retire in the next 10 years This could affect up to 2.8 million workers and 690,000 SME’s every year This could affect up to 2.8 million workers and 690,000 SME’s every year The successful transfer of ownership is therefore vital for both economic and social reasons The successful transfer of ownership is therefore vital for both economic and social reasons Increasing interest in how they work at EU Commission level Increasing interest in how they work at EU Commission level Apart from Ireland, there are ESOPs in UK and in other EU countries such as the giant Voestalpine steel company in Austria Apart from Ireland, there are ESOPs in UK and in other EU countries such as the giant Voestalpine steel company in Austria

Conclusions ESOPs must be seen as a part of the solution to the current global economic crisis ESOPs must be seen as a part of the solution to the current global economic crisis Great opportunity now to persuade governments and EU to pass legislation and provide greater incentives for companies to introduce ESOP schemes Great opportunity now to persuade governments and EU to pass legislation and provide greater incentives for companies to introduce ESOP schemes Need for education of workers, trade unions, employers, politicians and the general public Need for education of workers, trade unions, employers, politicians and the general public