ESOP Advisor Hall of Fame Interview - David Binns

Please share with us a brief history of your career.

This year marks the 40th year of my career in the ESOP field. I had the good fortune to be hired as the managing director of the ESOP Association in November, 1984. That turned out to be quite fortunate timing in that it was in July of 1984 that Senator Russell Long of Louisiana, at the time, the Chairman of the Senate Finance Committee, pushed through the first major ESOP tax incentives. At that time, there was a small group of ESOP advocates, but suddenly, the mission was to get on the road to promote the benefits of ESOPs to the business community. It was a great learning platform for me. I was there for six years, and the membership grew rapidly and we had lots of programs to help get the word out on ESOPs. It was an interesting opportunity for me to learn from some of the best ESOP consultants in the industry in working with them on a variety of workshops, conferences and, of course, extensive lobbying efforts to help expand the political support for ESOPs. I left the ESOP Association to join the Foundation for Enterprise Development a non-profit established by Bob Beyster, who was the founder and CEO of Science Applications International Corporation (SAIC). Dr. Beyster managed SAIC for 37 years. When he finally stepped down as CEO, they had something like $7 billion in sales and 45,000 employees. SAIC developed its own innovative, broad-based employee ownership model that served as a template for numerous other technology companies looking to incentivize employees with ownership.

The Foundation for Enterprise Development was later branded as the Beyster Institute. I stayed there for 17 years and helped lead a broad range of employee ownership consulting, publishing and advocacy work. I also did a lot of work in the international promotion of employee ownership, often in the context of privatization. That was back in the era of the market liberalizations in Europe and the former Soviet Union and elsewhere. There was a lot of interest in that type of thing, and of course, with SAIC's high-tech focus, we also expanded into other forms of employee ownership consulting.

I was recruited from the Beyster Institute by Macfadden & Associates, a client to join their Board and later to join the company as Chief Operating Officer. A few years later., I became President and CEO and served in that role for eight years. I joined Macfadden right as they completed a second-stage ESOP transaction to become a 100% ESOP S Corp. So, I had a chance to manage an ESOP through the full cycle, including the ultimate acquisition of Macfadden by PAE in 2018. I worked at PAE to the end of the year and left by mutual agreement.

Ron Gilbert of ESOP Services, whom I had known and occasionally worked with for most of my career, called the very next week to ask if I would join ESI as a senior consultant. So, for the last five years, I have been working with ESOP Services to design and implement ESOPs in mid-market companies.

Did you have any interaction with putting together that legislation in the 80s?

As the Managing Director, later the Executive Director, of The ESOP Association, I worked with the then-General Counsel, Michael Keeling, who succeeded me and became president and served in that role for the next 20 years or so. Michael was leading the lobbying efforts, and I was the treasurer of the ESOP PAC was involved in a lot of the lobbying efforts regarding ESOP legislation. We did a lot of work behind the scenes with various insiders like Jeff Gates, who at the time was the ESOP counsel for Senator Long. There was, of course, an active contingent of folks within the ESOP community working through the Association on all of those ongoing activities.

One of the more exciting aspects of my time there was watching Senator Long at his best to carve out a legislative legacy for ESOPs. As I mentioned, it was 1984 when the first major ESOP tax incentives were passed but the Section 1042 tax deferral which was implemented at that time is still a primary stimulus for new ESOP creation today. The 1984 legislation included a tax deduction for ESOP dividends and incentives for banks (which as later repealedJust two years later during the Reagan Administration was the famous tax reform effort that resulted in a dramatic restructuring of the tax code, yet ESOPs came out in great shape thanks to Senator Long’s masterful legislative abilities. The ESOP Association was actively engaged in helping to organize the ESOP community to protect the interests of ESOPs. That's what's kind of exciting – that ESOPs have largely been enhanced from a legislative perspective in the 50 years since the passage of ERISA. Senator Long was the one who got ESOPs that legislative foothold and then built from there. It’s certainly a credit to the long-term interests of the employee ownership community that Congressional support for ESOPs has remained so strong.

Another of the real dividends of my job at the ESOP Association was that it afforded me an opportunity to have a personal relationship with Louis Kelso, the founder of ESOPs. You can imagine, since I was running the trade association that promulgated his ideas, Louis Kelso was quite supportive of my work! He would come to Washington, DC to make presentations, including on occasion, testifying to Congress and I got to spend a good bit of time with him. Quite an impressive man and a very lively character. It was an honor to know him in a personal way while I worked there.

I bring him up because Kelso's core insight, that was dismissed as “rank amateurism” by the economists of the day, is that technology is inexorably, and with increasing speed, replacing labor as the fundamental input into wealth creation. And now, with the AI era we're in, technology is driving new technology. Kelso believed that you have to have widespread ownership of capital assets to ensure a vibrant economy. The ESOP was the most prominent of many approaches that he outlined in this theory of structuring the economy in a way to ensure we're all owners. So, he was a very lively character and it was an honor to know him in a personal way while I worked there.

Were Kelso’s books influential on you?

I certainly read The Capitalist Manifesto and Binary Economics, and in my role at the Association I helped put together booklets of various essays of Kelso and others, so I did have a good familiarity with it. I found the concept compelling. I, myself, am not a trained economist. I have more of a visceral sense that employee ownership is a good thing and let's promote it for all the reasons that we talk about. There's a real vigor, it seems, to me to the argument for ESOPs and broad-based ownership and going back to Kelso, he saw that from a kind of a core philosophical economic perspective and spent the rest of his life beating his drum for that idea.

You said Louis Kelso was a “lively character.” Can you give us a flavor of that?

I mean this respectfully because it brings to mind the story of how the man died from a heart attack just as he was putting on his to go out to dinner in San Francisco where he lived. The point is, he went out in style. Louis was full of himself, always wearing a bow tie. He was secure in his convictions and he would go into Congress or wherever and would expound confidently on his philosophy. So he could be a bit much for some people, I think, in his self-assurance, but it's great to quote the philosopher Isaiah Berlin on that, who described two types of knowledge of thinkers: the hedgehog and the fox. The fox knows lots of things, but the hedgehog knows one thing very well.” Well, that was Louis Kelso and his vision of binary economics.

What individuals have most helped and/or influenced you in your career?

I think I would start literally with how it did start for me. I was hired to run this small trade association back in 1984. Hardly anybody knew about ESOPs so the fact that I was ignorant about ESOPs put me on par with most of the people in the country at the time. During the first several days on the job, the guy who hired me flew me from Washington DC to Chicago expressly for the purposes of meeting with Jared Kaplan and Greg Brown, both of whom passed away in recent years. They were two of the preeminent ESOP lawyers at the time and for many years to come. Jared and Greg provided me kind of a steady legal feedback over the years. I remained professionally close with them throughout that time.

I think in terms of intellectual influence, should mention Corey Rosen at the National Center for Employee Ownership. Corey founded NCEO a couple of years before I joined the ESOP Association, . I have always found Corey's ability to write and speak about employee ownership to be brilliant. So, he's been a big influence.

Probably, though, at the top of the list in many ways is Bob Beyster of SAIC, both for his vision of creating an extraordinary employee ownership infrastructure at SAIC that helped nourish the 37-year growth of an extraordinary technology enterprise. After Dr. Beyster retired, SAIC transformed into what are today two publicly traded companies with a combined market cap of approximately $20 billion today. So that's his business legacy. Somebody drew something for him that he hung behind his desk, and it was him on a pedestal pointing this direction and the whole crowd he's talking to is looking in the other direction. The drawing had the slogan, “No one of us is smart as all of us.”

Dr. Beyster was a nuclear physicist who left a bureaucratic company to start SAIC with handful of employees, many of whom had left with him from his old employer. At the end of their first year they managed to turn a sliver of a profit (SAIC was profitable every quarter for the ensuing 37 years that Dr. Beyster ran the company),on less than $250,000 of total income, but Dr. Beyster had already diluted his personal SAIC ownership stake to 10%. He would give stock as incentives and rewards for scientists for winning business and doing cool work and that tradition continued and expanded as the company grew over the years. I think Dr. Beyster’s key insight was that not only is no one person as smart as all of us, but he was also managing a scientific organization. He couldn't pretend to control the explosion of scientific knowledge, so he used ownership as both an incentive and a glue to attract top performers to join a company of technology entrepreneurs.

I worked with Dr. Beyster for many years and it was a privilege to know him in a little bit more personal sense. I never worked within SAIC, but I worked closely with him and senior leadership on issues relating to employee ownership in initiatives both within the company and with other companies looking to emulate SAIC’s employee ownership strategies.

Please tell us about unique ESOP transactions with which you have been involved.

While I was at the Beyster Institute I was approached by a former SAIC insider who wanted to explore how he could structure an employee buyout. Unlike most of the other employee ownership consulting work we did at the Institute, which was typical short-term, in this instance I worked with the CEO and his management team over the course of more than a year to build out a team of ESOP consultants that completed a 100% ESOP buyout to divest a for-profit company from its university parent.

This is what was so fascinating about that deal. The company that became Alion Science & Technology was able to transition from being owned by a university to becoming a 100% ESOP-owned S corporation. That was an opportunity for me to work withand help build a larger team, and to be part of a very complicated transaction that was unlike most.

As president and CEO at Macfadden, I was ultimately the person leading the negotiations for the acquisition of Macfadden by a much larger company. Lessons learned from that experience has greatly enhanced my ability to provide advisory services at ESOP Services, because having gone through that experience and understanding how a deal works from within was an important experience for me.

You had mentioned some work with employee ownership related to the collapse of the Soviet block. Could you expand upon this a little bit?

That was related to my work with the Beyster Institute. The work afforded us an opportunity to see employee ownership from a different cultural, theoretical and political reality perspective, as was the case with our work in Russia. In the Yeltsin era there was a great deal of effort to design an employee ownership system to facilitate the privatization of Russian enterprises. That plan worked on paper, but they didn't have the full legal and securities infrastructure to prevent the oligarchs from buying everything up and it led to quite a different world.

One of the prominent board members of SAIC back in the day was William Perry who became Secretary of Defense. He, at the time, was also the president of the Stanford Center for International Securities and Arms Control. Perry was interested in promoting the privatization of the Russian defense enterprises in particular, and he, having seen the SAIC story, felt that employee ownership was a good model. And so, we were given a five-year subcontract through Stanford University to go in and work with Russian enterprises. The singular experience there was our first trip over to the Saratov Aviation plant, located in the city of Saratovon the Volga River. south of Moscow. Literally two weeks before we arrived the government had ended Saratov’s status as a closed military city.. We ended up staying there for three weeks, working through translators to design this concept, and the Saratov Aviation Plant actually took advantage of the reforms at the time to set up what was called a worker cooperative as part of the initial Gorbachev/ Yeltsin era initiatives to promote economic liberalization. So that was another cool experience.

In wrapping up, I would just add that the most exotic locale where I worked advising on ESOP privatization was Ulaanbaatar, the capital of Mongolia. That was an exotic post. I actually went there twice.

I think perhaps that brings to mind one other. This involved a collaboration with Ron Gilbert and ESOP Services, with whom I now work. He was an advisor to me on an assignment I had for the US Agency for International Development to prepare a report to an agency in South Africa that was promoting the privatization of state-owned enterprises. Employee ownership today remains and is actively promoted within South Africa. We designed some theoretical legislation and presented a report based on our work with several prospective privatization candidates. That was right at the time, just couple of years after the end of apartheid, so it was exciting and a chance to be influential in promoting broad-based economic development. We did similar work in Zimbabwe and some other African countries. Employee ownership today remains and is actively promoted within South Africa.

How have you seen the ESOP community evolve over your career?

There was a very small ESOP mafia back in the day. They were the pioneers who carved out the legislative and general framework for making it possible for ESOPs to eventually grow and prosper. But it's no discredit to them to note the positive changes I've seen since then, certainly growth in the industry but also the rigor and professionalism that's brought to the transactions. Part of that is under the gaze of the Department of Labor, which has been fairly confrontational at times in its approach to regulatory oversight of ESOP transactions. Nevertheless, the growing professionalism within the ESOP community is a credit to the industry.

Does recent legislation or court decisions impact your role as an ESOP advisor?

The forthcoming regulations from the Department of Labor for defining “adequate consideration” for purposes of the valuations of privately held ESOP companies have been pending since 1987. It's been pending and pending and pending, and ultimately, the ESOP Association sued and worked with Congress to require the Department of Labor to come out with said regulations. So that will certainly be impactful, given the importance in the ESOP context of the rigor of the valuation approach. The problem is that without any regulatory certainty, it’s easy to be second-guessed by plaintiffs or the Department itself. But it does show that it's a very, very difficult process to come up with regulations. Ultimately, it is that very rigor of the process, the independence of the ESOP trustee, and the credibility of the ESOP as an economic tool that are important to protect.

Can you share a story of how you helped a client achieve an “Aha” moment of understanding about what an ESOP could do for them?

I have the privilege today of being an independent board member for a company called the Panagora Group. Panagora was started as a woman-owned small business working in the US Agency for International Development market with a particular focus on global health. Betsy Bassan had earlier in her career worked for a much larger company with an ESOP. She did very well with that company which even helped fund her grub steak for starting out on her own. ESOP Services helped structure her sale of a 49% stake to the ESOP about four years ago and sometime thereafter I was invited to join the board. So both as an advisor and as a board member, I've helped to set the table (and really no more than that) to then see Betsy and her team do an extraordinary job of setting up an extremely participatory and inclusive employee ownership culture. A Panagora, the ethos of ownership is core to how they do their work both internally and with their clients.

What makes for a successful ESOP, and as a result, allows you to enjoy working with ESOPs?

Win-Win. I think that's it. People talk about that in a variety of circumstances, and you can get into it further, but the essence of an ESOP transaction is that you're helping a business (whether we're talking about a business with a hundred employees or a much larger one) achieve an important ownership transition. I'm talking about an ESOP transaction that typically involves a leveraged buy-out of some sort, which is extremely consequential to most private companies doing it and to the shareholders themselves, many of whom have built up significant wealth in their business over the years. For the employees who stay and work with what typically are successful, steadily growing companies, the transfer of wealth is significant. I'll leave it to Corey Rosen and others to detail the statistics, but the successful track record of ESOPs is remarkable.

Millions of dollars have been teed up to be transferred to participants through equity participation. Back to Louis Kelso – it just makes sense. More people need to own productive assets that can produce wealth. You won’t get there through your salary and savings alone. You must get ownership, and that gives a purpose, I think, to much of the ESOP movement. Going back to my early days at the ESOP Association, ESOPs where the new shiny toy in town. My job was to take the show on the road and I loved to go into engage businesspeople in roundtables and seminars, discussing the applications of ESOPs and working with others to increase understanding of ESOPs. There was a shared sense that this is a cool thing, that we're doing good things for the economy and for the country. We're doing good things for employees in a way that's not unprecedented but has never had that focus. That purpose-driven aspect of the work certainly reflects my participation in the nonprofit world as well as running an ESOP company, which was a different ball game. The pressure that I certainly felt, the fiduciary responsibility of having hundreds of ESOP participants – current and former employees - all looking at the profitability of the company, put a certain prism on the focus of managing the company. So that's why I enjoy working with ESOPs – that win-win outcome. It's been five years now and counting that I’ve I worked with Ron at ESOP Services; doing a number of transactions each year to help achieve similar goals is very satisfying.