ESOP Advisor Hall of Fame Interview - Ron Gilbert
Please share with us a brief history of your career.
In 1978, I joined Kelso and Company in San Francisco, when Dick Buxton and his partner Joe Schuchert acquired a majority interest. In 1980, with the blessing of Kelso and Company, I moved back to Virginia, where we’ve remained since and co-founded ESOP services with my wife Sue Gilbert in 1984.
We've been operating as such since that time.
In 1987, I traveled to London to help introduce employee ownership legislation that has since become law in the UK.
In October 1989, I began working with Kris Ludwiniak in Poland with the newly independent Solidarity government. Also in 1989, I co-edited and co-authored the book Employee Stock Ownership Plans, with Bob Smiley as the lead editor and author.
In 2006, Bob and I added three co-editors and a total of approximately 50 co-authors and produced a new book, Employee Stock Ownership Plans: ESOP Financing, Implementation, Law and Taxation. The two volumes, totalling 1700 pages, were published by the Byster Institute.
This year, I have contributed to a new book that Forbes Books hopes to have out by the end of the year on Employee Stock Ownership Plans, focusing on one very successful ESOP company.
Career timeline:
1978 – joined Kelso & Co. immediately after Dick Buxton and Joe Schuchert acquired the majority interest.
1984 – co-founded with wife Sue Gilbert, ESOP Services, Inc., when Kelso & Co moved to NEW YORK CITY, providing ESOPS Feasibility Studies and quarterbacking ESOP transactions.
1987 – help introduce Employee Ownership legislation in the U.K.
1989 – Began working in newly independent Poland with Kris Ludwiniak on privatization legislation, and helped to form the Polish Employee Ownership Association. Resulting legislation led to approximately 1,000 Polish companies that were privatized and became 100% owned with a loan from the Polish Government.
1989 – co-editor and co-author with Robert W. Smiley, Jr. of Employee Stock Ownership Plans.
2006 – co-editor and co-author of a two volume Employee Stock Ownership Plans: ESOP Planning, Financing, Implementation, Law, and Taxation.
2024 - Contributing to new Forbes book on employee ownership out later this year.
1980 – Present - Served on The ESOP Association’s board of directors and its Legislative and Regulatory Advisory Committee, and served on the board of directors for The National Center for Employee Ownership and eight ESOP companies. Have spoken in nine countries. Co-led the team that obtained the first IRS private letter ruling sanctioning an international ESOP for a U.S. based company.
Was there a name assigned to the legislation you worked on over in the UK?
There are four different laws that ended up in place over time. In the UK, employee ownership plans are often referred to as “share schemes.”
What specific ESOP work did you do in Poland?
Sue and I and a number of our employees worked with Kris Ludwiniak and several local legal experts to introduce legislation that resulted in approximately 1,000 companies being privatized. These were state-owned enterprises. Utilizing Louis Kelso's concept of access to credit, they were provided with low-cost government financing to purchase their companies. When their business plan was approved, they became 100 percent employee-owned, with 10 years to repay the government.
We're very proud of that. Poland now has one of the most robust economies and the highest GDP in the EU. The employee ownership privatization legislation certainly played a significant role in getting the Polish economy off to a very good start.
Are there any awards/honors you have received because of your work in ESOPs?
In 2013, I was awarded the ESOP Association Outstanding Board of Governors Member.
I was also an initial member and remain an emeritus member of the ESOP Association’s Legislative and Regulatory Advisory Committee.
What specifically does your company do?
Our website esopservices.com summarizes it. We specialize in quarterbacking ESOP transactions. We focus on aligning shareholder objectives to structure a win-win ESOP transaction that provides shareholders with tax-efficient liquidity and employee-owners with a significant wealth-building opportunity.
What individuals have most helped and/or influenced your career?
From the very beginning of my ESOP career in 1978 with Kelso, my wife Sue was on board in the early days when we were the pioneers. The definition of a pioneer is a person with arrows in their back. I had been offered the presidency of a small insurance company in Hawaii with a very guaranteed income and all the perks that go with that. Instead, I opted to go to work with Kelso and Company. There were no guarantees, and it was a roller coaster ride for a decade or so. So, my wife is at the top of my list of most helpful and influential.
Next is Dick Buxton. I had worked with Dick and Joe Schuchert in my capacity in another financial institution. One day in 1978 I was walking out of my office in downtown San Francisco, Dick yelled, “Ron! We just bought the Kelso Company. Let’s go to lunch.”
I accepted the Kelso job offer. Dick and his partner Joe Schuchert were my mentors during my six years at Kelso and Company. That turned out to be very providential because the insurance company I turned down was a subsidiary of a big conglomerate that owned mines in Chile. They woke up one morning to the Chilean government informing them that “the mines no longer belong to you; they belong to us.” The conglomerate went bankrupt, the little insurance company had to be acquired, and I would have been out of a job.
Here is a list of individuals who most influenced my career:
1. Susan Gilbert, co-founder ESOP Services, President ESOPs, Inc. (International Sister company to ESOP Services)
2. Dick Buxton, former President of Kelso & Co., President Private Capital Corporation – deceased
3. Joe Schuchert, President Kelso & Co., deceased
4. Bob Smiley, President Benefit Capital Corporation, retired
5. Ron Ludwig, ESOP Attorney, Ludwig, Goldberg & Krenzel, retired
6. Kris Ludwiniak, co-founder Polish Employee Owner Association (UNIA), retired
When you speak of Kelso and Company, was Louis Kelso still involved during your time with the business?
Absolutely, Louis Kelso was the founder. Because Louis Kelso had been singlehandedly supporting the ESOP lobbying efforts for about a decade, a substantial part of Kelso and Company profits went to fund a Washington DC office and a lobbyist and all the expenses that go with it. It reached the point where Kelso needed to raise capital to keep that effort going. Louis Kelso remained active for a number of years after selling a majority interest to Dick Buxton and Joe Schuchert.
What was your impression of him?
He was a brilliant economist and philosopher. He was also very passionate about employee ownership. When I was being recruited to work with Kelso and Company, we went to the Bohemian Club. I remember Louis telling me, “Ron, they don’t teach this in any graduate business school. It’s labor law and security law. It’s mergers and acquisitions. It’s employment practice. It’s all these different things rolled into one.”
Any further influences you’d like to talk about?
I mentioned Dick Buxton and Joe Schuchert. They were very supportive. In 1984, I got a call from Joe, who was then the president of Kelso and Company, (Dick had gone back to being president of a Private Capital Corporation). Joe informed me, “Ron. Everybody's moving to New York City.” We had two sons and a farm here in Central Virginia near Charlottesville. I’ve lots of family in New York City. I said, “Joe, I love you, man, but that’s just not going to work.” So, with Joe Schuchert’s blessing, I spun off the clients I had initiated and formed ESOP Services, Inc. with Sue in 1984.
There was never anything in writing. It was just a gentleman's agreement.
Joe’s only requirement was that I use Ron Ludwig for my legal work. Ron was the “dean” of ESOP lawyers. I thank God Joe made that requirement because I learned much of what I know about ESOPs from him.
I already mentioned Bob Smiley. Bob was an ESOP pioneer who predated me. But we’d never worked together or even met.
I had a call at home from Bob. He identified himself and mentioned he also worked with Ron Ludwig. He said, “Gilbert,” Bob called everybody by his last name, “Gilbert, Ludwig tells me you're going to write a book on ESOPs. I said, “Yeah, Bob, I'm seriously thinking about it.” He said,” I'm writing a book on ESOPs. So, let's work together. I'll do most of the work, and I'll put my name on the top of the book.” I said, “Okay.”
The conversation lasted about five minutes, and we worked together for over a decade. Bob did the lions share of the work on the book, just like he promised. There has never been any other work on ESOPs of that magnitude.
How many editions has the book gone through now?
Two editions. However, the 2006 edition had three or four electronic updates to the hard copy. It is now out of print.
Have any of your ESOPs been unique or different?
There are two. One is the Polish ESOPs. The model was very straightforward. Credit was obtained from the Polish government, at attractive terms and rates to allow employees to acquire stock. That was one of Louis Kelso's basic tenets, access to credit. There were efforts in different countries to provide some sort of employee ownership when state owned companies were privatized, but I'm not aware of any country that had anywhere near the success that we enjoyed in Poland. This was due in great part to Kris Ludwiniak. Kris had escaped Poland when it was under communist rule. He was a Polish-born and trained attorney whose father had been a post-WWII hero, a leader of the Polish resistance, fighting the Soviet Union and Polish communist governments after they took over at the end of World War II. Kris raised a lot of money in the United States for Solidarity. So, when he returned to Poland, working with me to begin this privatization effort, every door was open to Kris.
A war story that illustrates this is when Sue and I arrived in Warsaw. It was October 1, 1989. The Communists still controlled the army and the police at that time.
We met Sunday night and went over the list of people we're going to meet with, and I said, “Lech Walesa (the founder of Solidarity and later President of Poland) was not on the list. Kris, I told you that when we get back to the United States, the first question everybody's going to ask is, ‘Did you meet Lech Walesa?’” We have to meet with Lech.”
We were eating breakfast the next morning at 8 AM, and Kris looked at his watch and said, “Hurry up. We've got to meet Lech Walesa this afternoon in Gdansk.” So, that's how influential Kris was. We met Walesa, talked about employee ownership, and presented him with a copy of the ESOP book.
What industries were those in?
In those days, pretty much everything in Poland was manufacturing related. While they had some service Industries the majority were manufacturing, or distribution related to producing goods.
Were there any other different ones you wanted to mention?
Yes, the other was the International Employee Stock Ownership Plan. In 2011, I quarterbacked the 100 percent ESOP buyout of the current owners of Chemonics International, Inc. a government contractor with the U.S. Agency for International Development (USAID), headquartered in Washington. It was, and still is, one of the larger ESOP transactions, exceeding 200 million dollars.
I was asked to join the board of directors after closing and was vice chair of the board and served as vice chair of that board for eight years. We wanted to extend the employee ownership US-based ESOP benefit to as many of our international employees as we could. Chemonics typically operates in about 40 countries.
For three years, I worked closely with the ESOP Law Group, Larry Goldberg and Lynn DuBois. After three years of working with the IRS, which was encouraged US in our efforts, we obtained the first private letter ruling (“PLR”) on this matter. The PLR gives guidance as to how you can include people who are citizens of, and are taxpayer of other countries in a US-based ESOP, and have a US-based ESOP account.
Any “ESOP transaction war stories” that you could share?
The Chemonics International, Inc., domestic ESOP transaction took us three years to complete. We started in 2008, looking for a significant amount of bank financing. We were unsuccessful. To their credit, the two principal owners were very determined to see the company become 100% ESOP-owned. It was the vision of the deceased founder, Tony Teal, that the company be employee-owned. In 2011, we succeeded in a 100% ESOP transaction. Not only was it one hundred percent seller-financed, but the majority owner also provided the line of credit for this large company to operate on. To have everything financed by the sellers, including the operating line of credit is certainly very unusual, an was a bit of a roller coaster ride before closing.
Let’s talk about trends in ESOPs. How have you seen the ESOP Community change over the years?
It's the difference between a 1974 gas guzzler and a 2024 electric car—incredible changes. In the beginning, we had two or three advisory firms involved in forming the ESOP. Right now, it would typically be somewhere between eight and ten advisory firms, about triple with a common-sense increase in fees! That's been the biggest change. The ESOP community remains relatively small in terms of the people who started early on and many are still involved.
At Kelso, we handled multiple aspects of the transaction, including valuation. What we didn't do, firms that we were very closely affiliated with did. The best practice that evolved, and that ESOP Services has been focused on since 1984, is to specialize in executing the transaction. Then we have multiple experts, many of whom are independent, that are doing the many other things involved, either initially in the transaction or on an ongoing basis.
A trend that I wish I saw more of is family in the business. It’s been a great blessing to me.
In addition to working with my wife, Sue, both domestically and internationally, I worked for a decade with my niece, Paige Ryan, who ran our San Diego office. As my colleague she participated in every transaction we did, and led a number of them. Paige had an MBA and early on developed a passion for employee ownership by working with Robert Byster, the legionary founder of SAIC. When Paige retired it took two seasoned professionals to replace her.
My son, Joe Gilbert, is a financial advisor for Wells Fargo and with a national practice that specializes in the 1042 “tax-free” rollover. It has certainly been a source of pride for Sue and I to have a son become successful and assume leadership roles in the ESOP world. While we are not affiliated, we look for ways to work together, and have been fortunate to have spoken together at multiple ESOP conferences.
Do you have any thoughts about how the ESOP world or industry has changed over the years or how legislation has impacted your role?
What has not changed in 50 years is the Department of Labor’s ideological opposition to ESOPs. The Department of Labor has very frequently operated in ways that has certainly constrained the growth of employee ownership very significantly, and continue to this day. The IRS, who for the most part, has been an impartial government agency protecting and overseeing transactions and going after the bad guys. There would be millions more employee-owners and thousands more ESOP companies had the Department of Labor done its job properly as an impartial watchdog.
The moist recent negative change is class action lawsuits. In the past decade, more and more frivolous class action lawsuits have emerged brought by ambulance-chasing law firms looking to get an out-of-court settlement. They know that even to defend a frivolous lawsuit can cost a company millions of dollars in legal fees. A decade ago I was involved in one of those class action lawsuits, so I’ve experienced it firsthand. It was extraordinarily frivolous, but we were advised by our attorneys to settle because the cost of fighting and winning would be significantly more than a settlement. Unfortunately, we see that over and over. (see #2 below)
Let’s talk about the future of ESOPs. What do you see on the horizon?
Right now, it's cloudy because the Department of Labor has announced that they will be issuing Adequate Consideration Regulations (regulations on valuation and related issues) sometime in 2024, although it's dragging on. When they are issued, there will be a comment period, with the objective of having final regulations. I, along with others, are concerned that these regulations will be negative. Negative final regulations will be a major problem for ESOP companies. It is essential that the final regulations be positive if ESOPs are to experience robust growth in the future.
I believe that there are 4 key initiatives that should be implemented in order to foster continued ESOP growth.
Can you share a story of how you helped a client achieve an “aha” moment about what an ESOP could do for them and their employees?
Two examples. The first one is in Poland in 1989. In our first week of meetings, we were explaining to a small company that did reproduction antique furniture what employee ownership was about and how we were going to try to get a privatization law passed that would enable them to be 100% employee-owned. After the presentation, an elderly gentleman in the front row stood up and said, “‘They’ (meaning the communist government) told us we owned everything, we learned we own nothing, and now we want to own something.” And he sat down. To this day, I think that statement puts it in summary for people who, regardless of nationality, have worked under the thumb of the Soviet Union or other anti capitalism countries. There hadn’t been legal capitalism in that country for 50 years. But that guy was thinking like an owner. And so there is an international lesson here.
The second example was at ComSonics Inc. in Harrisonburg, Virginia. I was asked to join the board in 1991, and shortly after a significant recession ensued which hit the cable television industry hard. For the first fifteen years of that ESOP, the stock had always gone up. Now, the company was struggling, but the management didn't lay anyone off. A group of employee-owners came to management because management had spent fifteen years educating employees about what it meant to be an owner. The employee-owners said, “If you don't lay some people off soon, we're going to lose our jobs and our company and all our stock.” Management laid a group off, but they still struggled. A second layoff months later was implemented. ComSonics turned around and survived. Now celebrating its 50th anniversary, it is an extremely successful one hundred percent ESOP-owned company.
The key is that ESOPs allow employees to identify as employe-owners. There are lots of other forms of employee ownership now; there's Employee Ownership Trusts (“EOTs”), which are very popular in the UK. EOTs were also introduced in the US, but other than being applicable to some small companies that just aren't profitable enough for an ESOP, they won't have much application here. There's also the Private Equity (PE) model, which is set up to give employees when the company is sold five or so years down the road, a payout that could be a very substantial. But EOTs and the PE model aren't ESOPs. They don't have many of the attributes that allow the employee to identify as an employee-owner. A quick story on that. In 1984, Bill Simon, former Treasury Secretary, sold his Avis stock to the Avis ESOP. That was when the “tax-free” rollover came into place. I think Simon, in addition to being motivated by tax benefits, also hoped that employees would identify as owners. A short time later a thief stole an Avis car in broad daylight from an Avis lot, and an employee-owner jumped in another car, raced after him, and managed to force him over to the side of the road until the police arrived. When the police got there they said to the Avis employee, “Why did you do that? That was dangerous.” He looked at them and said, “He stole my car.” He identified as an owner. That identification is key.
What makes for a successful ESOP and as a result, makes you enjoy working with them?
ESOPs have given and can give millions of employee-owners very significant wealth-building opportunities that they would have never otherwise have access to. Recent research showed that ESOP participants have ten times the amount of funds in their retirement accounts than their peers.
The unique value of an ESOP account was brought home to me through the Chemonics International ESOP. Chemonics had many Iraqi employees in Iraq working on a major US Government development contract. Everything suddenly fell apart almost overnight, and many of those employees escaped the country with almost nothing—literally the clothes on their backs. Their bank accounts were gone. These former ESOP participants received payouts that almost single-handedly enabled them to get re-established in another country because the international ESOP provided for a rapid payout to people in situations like this. That just brought it all home.
