GAO Releases Analysis of DOD Contracting with Companies Maintaining ESOP Plans

6/25/2020

In a study released on June 18, 2020, the Government Accountability Office (GAO) analyzed Department of Defense (DOD) contracting patterns with respect to companies having in place Employee Stock Ownership Plans (ESOPs). The study was compiled pursuant to a request received from the House Committee on Armed Services.

While present in several forms, ESOPs in general are a means to transfer company stock ownership to employees. Depending on the structure and context, they can serve as employee incentives, retirement plans, and as a ready source of corporate financing for the company.

 

Rather than offering critical commentary or evolving policy recommendations around ESOPs (or companies maintaining ESOPs), the report was largely a fact-finding exercise which, based on data from 2014 – 2017, sought to provide a broad overview of contracting patterns and practices with respect to ESOPs. The exercise observed several notable trends that may influence future policymaking or forbearance in the area.

For one, GAO found that DOD obligated ‘almost half’ of all contracting dollars to companies with ESOPs in place. Ninety percent of these obligations went to 20 entities while the remaining ten percent went to another 600 entities. At the same time, the report noted DOD did not consider whether contractors had in place ESOPs at the time of contract award. Rather, DOD emphasized that ‘award decisions are based on a prospective contractor’s ability to deliver quality products and services and other applicable factors, such as the proposed price’. In terms of performance, companies having ESOPs were generally found to have been rated ‘satisfactory or better’ on metrics such as quality, cost, and schedule. However, this was also the general trend in rating observed for all other companies that contracted with DOD during the same period. In other words, no clear correlation was observed between the presence of an ESOP and a company’s performance on a DOD contract.

While not offering policy recommendation, the observations made in the GAO report are likely to factor into consideration of current or future legislative proposals which aim to offer incentives to contractors with ESOPs. While the report does not suggest that companies with ESOPs perform better on DOD contracts, analysis of the issue will likely require a more holistic consideration of the benefits of employee ownership of business as well as a dataset pertaining to a longer time period.

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