Employee shareholding: getting the best out of your trustees
When a company chooses to switch to employee share ownership (EO), a trust must be established for the benefit of the employees of the company. The trust becomes the legal owner of the shares of the company and the trustees are appointed to the board of directors of that trust. Their role is to protect the interests of employees as shareholders.
Who can be a trustee?
There is no fixed requirement for the composition of the board of directors; some may be composed of equal parts of employees and officers acting as trustees, while others may have a majority of employee representatives.
It is likely that the current owners will want to take on a fiduciary role, as the business goes into transition. However, maintaining a leadership role, or a controlling position, can lead to confusion, so it is important to be clear about roles and responsibilities. The trustees have an important oversight role while the management team takes care of the implementation of the strategy and its operational consequences.
One solution is to set a time limit for the former owner to take on a trustee role, perhaps just during the first few years of transition, to help steer the business and other trustees in the right direction during the transition period. transition. It might also be prudent to have an independent trustee serving as chairman during this time, to reinforce the message that the previous owner does not have control of the trustees, but is simply part of the team.
It is common for companies to appoint employees to act as trustees because they can bring a different perspective. Still, some founders may fear that their staff may not be ready to take responsibility for ownership, or that their management team may not have the experience to take immediate control of day-to-day decisions. Investing in training and development prior to conversion will allow for a smoother transition and can be invaluable. Being a Trustee comes with legal responsibilities and duties that must be understood, so an independent Trustee who can bring this knowledge to the table could be beneficial if this experience is not readily available internally.
There is no legal obligation to appoint an Independent Trustee (IT) unless the trust deed requires it, but having an independent and neutral perspective could be very beneficial. This is especially the case if there is a wide range of stakeholders represented on the board of trustees, or if the former owner assumes a role of trustee, as an IT specialist can ensure that all participants have an equal opportunity. to contribute.
When considering appointing an IT specialist, it is important to think about the knowledge and experience that may be lacking in the current composition of administrators. There might be certain attributes or skills that would make the board more balanced and efficient. For example, an IT person may have experience being a trustee of another EO or a trust-based organization, and have an understanding of the legal requirements and structure of an EO business.
One of the roles of the board of directors, as the majority shareholder, should be to oversee the strategy of the company and the implementation of that strategy. An IT department can support the board in this role by ensuring that discussions stay at the strategic level rather than focusing on the day-to-day, which directors who know the business inside out might tend to do. By being in a neutral position, IT can ask questions that those closest to the organization may not be comfortable asking or may not even have considered due to their in-depth knowledge of the business. ‘business.
Trustees are also responsible for overseeing the board and its effectiveness. Board assessment, whether formal or informal, provides invaluable insight into the effectiveness of a board and the interactions among its members. Having an independent trustee overseeing this element reduces the possibility of embarrassment, when the trustees can assess senior management or directors.
The role of trustees in the event of a crisis
Sometimes during a crisis, leaders can stop sharing information and restrict communication. Trustees have a responsibility to ensure that reporting and information sharing continues, especially during times when honesty and clarity are paramount.
The benefits of having an independent trustee can become increasingly evident in times of crisis; an IT can act as an intermediary between the board of directors and the board of directors on any confidential, difficult or contentious matter, with the assurance to all parties that they will not derive any benefit from the outcome.
Prior to the transition to EO, the company founder is likely to have created a trust deed or set of guiding principles that define company values as well as role definitions and plans for the future. These documents can be invaluable in easing the transition to employee ownership and providing much needed insight into what could be a confusing time for employees who have suddenly become business owners.
Guiding Principles can provide Trustees with the necessary context on which to base their decisions and are a useful roadmap to help steer the business in the right direction. The guiding principles are not necessarily legally binding and are not a hard-hitting document, but rather provide a strong indication of the overall values and philosophy of the company.
While it is not essential that a founder transitioning to employee ownership creates a set of guiding principles, it is a very valuable exercise in ensuring that your company has a framework to operate. ensure it remains well managed and aligned with a clear goal. Clarity of purpose and direction should ensure sustainable growth and success for the future.