When a business chooses to transition to employee ownership (EO), a trust must be established for the benefit of the employees of the company. The trust becomes the legal owner of the company shares, and the trustees are appointed to the board of that trust. Their role is to protect the interests of the employees as shareholders.
There is no set requirement for the composition of the trustee board; some might be comprised of an equal mix of employees and management acting as trustees, while others may have a majority of employee representatives.
It’s likely that the current owners will want to want to take on a trustee role, as the business enters transitions. However, retaining a leadership role, or position of control, can risk confusion, so it’s important to be clear on roles and responsibilities. Trustees have an important oversight role while the management team deliver on the implementation of the strategy and its operational consequence.
One solution is to set a finite term for the former owner to hold a trustee role, perhaps just during the early years of transition, to help steer the company and other trustees in the right direction during the transition period. It might also be prudent to have an independent trustee sitting as chair during this time, to reinforce the message that the former owner is not in control of the trustees, just part of the team.
It is common for businesses to appoint employees to act as trustees, as they can bring a different perspective. Yet some founders may worry that their staff aren't ready for the responsibility of ownership or that their senior management team don’t have the experience to take immediate control over day-to-day decisions. Investing in training and development pre-conversion will allow for smoother transition and can prove invaluable. Being a trustee comes with legal responsibilities and duties that need to be understood, so an independent trustee who can bring that knowledge to the table might be beneficial if that experience is not readily available in-house.
There is no legal requirement 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 are a wide range of stakeholders represented on the trust board, or if the former owner is taking a trustee role, as an IT can ensure that all attendees have equal opportunity to contribute.
When considering whether to appoint an IT, it is important to think about the knowledge and experience that may be lacking in the current trustee mix. There might be certain attributes or skills that would make the trustee board more balanced and effective. For example, an IT may have experience of being a trustee with another EO or trust based organisation, and have an understanding of the legal requirements and structure of an EO business.
One of the roles of the trustee board, as majority shareholder, should be to have oversight of the strategy of the company and the implementation of that strategy. An IT can support the trustee board in this role by ensuring that discussions remain at the strategic level rather than focusing on the day-to-day, which trustees who know the business inside out might tend to do. By being in a position of neutrality, the IT can ask the questions that those closer to the organisation may not be comfortable asking or may not have even considered due to their close working knowledge of the company.
Trustees also need to have oversight of the board and its effectiveness. Board evaluation, whether formal or informal, provides an invaluable insight into the effectiveness of a board and the interactions between its members. Having an independent trustee overseeing this element lessens the possibility of an awkwardness, where trustees may be evaluating senior management or directors.
Sometimes during a crisis, leaders can stop sharing information and restrict communication. Trustees have a responsibility to ensure reporting and information sharing continues, especially during periods where honesty and clarity is paramount.
The benefits of having an independent trustee can become increasingly clear in times of crisis; an IT can act as an intermediary between the board and the trustee board on any confidential, difficult, or contentious matters, with the assurance to all parties that they have no benefit in the outcome.
Prior to transition to EO, the company founder is likely to have created a Trust Deed or a set of guiding principles which set out the company values alongside role definitions and plans for the future. These documents can be invaluable in helping ease the transition to employee ownership, and provide much needed clarity in what could be a confusing period for employees that 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 them guide the business in the right direction. Guiding principles are not necessarily legally binding and are not an inflexible document, but instead provide a strong indication of the overarching values and philosophy of the business.
While it is not essential that a founder transitioning to employee ownership creates a set of guiding principles, it is a highly valuable exercise to ensure your business has a framework for ensuring that it remains well managed and aligned behind a clear purpose. Providing clarity on purpose and direction should secure sustainable growth and success for the future.
David Pester is head of strategic growth at TLT and has experience both as a corporate finance lawyer and of leading a successful professional services firm. He has experience in both non-executive and chair roles with several organisations, including employee owned businesses.
TLT has partnered with Stir to Action, J Gadd Associates, and Triodos Bank UK, together with the Employee Ownership Association, to explore the benefits of employee ownership as an alternative for business owners who are considering or planning their succession or exit. Join the Employee Ownership Accelerator this autumn to explore employee ownership models and look at how to determine what will work for your business, and also consider the legal, financial and tax implications.
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