By Anthony Mathews
In our last issue, we started a discussion of the three elements of the governance structure of ESOP companies with a brief analysis of the role of the board of directors in the oversight and governance of our companies. With this issue, we move from this highest level oversight unit to the other end of the spectrum – the management level employees of the company. To the same extent that the board is observing from the 30,000 foot level, the management is right down in the weeds running the company. As one of my old partners used to say, the board is looking down from the peak of a ski jump once a quarter while the management is observing the same phenomena from the luge (an odd metaphor, but I liked it then and I still do).
With reference to the board, you might recall, we discussed that one reason for limiting the influence of current employees on the board is that where the board is dominated by current employees, its meetings will most often descend into nothing more than somewhat higher level management meetings with the result that the ideal functions of the board are not met at all. And, as we said last quarter, it is critical that all the members of our governance team understand the parameters of their roles in the operation of the company, stick to them and perform their part of the process with dedication and excellence.
So, what is the function of senior management in the governance of ESOP companies? Simply put, the function of management in an ESOP company is the same as in any other company - to manage very well to achieve strategic objectives and to participate in the strategic operation of the company by giving the board feedback on how the strategic plan is being successfully implemented and, more important, where it is failing.
Management, for this purpose, goes by many names: senior management, executive team, C-suite members, etc. But in all cases, this group operates the company as a team generally assigned responsibilities according to function as: finance, operations, marketing, and human resources.
You may be relieved to understand, that for the most part, the responsibilities of management under each of those umbrellas is pretty much the same as in any other company, but there are a few significant ways our company responsibilities do differ.
In addition to all the expected factors, for example, finance management in an ESOP company needs to take into account both the tax and finance benefits the ESOP provides (the easy part) but also the financial responsibilities that having an ESOP creates (the not so easy part) including forecasting and managing repurchase costs, controlling the effect of debt on the company value, managing appropriate exchanges of funds between the company and its ESOP so as not to commit prohibited transactions, etc.
Operations may need to take into account the effect of ESOP operating provisions before making the final decision on a major operational issue. For example, a decision on whether to do a large layoff of employees or move an operational function from one location to another may be rendered less attractive by the vesting and distribution provisions of the plan. While the ESOP-related results (like full vesting in benefits from partial terminations or other benefit related outcomes) seldom are so compelling that an otherwise wise decision would not continue to be, it can happen and it does illustrate how even the most ground-level considerations might be somewhat influenced by the fact of having an ESOP.
Marketing may or may not be influenced by the existence of an ESOP depending on how you come down on the ongoing debate which so far has failed to decide the answer to the question, "Is the fact that we are employee owned a benefit or a handicap in promoting ourselves and our products to the open market?" Research is equivocal so people just have to use their best judgment.
Human resource tends to be influenced more by the existence of an ESOP than other functions, as the HR group tends to be what we call "the keeper of the culture." Most of the responsibility for developing and maintaining a culture that reflects the positive influence of employee ownership on the company will fall to HR. Without that, the ultimate benefits of employee ownership on company life and performance will not be realized.
So, the management of an ESOP company is certainly influenced by the existence of an ESOP, but you may be relieved to hear that none of the decision-making I have referenced in this brief article creates fiduciary exposure for the management employees. A decision to conduct a layoff one way or another may be influenced by the cost of acting one way or another, but management employees have no ERISA fiduciary obligation to do anything they would not otherwise do in the good management of the company.
If you are interested in a more comprehensive investigation of the ways ESOP and employee ownership impact the management of the company, I'd invite you to join us for the 2014 Employee Ownership Management course offered at our university, Oct. 12-15, 2014.