ESOP Governance Collaborators: The Board of Directors

By Anthony Mathews

In pure governance terms, the board of directors' role in any corporation is central to the growth and development of the business. It is the board's role to ensure, to every extent possible, the development of value for the shareholders of the corporation. In doing so, the board focuses on the goals of the business, sets strategic direction, and oversees the highest level management as it seeks to achieve those goals. In short, the board is the center of the governance hub and the primary responsible party when it comes to big-picture operation of the business. With slight variations in practical application, the board's job is to guide the company toward building and preserving value for the shareholders and to enforce the corporate values that determine how each company is prepared to go about doing that.

In most closely held company incarnations of this role, the board of directors is operated as a technical legal requirement filled by a group of shareholders or other management employees and friends of the CEO or family members (often spouses as a convenient way to justify business related expense deductions for travel to vacation destinations for meetings). In some cases, closely held boards also include a retired banker, accountant or attorney (or two) who are paid a stipend and sit on the board to add a somewhat professional oversight function to the group.

Where the board comprises only management employees, meetings tend to be either pro forma (usually reflecting the voice of the CEO/chair) or non-existent, and when they do occur, they tend to be merely more rigidly structured management meetings at which Danish pastry are served.

Many closely held company boards only meet in the virtual world of corporate counsel's template minutes and perform their important functions without much more thought than what is required to make a signature. 

In fact, though, in terms of the real functions of the board, this means that most closely held businesses do not actually have one.

Enter the ESOP company.  In ESOP-owned companies (or any structure that provides for broad ownership among employees of the company) the landscape changes, and the independent role of the board of directors as well as its oversight function become significantly more important.  We describe the governance structure of an efficiently governed ESOP company as a collaboration because in most cases, the group of three entities that make up the governance group for any company may have adverse interests and must work through them with each role fully and aggressively represented.  Where any of the three elements of the governance structure dominates the others, the outcome will not reflect the best governance functions of the corporate structure and will be much less likely to be successful in pursuing that value that should be its central focus.

Members of any board of directors, then, should each reflect at least one of three basic characteristics:

- A special skill or technical knowledge that will benefit the company's strategic growth objectives.
- Connections in the company's industry that will enhance the company's performance or provide opportunities to expand.
- Legacy connections to the business that will add value in holding the company on course consistent with its core values.

In ESOP companies, all board members should also:

- Have a thorough and comprehensive understanding of the governance roles and boundaries operating within the company; and
- Have a commitment to supporting the fact and the long-term values of employee ownership.

Each July at the Beyster Institute, we host a gathering of ESOP company directors - both employee and non-employee, independent directors.  We call the meeting the ESOP Corporate Directors' Exchange because unlike many of the classes we offer, this role is one that is not as completely regulated by law as the more consistently fiduciary roles, and it is the one that is perhaps most responsible for the growth and success of our companies that will prove our contention that employee ownership is not only a sustainable business model but a superior one.  Best practice in this role, more than any other, is being defined on a day to day basis by those who are involved in it, and we intend to gather as clear a picture as we can as that is developing.  Next issue, we'll be talking about the role of management in this unique ESOP governance collaboration.  

The Corporate Directors' Exchange: A Course on ESOP Company Governance

July 13-15, 2014