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Who runs a company owned by an Employee Stock Ownership Plan (ESOP)?

By Neil M. Brozen, CPA, Ventura ESOP Fiduciary Services

Corporate Governance is the process of allocating authority and responsibility among the company’s shareholders, board of directors and management.
 
Many privately owned companies have one shareholder who typically wears many hats — shareholder, director (usually the only one) and the CEO. There really is no question who runs these companies.
 
The management team of companies owned by ESOPs run the company on a day-to-day basis. The board of directors oversees the management team, holds them accountable and are responsible for growing shareholder value. The ESOP trustee as the shareholder does not run the company, does not tell the board what to do and has very clearly defined responsibilities.
 
There is no legal requirement that the trustee of any retirement plan be an independent person or persons. In fact, more than 50% of ESOP trustees are not independent even though this is not the best practice. They usually are a senior leader, board member and ESOP participant. The board of directors are responsible for engaging the trustee and they usually appoint internal trustees to save money, as well as to address their fear of losing control.
 
Ownership generally includes two elements. One element is the financial interests, which is the right to all the value that the ESOP owned company creates. The other element is control, which is the right to tell everyone what to do and the right to sell the business.
 
An ESOP operates as a trust, which has two separate features of ownership like any other business. The difference is who is responsible for these features. The financial interest — value of ownership — is held by the employee-owners (ESOP participants) through the ESOP trust (ESOT). Control is vested in the ESOP fiduciaries. This means that no single person or group has the right to the value that company creates, which is the right to tell everyone what to do and the right to sell the business in a majority ESOP-owned company.
 
The company management team, the board of directors and the ESOP trustee sit in an unusual, very effective balance of power. Each group must be aware of the role it plays, and each must also be true to its responsibility. Understanding these roles is critical to having excellent corporate governance, which leads to increased shareholder value. The result is a collaboration among complimentary roles with no one on absolute authority.
 
The general responsibilities of the board of an ESOP owned company are no different than a non-ESOP owned private company. The following are some of the key responsibilities:

  • Grow shareholder value.
  • Set long-term strategic goals.
  • Hold management accountable.
  • Succession planning.
  • Executive compensation.
  • Risk management.

The board of an ESOP owned company has the following responsibilities related to the ESOPs:

  • Adopt, amend and/or terminate ESOP.
  • Appoint and monitor ESOP trustee.
  • Determine ESOP contributions, dividends and distributions.
  • Determine and manage repurchase liability.
  • Direct trustee if required.

The duties and responsibilities of an ESOP trustee are as follows:

  • Custody plan assets.
  • Manage liquid assets or have board engage an investment adviser.
  • Receive contributions, distributions, dividends and make ESOP loan payments.
  • Process participant distribution payments.
  • Determine fair market value of shares held by ESOP.
  • Vote ESOP shares.
  • Monitor board of directors.
It is very important for the board and ESOP trustee to develop a partnership in which each party knows and understands each other’s roles/responsibilities because there are many situations where working together will create the best solutions.

Note: This article focuses on majority-owned ESOPs. 

Neil Brozen is president of Ventura ESOP Fiduciary ServicesNeil has provided ESOP trustee services from 2005 through April 2016 for two institutional trustees. During this time, he managed 175 transactions and 90 ongoing engagements. He and his wife began Ventura ESOP Fiduciary Services in July 2016. Neil has been the trustee for more than 150 ESOP transactions and is the ongoing trustee for 130 clients in 26 states. His clients are in the construction, manufacturing, distribution and service industries. You may reach him at brozen@venturaesop.com.
 
The Minnesota Center for Employee Ownership serves as a free unbiased source for education and resources around all forms of employee ownership. With 52,000 business owners over the age of 55 in Minnesota exiting their business in the next 3–5 years, there is a crisis looming. What will happen to their legacy, employees, community? Business owners will look to their advisers on how best to exit. Contact us for more information on how we can be a resource for you at  www.mnceo.org or Sue Crockett, executive director at scrockett@mnceo.org.