Employee Ownership & the Role of the Independent Trustee

Employee Ownership

Written by Sue Lawrence

June 26, 2020

Employee Ownership in an increasingly popular business model in the UK. Here we answer questions on the role of the Independent Trustee.

Employee ownership of businesses in the UK is rapidly growing with benefits for both the selling shareholder in terms of succession planning and continued ethos of the business, as well as engagement from employees and a greater shared focus by all stakeholders post implementation. It also should not be forgotten that the UK government is supporting the development of the structure through tax benefits and a relatively simple implementation process to encourage this as a way to share ownership and success with employees of a business.

Post implementation the role of the trust board, its effectiveness and its composition are central to the formal trust structure. Within this the role of the independent trustee (IT) can be a key appointment both in the early stages of employee ownership, and thereafter as the company seeks to continue to provide employee engagement.

Here we answer some of the questions that we have been asked as an independent trustee to help to frame the role for EO companies and those considering transition into employee ownership.

Do you have to appoint an IT?

It should be noted that, unless your Trust Deed specifically states the need for an independent trustee as a member of your trustee board, there is no legal requirement to appoint an IT to your trustee board. It should be noted as well that here is no set requirement for the composition of the trustee board. It may have a majority of employee representatives, alternatively there may be an equal representation from management and employees. The vendor shareholder may join the trustee board to continue to share their expertise and knowledge, especially if they are exiting the operational business on transfer to EO. The more stakeholders that are represented on the trust board the more benefit may be seen from having an independent, and neutral, trustee as a member.

Any such appointment should be balanced with the needs of the company, the board of directors of the company, any other shareholders and the trustees. Consider whether you have sufficient breadth and depth of knowledge and experience in your trustee board. Could a neutral, knowledgeable person add value and support the trustee board in being more effective in their role?

Consider what the trustee board looks like with and without an independent trustee. Consider what skills, knowledge and attributes an IT could bring that would make your trustee board more balanced or effective.

Once you’ve decided that you would like an IT on your trustee board, then you need to consider how they would add value and whether there are any particular attributes you’d like them to bring. 

Is the IT role the same as the employee trustees?

Yes. There are no additional or lesser roles and responsibilities expected of an IT. As mentioned, they may bring different knowledge, experience and skills, and contribute differently, but the role is effectively the same.

What added benefit can an IT bring to the EOT board?

Depending on the stage of your company in its EO journey, an IT can help to implement an effective trust board, helping to frame discussions, working out the roles and responsibilities of the trustees with their fellow appointees and bringing experience of acting on other boards and formal forums. They may also have experience in the role of being a trustee on an EO or other trust based organisation where the trustees have a fiduciary responsibility for the interests of the members or, as in the case of an EO, the employees as owners.

As a trust board member with no beneficial interest in the shareholding, they can ensure that discussions remain consistent across all employee shareholders, focusing on the employees as a class of shareholders without any knowledge of, or interest in, the variety of inter-company silos, divisions or nuances that are in place in any organisation.

They can also be a beneficial contributor or intermediary between the board and the trustee board on any confidential, difficult, or contentious matters, having no benefit in the outcome. If organisational change is proposed by the board as part of its strategy, the IT will not have the same personal interest that an employee representative will have. In these circumstances, the IT can also be a mentor for employee representative trustees who may have difficulty in separating their relationship with colleagues who may be directly affected and their role as a trustee, especially where confidential information may be shared.

One of the roles of the trustee board, as majority shareholder, should be to have oversight of the strategy of the company and its implementation. An IT can support the trustee board n this role by ensuring that discussions remain at the strategic level rather than taking the more natural route of focusing on the immediate impact on the day-to-day business. 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 recognise in relation to the current business.

With oversight of the company by the trustees, also comes 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. For employee and management trustees, this may create an awkward situation where they may be evaluating their senior managers and directors. The IT can be a beneficial point of contact for the managing director when they review their board composition, and could take a pro-active part in board evaluations, either in their role as a trustee or as an additional project.

Finally, the IT can be a beneficial coach and mentor to fellow trustees, especially those that are new to the role or who are new to taking a position of responsibility that may set them apart from their colleagues. This can be both in the meeting and outside on a confidential basis, or as part of a more formal training programme. They can also take a leading role when interviewing potential new trustees as and when trustees resign, reach the end of their term and additional or replacement trustees are appointed. If employee trustees are appointed by election, the IT can ensure that the role of the trustee is understood and can support the induction of new trustees.

Does the IT chair the EOT board meetings?

The IT can chair the EOT board meetings, but it is not a prerequisite.

Many companies have individuals acting as trustees who are very effective as chairs, so the ITs role, along with the other trustees, is to support the chair in their role.

In other companies it is beneficial to have this neutral party chairing meetings. This may be particularly beneficial where multiple parties are represented by trustees where the chair needs to ensure that all attendees have equal opportunity to contribute.

Equally, whilst the IT may be the initial chair when a company first transitions to EO, over time the role may migrate to other trustees as the framework of the trust board gains more clarity.

Do the EO Trustees vote at company board meetings?

The EOT board is a majority shareholder in the business. Hence, wherever shareholder approval is required, the EOT would vote in the same way that shareholders vote at an AGM of a listed company.

Similar to listed company shareholders, they do not set the strategy or make operational decisions.

The Articles of the company should be checked to confirm if any decisions need shareholder approval. If they are, keeping an audit trail of the approval is also a key requirement and should be kept as part of the documentation company and at the trust level.

Does the IT have the same voting rights as the other trustees in trustee meetings?

Unless the trust deed states otherwise, the IT will have the same voting rights as all other named trustees.

In some company structures, the chair may have the casting vote, and the IT may be the chair. This would be documented in the articles and/or the trust deed.

Can the IT also provide non-IT services or are they conflicted?

The IT can also provide other services.

Best practice is to document and recompense any additional services provided by the IT so there is an audit trail of the request as well as a clear description of the additional services so that it is differentiated from their role as trustee.

The most frequent additional services provided by an IT are related to the trust, such as coaching or mentoring new trustees, working with the board in a bridging role between the board and trustees, training, providing strategic advice or undertaking board reviews. However, this could be an endless list and is dependent on the company need as well as the skills of the individual IT.

One of the advantages of using the IT for additional projects is that they will already have access to confidential information and, in their role as trustee, will have gained knowledge of how the company acts and operates. Hence, they will be able to contribute without too long a lead time in gathering knowledge. Equally, for some additional services, this may be a detriment as they may have too much knowledge through their role as trustee or the additional services may put them in conflict with their trustee obligations.

In practice, each additional service proposition should be considered in isolation based on experience, ability, conflict and deliverables.

Is it better to have an IT that knows the company?

The benefit of an IT is that they bring something different to the trustee board and its meetings. The employee trustees, and management and vendor trustees if there are any, know the company in depth. Hence it may be better to have an IT that has no company connection so does bring diversity of thought and a fresh view, and is truly independent.

Is it better to have an IT that knows the sector?

There are positives and negatives in knowing the sector.

Firstly, it’s important to understand how they know the sector. Have they worked in the business or at a competitors before? Or have they had a different connection to the sector, perhaps as a service provider?

Secondly, it is useful to consider what value having this knowledge will bring to their role as IT. Yes, they will understand the drivers of the company, what the specifics of the sector are and what the challenges that are faced. But equally, the trustee board is not setting strategy or running the company. Would this knowledge be better sitting as a non-executive director of the board of the company itself?

What about confidential information that the IT will receive?

As with any senior appointment, company confidential information will be shared in order for the role to be effectively discharged. Having a confidentiality clause in the appointment contract will cover the formality of its dissemination and use.

Can an IT be appointed to more than one EO board?

Yes. As long as you are clear on any conflicts of interest that may arise. As with any board appointment, identifying and accommodating conflicts is a key requirement. They are not necessarily a reason to not appoint somebody to the role if they are the best candidate. 

Who Chooses the IT?

Unlike employee trustees, the IT is not elected by the employee owners. They are usually identified by, or at least short-listed by, the board of directors of the company or the vendor owners during the implementation process. Depending on the structure of the trust board, the appointment may also need approval by the trustees, or at least be ratified by them.

It should be remembered that the IT needs to work alongside the trustees and with the board, so must be able to communicate well with both forums.

Subsequent appointments of an IT, whether through resignation, replacement or in addition to an IT, can be led either by the board or the trustees, most commonly the chair of each forum would work collegiately in identifying the requirements and candidates.

How is the EO appointed?

At the implementation of the EO, it is often a combination of the selling vendors (especially if they will have a residual holding or role in the company after implementation) and the board of directors who appoint the initial IT. This could either be by the identification of a single suitable candidate or through meeting with a few candidates to identify an individual who would work well with the culture of the business. At the implementation of the EOT, the aim is to have a successful transition to EO so having an IT that can support and benefit this process is useful.

Subsequent appointments of an IT may be a combination of input from the board of directors and trustees based on the requirements at that time.

Who does the IT contract with?

The IT formally contracts with the trust company, however, the cost of the IT is invariably picked up by the company itself on behalf of the trust.

Having a formal contract between the company, the trust company and the IT themselves (whether as an individual or through a company) ensures that all three parties are aware of the content.

Who pays the IT?

Invariably the Company pays the costs and expenses of the trust, part of which is the cost of the IT.

How are the fees of the IT structured?

IT fees are most commonly structured as a fee for preparation, attendance and follow up at scheduled meetings. Any additional work outside of this formal schedule is then charged on an hour or day rate set at the outset.

Where additional services are provided these may be agreed separately, often on a day rate or base on delivery of the project.

How long should an IT be appointed for?

The trust deed should document the maximum term of all trustees. In some cases this document differentiates between the employee trustees and the IT, with different tenors for each. In others it is a standard expected period, most frequently 3 years, with an option to extend.

How many ITs should we appoint?

Once you’ve decided to appoint an IT, you should consider what attributes, experience and knowledge you would like them to bring to your trustee board. Consider which are required and which would bring an added benefit. If your core requirements are extensive, it may be beneficial to consider appointing more than one IT to ensure that you are getting what you need. However, if your core requirements are limited, or you are unsure of what the added benefits may be, having a single IT at the outset may be preferable, with flexibility to add additional Its in the future if ever needed.

Remember as well that the trust board can draw on expertise from outside their members, so the knowledge and experience of the trust board can be supplemented by outside contributors. This may be particularly beneficial if the requirements may be brief or limited in scope

Equally, remember that your IT is not there forever. They will be appointed for an initial term, usually 3 years, after which their term can be extended, or they could be replaced by somebody with the skills that are needed then, rather than 3 years previously.

You may be best suited to having one IT for the initial transition period whilst your EO scheme, your employees, trustees and board are all settling into the new structure. Your IT can be beneficial in supporting this transition period. Helping to reflect on the core roles of each forum, what the responsibilities are and, equally, what they are not. Thereafter you may want to keep the same IT, add a new additional appointee or a replacement. Equally, you may feel that you would prefer to not have an IT whilst the trustee board remains stable.

The primary considerations are what additional benefit you expect your IT(s) to provide, the cost and the flexibility.

Where can you find an IT?

Once you have decided that you would benefit from having an IT on your trustee board, and you have discussed what attributes you would like them to bring to the trustee board, you are ready to search for suitable candidates. This could be from your existing contacts, suggestions or introductions from your advisers, or from a provider such as Independent Director & Trustees Limited.

Wherever you source your IT from, ensure you have a clear expectation of their role and deliverables and a budget to cover their cost. Then it’s just a matter of finding an IT that meets your need and both the board and the trustees feel they can work with. Don’t worry that this has to be an exact description from the outset as both your trust board and the contribution of the IT will change over time as the trust board develops and matures.

This Q&A on the role of the Independent Trustee was written for, and distributed on, EODay, 26th June 2020. 

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