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 an IT only beneficial for large companies?
It is a common misconception that only large companies benefit from the appointment of an IT, or that the cost of an IT is prohibitive to smaller EO companies. Setting the expectations from an IT and understanding where they add value can help companies understand whether an IT is right for them, no matter what their size.
A larger company, where there is greater support, potentially a more defined governance structure, and usually a breadth of existing advisers and consultants, will benefit from appointing an IT in terms of the specific role of the trust within this framework, and trust related activities, initiatives and discussions.
A smaller company, may seek to appoint an IT that brings additional skills, potentially as a board mentor, or strategic adviser, or employee ownership implementation support. The added benefit can, in these cases, far outweigh the costs, if they are acting in multiple roles and may negate some of the need for additional advisors or consultants (see below -Can the IT also provide non-IT services or are they
conflicted?)
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 teams, divisions or nuances that are in place in any
organisation.
They can also be a beneficial contributor
or intermediary between the trading company board and the trust 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.
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.
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 if 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 formal documentation of the 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 by Independent Directors and Trustees to assist in understanding the role. Readers are welcome to share it with their contacts and colleagues. If you would like to know more about IDTs independent trustee services, contact us at info@directorsandtrustees.co.uk
