Founder Succession in EO Companies

Employee Ownership Founder

Written by Simon Carter

June 22, 2021

Transferring to employee ownership is a great plan for founder succession, and can build resilience and sustainability if handled correctly

Employee ownership produces a unique blend of three things: 

  1. a focus on employee inclusion and connection; 
  2. incentive; and 
  3. the balancing roles of an operating board and trust working to common vision.

It is an innately resilient and aligned model, and one that also preserves the founding ethos and identity of a company.

And as an exit solution, one real advantage is the ability for founders to choose when and how they step down. They have a wide range of aiming points; whilst physical transfer of ownership is marked by signing legal/financial documentation, employee ownership only comes to life once its principles are embedded. It is natural to want to be sure the right things are in place. 

Succession means setting the conditions for effective employee ownership

Employee ownership sees the mantle of ‘being the business and its conscience’ swing from the founder to all who work in the company, strengthening its heritage in the process. Succession, therefore, is more than completing a transactional change of controlling entity, or simply a matter of finding a new managing director, or an altruistic recognition of employee endeavour.

 It means certain things need to happen to prepare the company and its people:  

  • Evolving from a senior leadership team looking to its founder owner for direction, to an executive operating board thinking collectively on behalf of the company;
  • Building a wider understanding of company context and headline performance to encourage interest, collaboration, and the confidence to participate in its dialogue; and
  • Capturing the methods and values that have grown a successful business, so that they are enshrined in its thinking and decision making, in its new constitution, and in its stewardship through the trustees and their relationship with the operating board.

It seems a lot to achieve but that depends on where you are starting from – some companies will have already developed their operating boards and generated high levels of awareness and collaboration whether they had an eye to employee ownership or not.

There is lots of flexibility. The trustees and operating board can begin to shape the practicalities of their relationship in advance, or once ownership has changed; employees can be brought deeper into strategic conversation, grow their understanding of the company’s context, and be taught how to interpret its performance either before or after ownership changes.

And there is the opportunity to bolster capacity at any stage with independent trustees and non-executive directors; to offer a practitioner’s eye when designing the governance, to help mentor and induct people into new roles or practices, as confidantes, and as steadying hands through the legal ground-rush and into the first turn of the cycle.   

Succession means carefully selecting the moment for transition

There is latitude to formally become employee owned at any point in the journey. It may coincide with the founder departing, or they can plan to stay involved with the company while things continue to bed in – under the crucial proviso that personal control has been ceded.

But that does not mean the timing is not important.

Transition represents a defining moment for a founder owner, the company and everyone in it. The balance of power shifts, a Trust is formed, employees become beneficiaries of their contribution to the company’s fortune and assume renewed responsibility for it.

It is a statement of confidence and identity that sends strong signals to clients and employees alike. It is a milestone to celebrate with none of the risk or uncertainty that everything will be swept aside on change of ownership, as can be the case with a merger, acquisition, or sale.

Founders have told us that the transition of decision making, and trusting a wider decision making forum such as a company board, is one of the most difficult but ultimately rewarding and liberating parts of the process. Others have stepped up to lead the organisation, the buck no longer only stops with them, their legacy is on a solid footing.

But the significance of the transition may be imperceptible to employees looking for something more tangible and immediate on their level. Their expectations also need to be considered and managed appropriately.

And how employees feel on the day can be decisive in accelerating or stalling momentum – whether they are reassured and trust the founder’s motives, are confident to embark on a future under employee ownership, and whether they understand where they are on the journey and what the moment of transition will actually represent.

Founders are often disappointed that their employees aren’t as excited as they are on the day of announcement, and this may diminish the excitement for the founders themselves. But it should be remembered that this is a new journey for employees, in the same way that the journey to this point was new for the founder. It takes time for employees to understand their new organisational ownership structure and recognise their opportunity. Over time, will they become more excited and will they be inspired participants?     

But succession through employee ownership means it really is your legacy

Employee ownership is a route that gives founders space to wean themselves from the business, until they are comfortable with their legacy and that their people are ready to pick up the torch. The path to succession builds resilience and stability, leaving the company’s future as assured as it ever can be when the founder goes. But perhaps most important of all, it is an exit that keeps people at its heart – and, ultimately, people are what makes a company.

 

Simon Carter is a consultant with Independent Directors and Trustees, an experienced director and Independent EO trustee, as well as a leadership and governance expert. He is appointed to a number of employee ownership trust boards, working closely with founders to ensure their legacy carries forward to their EO model. 

This article was written for the lead up to EODay 2021 on 25th June 2021, a day to celebrate employee ownership that is spearheaded by the Employee Ownership Association of which IDT is proud to be a Supporter Member.

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