Governance Tips for EO Companies

Let’s start at the beginning – What is Governance?

The Chartered Governance Institute (ICSA) defines governance as:

 ‘Governance is a system that provides a framework for managing organisations. It identifies who can make decisions, who has the authority to act on behalf of the organisation and who is accountable for how an organisation and its people behave and perform.’

Taking this one step further, the governance of an organisation can be equated to being its skeleton – a core part of its functioning but, when working smoothly, it shouldn’t be seen. Without it the body of the organisation cannot function, it falls apart and is disconnected with time spent shoring up areas that, if connected to a robust structure, wouldn’t take so much time and resource away from creating a successful business, however that is defined.

Governance in Practice

All good so far, but what does that mean in practice?

Governance isn’t just administration or support, it is evidenced by a board, a leadership team and forums where decisions are made, not just those related to operations but also the strategic direction of the organisation.  

So starting with the above definition and the wider view, who makes the decisions? Who has the authority to act?

Usually this would be the board of directors. In smaller companies it may be the founder, or a small group of senior leaders, whether appointed as statutory directors or not. In larger companies it will be the executive directors, with the board including non-executive directors discussing, challenging, agreeing and making significant decisions, whether they are operational or strategic.

In an employee owned company it is still the operating board that makes the decisions … not the trustees or the employee body, which is often a misconception in companies that have recently transitioned to ownership through an employee ownership trust.

It is the group of executives who lead operations, have oversight of all the functions and ensure the business runs smoothly that are the visible leaders of any company. They also set the future direction of the business, through the near term budget setting and business plans, and agreeing the longer term strategy. In effect, they ensure that the company is working effectively, is placing its resources in the right place, has an eye on the future and is fit for purpose.

 

IDT Tip: Ensure your board as a collectively group have the skills to fulfil their roles and responsibilities. Consider board evaluations. Don’t be afraid to welcome in a Non-Executive Director to bolster your boards’ expertise or bring a broader perspective, it may be more effective and cheaper than a raft of subject matter expert consultants.

 

The Role of the EO Trustees

So far so good with an operating board and shareholders outside of the day-to-day operations of the organisation. But what about EO companies, where the shareholders are the employees, represented by the trust board?

In the majority of EO companies, though not all, the employees are represented by a trust company, with a board of directors who act as the trustees. These trustees are usually a combination of any of the following: founders, management, employees, former employees, company advisers and independent trustees with no former connection to the company.

The composition of the trust board is many and varied and often unique to each organisation.

What should unite them is a having a clear purpose – acting as the representative of the employees as owners.

They should also be united by having a responsibility for three things:

1.  Oversight of the current health of the organisation;
2.  Understanding of, and supportive challenge on, the future direction of the organisation; and
3.  Oversight of the effectiveness of the operating board in delivering (1) and (2).

Too frequently trustees, whether on their own volition, as a result of their differing roles and conflicts, or at the behest of an operating board, stray into the operational decision making and strategy setting that sits with the board. The result is that the differing roles and responsibilities for these two forums becomes confused, both for their members and for the employees.

The outcome is that both forums spend precious time overlapping in their discussions of the same topics, duplicating effort and potentially getting mired in a lack of forward momentum as the ultimate decision maker is not clearly identified.

For clarity, from a governance perspective, the trustees should be the back-stop. The forum for supportive challenge of board decisions, the group that, once feedback from that challenge has be accepted and, if appropriate, acted upon by the operating board, will support the communication of the decision made and communicated by the board.

There is a need to ensure that trustee actions and communications don’t undermine the operating board, particularly where that board may be recently constituted as a result of conversion to EO. The trustee role as one of oversight is less action driven than that of the board. Actions are taken when necessary, but not as a regular occurrence, and not as part of the day-to-day operations of the organisation.

Trustees should always be cognisant to not communicate in a way that confuses their role, overlaps with that of the operating board, or undermines the leadership team of the organisation.

The trust should have a clear and specific role in representing the employees as beneficiaries of the trust (the beneficial owners), and this distinction should be at the heart of all their discussions and communications with employees.

 

IDT Tip: Have a standard agenda for your trustee meetings that reflects the 3 areas of responsibility – current health, future direction, effectiveness of the board – discussing each of these topics in depth as and when required, not equally at all meetings.

 

Implementing or Reviewing EO Governance

It may sound counter-intuitive to the proposition of IDT as a collective of independent trustees, but we would recommend that all companies consider their governance structure before they appoint an independent trustee, or at least when they are considering changing the composition of the trustee board.

Why? Because until you are clear on the roles and responsibilities of the various forums, you don’t know what skills you will need, what contribution you are expecting and what deliverables you expect from your trustees.

Your legal documentation will only take you so far in identifying what these various roles and responsibilities are. What it won’t do is provide the practical application of the legal framework. Often the legal documentation requires the appointment of an independent trustee. If so, make sure that one of your first tasks as a trustee board is to understand what the role of the trustee is. An experienced independent trustee will be invaluable in creating this understanding.

Working through where the decision making sits, who sets the strategy, what should be referred to trustees (and critically what shouldn’t), how the employee voice will be captured, are all key questions.

Recently transitioned EO companies, or those that are in the planning stage, should consider what they already have in place, particularly what works effectively already. Good EO governance should take this and layer EO on top of this existing robust foundation.

Too frequently, companies transition into EO and believe they have to change everything. But being in a position that is strong enough to move into ownership by employees means that something is working well. Why would you stop doing this?

We frequently work with EO companies to review, create, assess or document their governance structure, either as an independent trustee or as a consultant. It may seem a dry topic that isn’t a priority, but once it is in place and communicated to all employees, it can be used effectively and should help to avoid misunderstanding, duplication and resource stretch. In fact, by communicating it to all employees, with the full understanding of the management team and the appointed trustees, it can help to create a true understanding of what employee ownership means.

As a hint, governance reviews look at the roles, responsibilities and communications between the three main forums within an employee organisation – the operating board, the trustees and the employees.

 

IDT Tip: Review your governance framework occasionally, and be clear where roles, responsibilities and decision making rests … and communicate this with all employees. If you’re newly transitioned, go through this exercise and communicate it widely. Consider incorporating it into your employee handbook and induction process.

 

Conflicts in Governance

The role of the trustee is complex, especially when its members frequently have two hats to wear:

• founder/ recipient of outstanding consideration / trustee
• director /manager / trustee;
• employee / trustee;
• former employee / company pensioner / trustee;
• company adviser (lawyer, accountant, etc) / trustee.

As trustees representing the employees as beneficiaries., internal trustees often have to learn the difference in their role between being an employee and being an employee trustee.  Crucially, their trustee role is to represent  all employees equally, not just the subset that an internal trustee, whether a director, management or employee trustee,  works alongside, or is responsible for.

For a semi-independent trustee, such as a company adviser, their benefit to fellow trustees is from their expertise as a lawyer, accountant or as a knowledgeable ‘friend’ of the company, with an existing knowledge and understanding of the business. However, this existing knowledge also means that they may have a conflict in their role, especially if they continue as an adviser to the company or they maintain a close relationship with a former owner. It is this conflict that may result in them acting as if the company had not transferred into employee ownership. In some cases, they may also not have any wider experience of employee owned companies or acting as a trustee.  This is not always the case, and there are many semi-independent trustees who fulfil the role excellently, but this conflict is one that should be considered at some point during their term.  

The only trustee truly not conflicted is the independent trustee, who should be able to bring best practice through their personal knowledge of EO companies, trustee decision making, governance and related experience, employee communications and expertise.

 

IDT Tip: Look at the composition of your trust board in relation to its purpose, roles and responsibilities. Does this forum have the combined skills to function effectively as representatives of the shareholders? Have you really identified the conflicts, been clear about these, and ensured that the beneficiaries as a whole are represented? And do this exercise on a regular basis.

 

The Employee Voice and Governance

The crucial part of being an EO company is that your employees should have a voice and this shouldn’t be lost in your governance framework.

Employees will already have opinions and ideas about how things could be done better. Your governance model needs to be able to work these into the decision making process, the discussions and the actions of the company.

But crucially, it needs to be clear that there is still a board that leads the business, that takes the tough decisions, that drives the direction of travel. The board has full knowledge, can connect the dots, can review from a position of knowledge of the whole company and how it inter-connects. It is not constrained by considering matters from a single functional perspective, or one team.

Employees should have a voice, certainly, but their key role is to understand their role in the company, how this fits into the company purpose and how, by working at their best, they are contributing to the collective success. Beyond this, their ideas are invaluable and should be encouraged, but every idea has its day and sometimes that day may not be today.

From a leadership perspective, encourage and welcome those ideas. Consider asking for employee contribution on subjects that the board is discussing. For example, if as a board you are struggling to recruit in a competitive market, ask your employees for their ideas and suggestions, their different viewpoint may identify excellent alternative solutions.

Don’t just refer employee, HR related and social matters to your employees. Share knowledge of the company by getting their input and feedback on business related matters. Trough doing this your employees will gain a greater understanding of the challenges in place and the opportunities that your company provides to them.

Bring employees, whether directly or through a formal forum, into your discussions. Engage with them and welcome input. But crucially, give feedback. If the time for one of their suggestions isn’t today, say why not, but keep it for future consideration.

 

IDT Tip: find a way to encourage and accept employee contributions that supports, enhances and fits in with the governance framework, whether this is via an employee council, performance reviews, workshops, ideas boxes, surveys or one of the other many means of engaging and getting feedback.

In conclusion, and reverting back to the analogy with the skeleton … be clear on how your skeleton fits together and understand what each part has responsibility for. As with a skeleton, if part of it breaks, for example if the board needs additional expertise, if a trustee resigns, if the employee voice is not being heard, mend it as soon as possible.

Long term issues not mended will remain and will gradually erode the effectiveness of the governance framework. They will also take more time and resource to mend in the future and could create an even greater issue if not addressed in a timely manner. Like a broken bone that hasn’t healed, the dull pain will eventually turn into a greater distraction that could compromise the whole organisation.

Having a robust, healthy governance skeleton will be an effective support for your organisation. Understanding and communicating your governance model, and putting it into practice, will enable your organisation to focus on the excitement and energy in making it even more successful as an employee owned company, with even greater contribution by all your employees.

 

Sue Lawrence is the founder of Independent Directors and Trustees, a published author and editor on governance topics through The Chartered Governance Institute and an independent trustee on a number of EO companies primarily within architecture, construction, distribution and professional services. She has a particular focus on companies transitioning to EO working with them to create their EO governance model, as well as those seeking to review their existing EO governance framework.

 

Independent Directors and Trustees is a collective of experienced NEDs and independent trustees who share their knowledge for their personal development, as well as for the benefit of their clients. If you would like to know more, visit our website at www.indepndentdirectorsandtrustees.co.uk or call us on 0203 926 6000 to arrange a no obligation chat

 

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.