Businesses which are majority owned by an employee ownership trust (EOT) have a trust board which owns a majority of shares (often all the shares) on behalf of all employees. This body is the crucial link between the employee owners and the main board which runs the company and it is vital that it has the right skill set to exercise its ownership rights. Usually the directors of the trust board are a mixture of employee representatives and directors of the operating company with some independent representation to hold the balance between what are essentially worker and management representatives.
Employee directors are sometimes appointed by the founders of the trust when the business transitions into employee ownership. More often, they are elected by the workforce, either indirectly by members of an elected workplace council or directly by ballot of the whole workforce. As with any election, there is a risk that the person who wins the ballot is chosen more for their electioneering than for their problem-solving skills. That is not to minimise the importance of them being a popular choice: enthusiasm among the elected trustees is one of the most important factors in determining the successful transition to employee ownership as anyone who has witnessed the positivity that can be created by enthusiastic employee directors will attest. However, they are not there solely to be enthusiastic advocates of employee ownership, they are also there to hold the main board to account and ensure the employee-owners are well served by the actions of their board. Unless they have the necessary skills to challenge the board, there is a risk that the main board members on the trust board will ‘blind them with science’ and undermine their ability to hold the main board to account.
In most EO situations, for the first few years the founders will be members of the trust board (and probably also of the main board). Their role can be crucial in enabling the employee representatives to find their feet. They will usually have at least as much knowledge of the business as other members of the main board who might be on the trust board. Moreover, they tend to be more disinterested advocates on behalf of the employees than other main board members – after all, it is usually them who decided to make the business employee-owned. If there is an uncomfortable message to be given to the main board, they also have less to lose than employee representatives by upsetting main board members.
However, although founder involvement is helpful in the early stages of employee ownership, it also has its downside. It can sometimes result in other members of the main board counting the days until the founders are paid off and cease to be an irritation. It occasionally results in direct appeals from the main board to the workforce, bypassing the trust board – something which it is vital to avoid if a fully mature EO ethos is to develop. In the long term, other measures are necessary to develop the skill set of the trust board.
The most obvious of these is the training of the elected employee representatives. Solicitors specialising in employee ownership can be very helpful in training employee representatives in their legal duties. If the EO business is a professional one (and a huge proportion of EO businesses are ‘knowledge businesses’ such as planning consultants, architects etc. with a highly educated workforce) then a short legal course and possibly a ‘finance for managers’ course might be enough. In a larger enterprise there is a bigger risk of disparity between the skills of the board and those of the elected representative and more training will be necessary.
Other employee-owned business can be of real help here. One of the most notable characteristics of the employee-owned community is their generosity with their time in supporting other members. The Employee Ownership Association can also provide advice. Attendance at EOA Regional Meetings will give access to an experienced network of EO professionals and provide a useful self-help support group. Attendance at the EOA annual conference is also an experience no new employee representative should miss.
There is also a strong case for beefing up the board with one or more non-executive directors (NEDs). Because employee trustees are invariably elected for relatively short terms (rarely for more than three years) most EO businesses have a continuity issue. NEDs can help provide that essential continuity. NEDs do not have to be experienced in employee ownership. On the contrary, since the knowledge deficit is likely to be in the experience and skills to challenge members of the main board, the focus should be on people who have spent their careers in highly commercial environments. Though it is sometimes said that most NEDs on plc boards are appointed to be puppets of the Chief Executive, ensuring that the trust board and not the main board makes the NED appointment should avoid that risk in an employee-owned business.
In many cases the founders effectively act as NEDs in the early years. However, appointing external NEDs is usually preferable to relying on the founders because it helps move the business on to a more mature EO relationship between the employee owners and the main board. It also provides better continuity once the founders finally leave the business entirely.
Dr. Paul Sawbridge is a Founder and former Chairman of Alfa Leisureplex Group, a family-owned hospitality and travel business employing 670 staff which converted to a 75% EOT in 2015.