ESOP Corporate Governance

Posted by Aaron Juckett, CPA, CPC, QPA, QKA on Mon, May 05, 2014
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Corporate GovernanceCorporate governance is how corporations manage the business affairs of the company to achieve their corporate and shareholder objectives.

Primary Stakeholders

  • Shareholders – The shareholders are the owners of the company. The primary responsibility of shareholders is to elect the Board of Directors. 
  • Board of Directors – The Board of Directors are responsible for corporate governance and delegate authority to officers/management. The Board represents the Shareholders, is the highest level of management in a company, and is responsible for governing the company. 

    The Board has a corporate fiduciary obligation under state law to the Shareholders, including growing shareholder value. Advising the CEO and succession planning are other key responsibilities. For more discussions on the Board's responsibilities, check out Responsibilities of the Board of Directors and More Responsibilities of the Board of Directors. 
  • Officers/Management – The officers/management are appointed by the Board to carry out the strategic direction of the company and are responsible for the day-to-day operations of the company.  Management hires the employees for day-to-day operations and to carry out the operational plan.

ESOP Stakeholders

  • ESOP Plan Sponsor – The employer that establishes and maintains the ESOP.

  • ESOP Plan Administrator – The individual(s) with authority and discretion over the management of the plan. Unless another individual or entity (e.g. ESOP Administrative Committee) is specifically assigned, the Plan Sponsor is the legal Plan Administrator and decisions are made by the Board of Directors. The Administrator(s) is an ERISA fiduciary.

  • ESOP Administrative Committee – The ESOP Administrative Committee is usually appointed by the Board of Directors and serves as the Plan Administrator.

  • ESOP Trustee - The ESOP assets, which primarily consist of the stock of the company, are held in a trust and managed by the ESOP Trustee. The ESOP Trustee is the individual(s) with authority and discretion over the plan assets. For most purposes the ESOP Trustee acts as the legal Shareholder of the ESOP.  The ESOP Trustee is an ERISA fiduciary and has a fiduciary duty to act in the sole interest of ESOP Participants, maximizing the long-term value of the assets of the trust (the stock of the company). The ESOP Trustee will often vote according to the direction of the ESOP Administrative Committee. In addition to ERISA, the ESOP Trustee is goverened by the Internal Revenue Code, the plan document, and trust document.  

    For many ESOPs, including many small, closely held companies, a member of management acts as the ESOP Trustee. 

    We recently reviewed the Ongoing ESOP Trustee Responsibilities.

  • ESOP Participants – The ESOP Participants are beneficial owners of the company and generally have limited legal authority.  In most cases the ESOP participants as Shareholders are represented by the ESOP Trustee.  The plan document specifies the voting rules. Unless provided by the plan document, the ESOP Trustee is not required to pass-through decisions such as voting for the Board of Directors, buying or selling stock, and exercising voting rights. 

    In limited cases, such as a significant corporate event (e.g. liquidation, sale of all or substantially all the assets, recapitalization, merger) or if the ESOP has any Section 133 shares, the ESOP Participants may have the right to have pass-through voting rights on all issues, including the election of the Board.

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ERISA Plan Fiduciary

A plan fiduciary is a person that exercises discretionary authority or control over the management of the plan or plan assets. ERISA defines the four Primary Duties of an ERISA Fiduciary

Relationship between the ESOP Trustee, Board of Directors, and the ESOP Committee?

  • The ESOP Trustee is selected by the Board of Directors. 

  • The ESOP Trustee generally votes the ESOP shares for the election of the Board of Directors. The ESOP Trustee will often vote according to the direction of the ESOP Administrative Committee.

  • The ESOP Administrative Committee is usually selected by the Board of Directors and generally consists of members of management. 

  • This "circular" selection process often leaves the same people in charge of the company and the ESOP.

     

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Topics: ESOP Corporate Governance, Employee Stock Ownership Plan (ESOP)

Aaron Juckett, CPA, CPC, QPA, QKA
Written by Aaron Juckett, CPA, CPC, QPA, QKA

Aaron is President and Founder of ESOP Partners and provides implementation, administration, and consulting services to hundreds of companies. He is a member of The ESOP Association (TEA) and the National Center for Employee Ownership (NCEO).

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