At the time a business owner or company begins the process of exploring an employee stock ownership plan (ESOP) as a component of their Business Succession Plan, many have never established a functioning Board of Directors. More often than not, the shareholder serves as the only member of the Board, while also serving as the President of the company. Of those that do have a Board, many operate the Board as nothing more than an extension of the senior management team to make short-term operational decisions rather than long-term, strategically focused Corporate Governance.
Primary Responsibilities of the Board
The Board has a fiduciary obligation under state law to the shareholders and is governed by the Articles of Incorporation and Bylaws. A properly functioning Board has three primary areas of responsibility:
- Grow Shareholder Value – A primary Board responsibility is to protect and grow the shareholders’ value and carry out the mission and values of the company. The Board has a fiduciary duty of care to act prudently. It also has a fiduciary duty of loyalty to act in good faith and in the interest of the company and to all of its shareholders. This must be done while satisfying the fiduciary duty of obedience to remain faithful to the purpose of the company.
- Succession Planning – The Board is responsible for ensuring a succession plan is place for the CEO and key senior members of management. This includes developing and training replacements internally and selecting external candidates when appropriate.
- Advise the CEO – The Board advises and sets strategic goals for the CEO by approving financial statements and making significant cash decisions and strategic decisions:
- Officers – Selecting, monitoring, evaluating, compensating, and replacing the CEO and key senior management as needed
- Financial Planning – Reviewing and approving financial statements, financial plans and forecasts, and projected capital expenditures
- Strategic Direction – Reviewing and approving the corporate philosophy and mission, business plan, and strategic plan
- Making Strategic Decisions – Reviewing and approving significant transactions outside of the operations of the business
- Risk Management – Providing an ethical environment, compliance with regulations, security of information, etc.
- Corporate Governance – Fulfilling responsibilities in accordance with state law, Articles, Bylaws, and other governing documents and regulations
Process and Documentation
The decision-making process is just as important as the result of the process and should be clearly defined and executed as planned. It is important to take and keep thorough notes. Maintaining minutes and internal memos are recommended practices. Board resolutions should be prepared to document the work of the Board.
Other Parties in the Corporate Governance Process
While the ESOP Trustee is an integral part of the ESOP Corporate Governance process, they should not be on the Board due to the many potential conflicts of interest. The ESOP Trustee serves as the legal shareholder of the shares held by the ESOP Trust. The ESOP Trustee exercises his or her control by voting the ESOP shares to select the Board. In practice, the ESOP Trustee usually does not select or nominate the candidates for the Board and does not operate in a management capacity. The ESOP Trustee generally acts in a consultant and oversight capacity to ensure the Board is carrying out responsibilities to the shareholder(s).
The company officers have a fiduciary obligation to share financial information with the shareholders.