Responsibilities of an ESOP Company Board of Directors

Posted by Aaron Juckett, CPA, CPC, QPA, QKA on Fri, Feb 03, 2017
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ESOP business successionMany business owners that have implemented or are exploring an employee stock ownership plan (ESOP) may not have an active Board of Directors in place. Often times the Shareholder(s) are operating as the Director(s) of the company as they manage the day-to-day operations, and are not separately meeting as a Board to formally achieve the Corporate Governance responsibilities of the Board. Of those that do have a functioning Board, many operate the Board as an extension of the senior management team to make short-term operational decisions, rather than long-term, strategically focused decisions in line with corporate governance best practices. 

Relationship Between Shareholders and the Board

Shareholders are the owners of a company. The legal rights of the owners are defined by the laws of the state in which the company is incorporated, the Articles of Incorporation, and the company Bylaws. The Articles define the legal purpose of the business, the number of shares issued, and voting rights. The Bylaws provide more details on how to govern the company, shareholder meetings, and elect or remove members of the Board. The Shareholders are responsible for electing the Board of Directors to run the company, approving and amending the Articles and Bylaws, and approving significant corporate transactions.

Please note that for most legal purposes, the ESOP Trustee acts as the Shareholder of the ESOP.

The Board of Directors are elected by the Shareholders to oversee the strategic direction of the company and protect the interests of the Shareholders. The Board represents the highest level of management in the company and has a fiduciary obligation under state law to the shareholders.

Primary Responsibilities of the Board

A properly functioning Board has three primary areas of responsibility:

  1. Grow Shareholder Value — A primary responsibility of the Board 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.
  2. Succession Planning — The Board is responsible for ensuring a succession plan is in place for the CEO and key senior members of management. This includes developing and training replacements internally and selecting external candidates when appropriate.
  3. 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

ESOP Trustee: 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 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 consulting and oversight capacity to ensure the Board is carrying out responsibilities to the shareholder(s).

Officers: The company officers are responsible for the day-to-day operations of the company. Officers are generally appointed by the Board and have the legal authority to act on the company’s behalf. Common Officer positions include the Chief Executive Officer (CEO) and/or President, The Chief Operating Officer (COO), Chief Financial Officer (CFO) or Treasurer, and Secretary.

Benefits of an ESOP as Business Exit Strategy eBook

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

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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