Building a Sustainable Ownership Culture with ESOP Corporate Governance — Part 1

Posted by Aaron Juckett, CPA, CPC, QPA, QKA on Thu, Feb 16, 2017
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sustainable-ownership-culture.jpgMany ESOP companies strive to build and sustain a strong ownership culture that will increase shareholder value. Developing an ownership culture is an ongoing process that evolves over time.  A strong ownership culture can be driven by the CEO, sometimes referred to as the keeper of the culture, and the Board of Directors (“Board”) through corporate governance.  This two-part article series will review the various stakeholders in the corporate governance of an ESOP company, explore their roles in the process, and things stakeholders can implement to strengthen the culture.


Company Shareholders are the owners and investors of the company.  Each shareholder generally receives a stock certificate to identify the number of shares owned.  A corporation is governed by state law and the company’s articles of incorporation and bylaws.  The articles define the legal purpose of the business and describe the number of shares issued and voting rights.  The bylaws provide more specific details on how to govern the company, including procedures on shareholder meetings and selecting and removing Directors.

The Shareholders’ primary responsibility is to elect the Board to govern the company.  Other responsibilities include approving and amending the articles and bylaws and approving significant corporate transactions.

Ownership Culture Action Items: Shareholders can help sustain an ownership culture by ensuring that remaining employee owned is a legal purpose of the company and that the ESOP and ownership culture are long-term strategic objectives of the company.  Shareholders should make sure that Board members have ESOP experience and that all Board members are supportive of the ESOP and employee ownership and receive training as needed.  The Shareholders should consider support of the ESOP and building an ownership culture when evaluating the Board.

Board of Directors

The Board is selected by and accountable to the Shareholders to govern the company and is the highest level of management in the company.  The Board is governed by state law and the article and bylaws.  They have a fiduciary obligation to the Shareholders of the company.  They have many duties, including a duty of care to act prudently, a duty of loyalty to act in good faith and in the interests of the company, and a duty of obedience to remain faithful to the purpose of the company.

Primary responsibilities of the Board include growing shareholder value, governing to ensure the company is achieving its legal purpose and strategic objectives; appointing, compensating, monitoring and advising the CEO and senior management; approving transactions and activities; planning for succession; managing risk; evaluating transactions from a corporate and shareholder perspective; and amending the corporate documents.  The Board appoints the Trustee.

Ownership Culture Action Items: A commitment to the ESOP and employee ownership by the Board is important. Ideally the Board will specifically incorporate the ESOP in its long-term corporate strategy.  The ESOP and the future repurchase obligation forecast should be part of the strategic planning process.  Making meaningful contributions to the ESOP while continuously evaluating the employee benefit level, distribution policy, and ESOP funding are best practices to keeping the ESOP sustainable in the long-term.  The Board should also implement a policy for evaluating unsolicited offers.

Looking to go a step further?  Some companies offer more liberal pass-through voting rights, including the right to elect some or all of the Board.  Other companies allocate one or more seats on the Board for non-management employee representatives or allow employees to participate in an advisory capacity.  


The Trustee is appointed by the Board and represents the ESOP participants, in most cases by voting on behalf of the ESOP participants.  The Trustee and the Board often consist of the same members of management, creating a “circular” selection process that leaves the same people in charge of the company and the ESOP.

Because the Trustee is acting as the ESOP shareholder, they are governed by state law and the articles and bylaws just like any other shareholder.  In addition, Trustees are ERISA fiduciaries and must act solely for the exclusive benefit of the plan’s participants and beneficiaries while defraying reasonable plan expenses, must act with the care, skill, prudence, and diligence that a prudent person would act under similar circumstances, and must act in accordance with the plan documents.

The Trustee has authority and discretion over the plan assets.  The Trustee reviews the financial statements and the independent stock appraisal report to set the value of the company stock on an annual basis and for transaction purposes.  The plan document specifies the voting rules. Unless provided otherwise, the Trustee votes the ESOP shares and is responsible for electing and monitoring the Board.  In limited circumstances the Trustee is required to pass-through voting rights directly to the ESOP participants.  

Ownership Culture Action Items: A strong ownership culture can help minimize the Trustee’s fiduciary risk.  The Trustee impacts the culture by electing Board members that are supportive of the ESOP and the ownership culture.  If an ESOP has paid a control premium, the Trustee has a responsibility to ensure the ESOP has and maintains both voting control and control in fact.

The Trustee is able to directly impact the culture by participating in the employee communication process and interacting with the ESOP communications committee.  An independent Trustee can add independence, credibility, and transparency to the communications process and are effective in teaching ESOP concepts like corporate governance and how the stock price is determined to the participants.

Creating a strong ownership culture takes time, and it starts with the senior leadership team. But management and employees also have a role to play. In the next article we'll cover the roles of officers/management, employees/ESOP participants, and the Plan Administrator. Check back next week for part two!Blg-FTR-TPA-Self-AssessmentA version of this article was originally written by Aaron Juckett for The ESOP Report.

Topics: ESOP Corporate Governance

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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