Recently we have discussing ESOP Corporate Governance issues. For companies interested in sustaining an ESOP in the long-term, building and maintaining an ownership culture should be a part of your company's long-term corporate strategy that is monitored by the Board of Directors.
ERISA Section 404(a) defines the primary duties of an ERISA fiduciary:
Yesterday we discussed how engaging an Independent Fiduciaries Does Not Eliminate Fiduciary Liability in all cases. Nonetheless, if selected and monitored diligently, an independent fiduciary can significantly reduce fiduciary risk. They also bring expertise to the table that can help a company achieve their plan and corporate objectives. Independent Fiduciary Role Set to "Explode" discusses how the most important responsibility of a fiduciary is for the plan to stay qualified and how pending DOL regulations will increase the importance of engaging independent fiduciaries:
Speaking at the Independent Fiduciary Symposium in New York on May 26, Mamorsky asserted that, "the independent fiduciary is the most important position in the ERISA world today." Sponsors don't want to have fiduciary responsibility for their ERISA plans. Most don't have the time or skills needed to fulfill this responsibility, according to Mamorsky. And many don't even realize that they have a fiduciary obligation to participants; that leaves them open to lawsuits by participants or missing compliance with IRS or ERISA rules that could disqualify a planand result in hefty monetary sanctions.
When sponsors understand that they can outsource the fiduciary responsibility to an expert, it would seem to be an easy choice for them to make. Mamorsky says this area of expertise is ready to "explode," especially with the changes pending in Department of Labor legislation that is expected to require that plans reveal all fees or costs to participants.
We have often discussed the corporate governance conflicts that occur when the same person wears multiple hats (e.g. Seller, Board member, Trustee, etc.). One solution to reduce the conflicts is to engage an independent fiduciary.
The April 14, 2010 Employee Ownership Update is online and discusses the following:
Responding to Unsolicited Offers to Buy discusses the issues that the CEO, Board of Directors, and trustees face when an unsolicited offer is received. It talks about how a "not for sale" resolution could make things worse, at least from a trustee perspective. The article suggests a Policy on Unsolicited Offers that should be reviewed and approved by the Board of Directors on a regular basis and provides a template:
In Shared Ownership Firms Report Substantially Larger Return on Assets we discussed selling to an ESOP in phases. In addition to providing a ready market for an otherwise illiquid asset and providing the owner with diversification and liquidity while retaining control of the company, it helps set the stage for a gradual business transition. The lead director's role in succession planning discusses the board's role in succession planning for both the CEO and the management team:
- CEO succession: emergency plan
LDN members believe it is critical for all companies to draft an emergency CEO succession plan and to review that plan annually. But they disagree on the specificity of these plans. Some companies have a very detailed plan; other companies have a less formal plan.
- CEO succession: orderly, long-term plan
LDN members agree on the importance of having a long-term succession plan that has been carefully developed over months and years. This plan generally defines the roles and responsibilities of the board and management, gives a timeline for CEO succession, assesses future business needs, lists the wanted attributes and experiences of the next CEO, creates opportunities for board members to interact with CEO candidates, and provides for open dialogue between the board and the current CEO about the process.
- CEO succession: specific roles and responsibilities
Members agree that the board either in full or through a committee has primary responsibility for developing and executing the CEO succession plan. The lead director also plays a vital role in CEO succession planning, aggregating feedback on candidates and driving the board to consensus. The CEO's perspective on candidates is an important contribution. Members also agree that if a company hires a search firm to help with the succession process, the lead director or a committee of the board should manage the company's relationship with that firm.
- Management succession
In addition to being responsible for CEO succession, boards also provide oversight and support for the wider management succession process. LDN members report that boards often develop relationships with the top 20 or so senior executives over a period of years, relying on the company's management development program to ensure that lower-level executives are developed properly. The board's role is to review the program regularly to be sure it is working satisfactorily.