As ESOP Experts we write about participation a lot when it comes to ESOPs. Our whole design and implementation methodology is based around a participative approach, and that’s no coincidence. But what does participation look like? Does it always mean representation on the Board of Directors?
Where a goal of the ESOP is an overhaul or integration of the company’s corporate culture, a significant factor could be whether or not employee-owners should have a right to representation on the board of directors. In a unionized company the unions usually require that representation, if they are to look at an ESOP as a means of supplementing wage concessions. Because ESOPs are put into place as a means to allow employees to participate in the value growth of the company, there is a tendency to develop the right of the employee-owners to representation on the board of directors. This is generally done over time as the shares owned by employees becomes about 40% or greater. Studies in the United States have shown that a majority of companies, after five or six years of operating the ESOP, tend to appoint employees to the board, as all stakeholders begin to understand and respect the issues that are involved in running the corporation, and trust each other to do what is best for the growth of the company.
One of our clients decided that board representation was important to their company culture. They decided that one board member would come from among the employee-owners and would have a term of three years. To select this board member, the employee-owners voted for one of three candidates chosen by the founding owners.
A successful ESOP is flexible and adapts with the changing needs of the growing company. In this way the level of participation can change as the plan grows and employee-owners show greater understanding of what is involved in running an organization.
By Joanna Phillips, CHRL, CVB, Vice President, and Perry Phillips CPA, CA, CBV, President