Since the introduction of Employee Ownership Trusts (EOT) in 2014, transitioning to employee ownership in the UK,  usually means a trust becomes the majority shareholder and the trustee or trustees of the EOT take on the important role as its majority shareholder.

This marks a significant change in ownership and governance; as the company changes from an owner managed business, to one where ownership and leadership are separate. The ownership of the business now sits with the EOT and leadership with the company board.

A frequently asked question is “what is the role of the EOT and how does this differ to the role of the company’s board?”.

It’s worth noting that when setting up an EOT, most are set up with a corporate trustee (rather than individual trustees).  The corporate trustee is a dormant company, limited by guarantee, and the individuals who are in control of the EOT are its directors. So, when we talk about the EOT board, we’re talking about the directors of the trustee of the EOT, who we call the Trustee Directors.

To get a clearer picture of the role each board has, it’s important to understand what the EOT Board and the Company Board are responsible for. Knowing the difference from the outset helps make a transition to employee ownership smoother and sets the scene for good governance.

The EOT’s role

The EOT is the majority shareholder of the company, so when a shareholder decision is required, it will be made by the EOT Board.  Under company law, as a majority shareholder, all  EOTs have certain high-level powers and certain responsibilities to its beneficiaries (the employees). It is vital that the EOT Board understands how these apply in practice even though for the vast majority of employee owned businesses shareholder decisions do not come around often.

The role of the EOT Board then, can be described as follows:

1. Monitoring role

The primary role of the EOT Board is to monitor the Company Board, making sure that the business is being run in the best interests of all the employees within the company.  This  involves ensuring that the business is performing as expected financially, and that the Company Directors are carrying out their duties in a responsible manner, as well as considering the wider benefit to the employees.

The EOT Board does have oversight on how the company is being run, however it is important to emphasise that the EOT Board is not there to run the company itself and get involved in the day to day running of the company – its role is to oversee and monitor the running of the company.

2. Governance role

Along with a monitoring role, some EOT Boards have a  governance role that goes above and beyond it’s right as the majority shareholder.  There may be a list of matters on which the Company Board must seek the consent of the EOT Board. For example, if the Company Board wants to increase the number of shares in the company or form a subsidiary, the Company Board would often need the consent of the EOT Board.

It is common practice for the Company Board to adopt an “inform, consult, consent” approach when engaging with the EOT Board. By adopting this approach, there is greater understanding across both boards as to when the EOT Board can expect to be informed by the Company Board of matters of interest to them, when they should expect to be consulted and where there are matters that the EOT Board should be asked for its consent on, before the Company Board can proceed.

As employee-owned businesses mature, there will be certain milestones like financial freedom or changes in leadership where it may be appropriate for a review of governance to take place; we provide help to employee-owned businesses facing these challenges, in the form of an Employee Ownership Review.

3. Guardian role

The EOT Board can also act as a guardian of the company’s mission, culture, and values. For a number of  values led businesses (like B-Corps); it’s values / purpose / guiding principles may  be recorded within the Deed of Trust, becoming  the responsibility of the EOT Board to hold the Company Board to account on staying true to them.

Alternatively, the Founders / former owners often  provide a letter of wishes or recommendation, outlining values or principles that are important to the success of the company, which should be considered when both boards carry out their responsibilities.  These letters are not binding but provide valuable guidance to the EOT Board as it seeks to hold the Company Board to account on less tangible things, like the values and culture.

The Company Board’s role  

The Company Board’s primary responsibilities encompass several areas that ensure the company operates effectively, ethically, and in the best interests of all its stakeholders.

The Company Board has ultimate responsibility for the day-to-day running and commercial long-term success of the company. It is responsible for overall governance, including strategic direction, financial performance, risk management, leadership development, and compliance with the legal and regulatory requirements.

The Company Board may delegate some of this authority to the company’s management team or employees more generally, but in order to take decisions or delegate, it needs a free hand to run the company as it sees fit; it is therefore important that the EOT Board does not try to get involved in operational and strategic decisions.

We should emphasise that there are certain responsibilities and personal liabilities that come with being a statutory director of a trading company and it is important that the EOT Board is aware that the  Board Directors hold these responsibilities and allows them to carry out their duties. The role of the EOT Board should be to challenge the Company Board, when necessary, but this should also come with support and understanding.

Open communication and trust between the two boards is essential to ensure its relationship functions correctly.  Confidentiality, where sensitive information is shared, is also very important.

Summary

Ultimately the EOT Board and Company Board want the company to succeed in the long term but have different roles in its structure, ensuring its continued success. The EOT Board is there to ensure the company is performing in the best interests of its beneficiaries (the employees), while the Company Board focuses on the day to day running of the business, financial performance, and strategy. Ensuring these roles are clearly understood from the start, makes for a smoother transition and stronger governance for the long term.