When I do talks on the EOT (and I do a lot of talks on the EOT!), I play a little game of bingo in my head.
I have spoken at so many conferences and webinars about the EOT that I now know most of the questions that I will be asked. I try and cover these off during the talk, but there are always a few old favourites that come up.
One such question that never disappoints me is: who are the trustees?
The EOT trustees
This is such a crucial point come up with so many which impact on so many areas of the business.
The trustees of the EOT act like the shareholders of the business, holding the Board to account and representing the interests of the employees. Owners thinking about the EOT as a potential exit therefore quickly realise that getting the right people as trustees is crucial.
I would therefore like to explain some of the issues involved.
The trustee types
We always recommend that there should be three different types of trustee. (Note: most EOTs have a corporate structure, so they are sometimes described as trustee directors, however in this piece I will simply refer to them as trustees).
The first is the employee trustee. The trustees are ultimately responsible for the beneficiaries of the trust i.e. the employees, and it is therefore key that they are represented.
The second is a board trustee, someone from the main company board. A non-executive director could be ideal. This is to allow the trustees to have a voice, and an ear, directly into the boardroom.
The third is the independent trustee. This is also often the chair of trustees. They should ideally be someone who has board experience, but also has experience in (or, given the EOT is still relatively new, at least training in) the issues facing employee owned businesses.
The Eternal Business Consultancy runs an independent trustee placement service, providing independent trustees to EOT trustee boards. It only costs £300, which we then donate to the Employee Ownership Association.
Why the trustees are so important
Before we look at some common mistakes people make with their trustees, let’s take a moment to reflect in a bit more detail on why this is such a key position.
The transition from a privately owned business to employee owned business is one of control.
This needs to be genuine, and fulsome.
Giving up some control is a bit like being a little bit pregnant. You either have the final say, or you don’t.
It is very common for owners’ to try and keep some level of control in the business post sale to the EOT.
Indeed, this is a perfectly reasonable stance to take, given that owners are invariably going to be paid out of the future profit of the business. However, rather than trying to protect your earn out through retaining some control, it is better that such precautions are handled through the Sale and Purchase Agreement which will cover the period of the earnout.
If owners try and protect themselves through keeping control, then this will become immediately apparent to the employees, who may then conclude that nothing has really changed.
At best, this can prevent the many advantages to the business of employee ownership from emerging. At worst, it can disincentive the employees, who may previously have been sold the attractions of having a voice in the business, only to conclude that this isn’t actually happening.
Independence of trustees
It is therefore important that the employees feel the trustees are truly independent of the previous owners.
It is for this reason that we do not recommend the previous owners appoint themselves as one of the trustees. This might send a signal to the employees that the owner is struggling to let go.
If the owner really does want to be one of the initial trustees, then we would recommend a short, fixed term appointment, such as one year.
Faced with not being a trustee themselves, the next step owners take is to appoint a trustee from their own contacts. There is certainly logic in this, as they may well know somebody suitably experienced or qualified.
Again, however, this may sending the wrong signal to the employees, as it may be perceived that you are trying to hold onto control by proxy.
If you do appoint someone from your contacts, then their suitability for the role beyond being your friend needs to be explicitly promoted to the employees.
Role of trustees
There is one other area that I would touch upon regarding the independence of the trustees, and that is the purpose of the business.
I’m now directly addressing employees and new leadership teams: if you want your former owner (or soon to be former owner!) to let go, then you need them to trust that the business they have built up is in safe hands. This means the future profit, of course – but it also means the aspects of the business that is important to them. The core values.
Owners, and especially founders, often feel defined by the business that they started. They are proud of their creation. They will therefore want to make sure that everything isn’t going to change the moment that they leave.
If you want owners to let go, therefore, you need to give them comfort that the values of the business will succeed them.
As for how – we’ll cover that in part 2!