This is a very specific blog on a particular point of the employee ownership trust (EOT). As such, it will not be of interest to everyone.
It will, however, be of huge importance to some. If you know anyone who is currently working towards selling the business to an EOT, therefore, I would be grateful if you could forward it to them.
The EOT Whoosh Factor
When a company is sold, wholly or in part, to an EOT, the shares are owned by the trust. The beneficiaries of the trust are the employees.
This therefore means that the employees become indirect owners of the business. They do not actually own shares, but they do benefit from the profit of the business.
This can have a powerful effect on the employees. The Employee Ownership Association (EOA) calls this the ‘woosh factor’, a boost to the business from employees who become increasingly engaged as they have a voice in the business.
This can, however, work against the business if it is not set up correctly – if employees are promised a voice by the nature of the EOT, and that voice does not materialise.
Giving the employees a voice in the business takes time. This process is particularly acute when the owners are still running the business. The process of the transference of control is a delicate one, and can take several years.
As well as changing attitudes, there are legal issues that can help – or hinder – the process. One of these is the role of the trustees.
The trustees of the EOT become, in effect, the shareholders of the business. As such, they hold the board to account on behalf of the employees, and they need to be consulted on certain major issues.
Getting a good trustee is therefore a crucial part of having a successful EOT owned company.
In general, it is recommended that at least one employee should be a trustee. There may also be a director trustee, and an independent trustee is also advisable.
There are some advisors, however, who are recommending a very different set up which, we believe, could prove disastrous.
The Professional Trustee
There is some debate about the trustee being a corporate body, and/or whether it should be offshore. That is not the topic of this piece.
One thing that we at the Eternal Business Consultancy believe to be sacrosanct is the importance of the employees having representation on the trustee body.
Some EOTs, however, seem to have been set up with a professional trustee company as the only trustee.
The role of this hired company, as we understand it, is purely the passing of information to employees from the board. They have no role in employee engagement, or employee representation, and no active role within the business.
So why do we think that this is wrong?
Firstly, this means that, if the board need to take a major decision, then the shareholders have no knowledge either of the business, or of the views of the employees.
Secondly, the route for the employees to hold the board to account has been closed to them. They may still be able to offer their thoughts and ideas, perhaps via an employee forum, but these will typically be on day-to-day business issues, not on business ownership issues or the performance of the board.
The net result of this may well be a disengaged workforce who have been promised employee engagement, and yet find the ultimate route to accountability has been closed to them.
We have discussed this issue with many of the leading legal experts on employee ownership in the UK, and all have agreed that the appointment of a sole professional trustee company with no involvement in engaging the employees is not a route any of them would advise.
If you are heading towards selling to an EOT, therefore, and this structure has been recommended to you, do get in touch and we will be happy to put you onto legal experts that can explain to you why this is a bad thing to do.