How to structure an effective EOT Trustee Board
When a company becomes employee owned through an Employee Ownership Trust (EOT), a board of trustees must be appointed to act on behalf of the trust and its beneficiaries (the company’s employees).
The trustees will work together as a team when carrying out their role, so it is important to take time before establishing the EOT to consider the make-up of the trustee board. A well-structured trustee board will be key to supporting the business’ long-term success as an employee-owned company.
In this second blog of our trustee series, we explain:
- who should sit on an EOT trustee board,
- how employee trustees are selected,
- the role of independent trustees,
- whether sellers should remain trustees,
- and how many trustees an employee ownership trust should have.
Who should be on the board of trustees?
There is no single ‘correct’ structure but having the right mix of individuals on the trustee board is important to ensure balanced decision-making and effective governance.
Most companies have a trustee board made up of people from set categories. Most commonly (but not always), there will be a representative from the following three groups:
- seller or founder representative
- an employee representative
- a completely independent person
Further details of each of these trustee groups are set out below.
Who would make a good Employee Trustee?
Although there is no legal requirement for an EOT to appoint an employee trustee, it is best practice to do so and most company’s chose to have at least one trustee from this group.
When decisions are made by the trustees, they should be made with the best interests of the beneficiaries (employees) in mind. Therefore, an employee trustee can bring helpful insights into:
- employee concerns and priorities
- communication issues
- how decisions may be perceived
- employees’ general feelings about various matters
For this reason, it is valuable if the employee trustee is someone who other employees feel able to approach.
It is also important in their role that they are willing to speak up and where appropriate, challenge matters that they don’t agree with and/or they feel are not in the employees’ best interests.
How is an employee trustee selected?
There are several ways an employee trustee can be appointed and the best approach is often determined by the size and structure of the company and how many employee trustee representatives are required. Some common approaches include:
- an employee ballot or election
- selection by the other trustees
- selection by the company’s board of directors.
Some companies may want to appoint multiple employee trustees to ensure there is broad representation for all employees. For example, if a company operates from multiple locations, or has distinct groups of employees (e.g. office workers and shop floor workers), they may want to have a representative from each location or team.
Who would be an appropriate Independent Trustee?
Most trust boards also include an independent person. An independent trustee is someone who is:
- not an employee of the company
- not a seller
- not related to anyone who is a seller or an employee.
Commonly, companies will appoint someone with a strong financial background, a good understanding of the industry or, ideally, both. This may be an accountant, a business consultant or an industry contact.
The independent trustee often provides a good balance between the seller and the employee trustee if they are not able to agree on a particular issue.
Sometimes, company’s may already know someone who would be a good fit for this role. In some circumstances, professional advisers experienced in employee ownership – including us at Postlethwaite Solicitors, can provide a professional independent trustee, especially during the early years following an EOT transition.
Should the Seller or Founder be on the Trustee Board?
It is common for one of the sellers to be appointed as a trustee, at least for the first few years after the trust has been established.
This is often beneficial for the EOT because usually no one knows the business better than the seller, particularly if they were an owner-manager. They have been involved with growing the business to where it is today, and so have deep insight and knowledge which they can share with the other trustees. Additionally, if the seller is looking to step back or retire at the time of the transition to employee ownership, it gives them a way to remain helpfully involved with the business and provides continuity during the transition period.
Importantly, to qualify for the tax advantages associated with an employee ownership trust, it is essential that sellers or those connected with them do not control (make up 50% or more of) the trustee board.
The seller trustee and decision making
It is really important that a seller trustee is willing to step back from any decisions where they have a conflict of interest. For example, decisions regarding paying them for their shares. It is also important that they are willing to work collaboratively with the other trustees and understand that they no longer have control of the Company.
When should a seller step down from the trustee board?
Usually, after an agreed period (e.g. after a fixed number of years or when they’ve been paid in full for their shares) the seller trustee will resign from their role. When this happens there are three common scenarios:
- The Trustees and Seller mutually agree it would be in the Trust’s best interests for the Seller to be reappointed as they are still valuable to the Trust and are willing to continue in the role
- They are replaced by an additional independent or employee trustee
- The size of the board is reduced to reflect that there is no longer a seller trustee.
How many trustees should an EOT have?
There are no hard and fast rules or legal requirements of an exact number of trustees that should make up an employee owned company’s trustee board. Usually, the size of the company and the balance that company is trying to achieve will dictate the appropriate number of trustees.
We would usually recommend (and it is best practice) that there is an uneven number of trustees, as this means a majority or unanimous decision can always be reached.
That said, some companies chose to have an even number to ensure that 50% of the board is made up of employees of the company.
Most employee-owned companies have at least three trustees, although this is not always the case.
As mentioned above, it is essential that seller trustees do not make up 50% or more of the trustees. Therefore, if a company is going to have a seller trustee, they cannot have less than three trustees in total. If a company wants to have more than one seller representative, they will need to ensure that there are a sufficient number of other trustees so that this requirement is met. For example, if a company wanted to have two seller trustees, they then must have at least three other trustees who are not sellers or people connected to the sellers. This could be two employees and one independent person, or vice versa.
How does an EOT Trustee Board operate?
- the legal duties of EOT trustees
- decisions they are responsible for
- how the trustee board operates
- and what trustees are, and are not, expected to do.
How Postlethwaite can help structure your EOT trustee board
Transitioning to employee ownership involves more than simply selling shares to an EOT. It is important from the outset to ensure that a suitable and sustainable structure is put in place which will work for many years to come.
At Postlethwaite Solicitors, we have extensive experience advising EOT trustees and employee-owned businesses, having helped more than 215 companies transition to employee ownership.
We can support businesses through the whole process of transitioning to employee-ownership, and/or provide more specific advice this may include:
- trustee board structuring,
- governance planning,
- trustee training,
- and ongoing employee ownership legal advice.
In some cases and as previously mentioned, our solicitors can act as independent trustees, particularly during the first year after an employee ownership transition. We bring both legal expertise and first-hand experience of the trustee role.
If you are considering a transition to employee ownership and would like to discuss how best to structure your trustee board, or would like advice in general, get in touch with our team for a chat.