ESOPs and Corporate Governance

Introduction
1. ESOP Governance Q&A
2. ESOP Participants and Shareholder Rights
3. Shareholder Obligations of the ESOP Trustee
4. A Practical Guide for Company Stock Fiduciaries
5. Who Should Be the Fiduciary?
6. Notes to In-House Employee Fiduciaries
7. Don't Be Fooled: Sarbanes-Oxley Applies to Private ESOP Companies
8. ESOP Corporate Governance in a New Era
9. The Role of the Board in ESOP Companies

From Chapter 3, "Shareholder Obligations of the ESOP Trustee"

ESOP trustees must play active roles in the election of a corporation's board of directors. The board is responsible for directing the corporation and its senior managers, who conduct the company's day-to-day affairs. Their decisions will largely determine the value of the corporation and ultimately the value of the shareholders' investment.

Ideally, a group from the board, often a nominating committee, will present a slate of directors. The committee should examine each potential nominee's qualifications, including experience, relationship to the corporation, age, and investment in the corporation, whether as a shareholder or through some other arrangement. The ESOP may provide for voting on directors to be passed through to plan participants. If so, the ESOP trustee has a duty to send relevant information to and obtain instructions from the participants. After receipt, the ESOP trustee should summarize the direction results to draw a consensus from the plan participants. The ESOP plan document will generally state how the trustee is to vote. Some plans provide for participant direction; most provide that the trustee either make an independent decision or follow the directions of a third party (often the board itself). In this case, the third party becomes a co-fiduciary to the decision. Ultimately, though, the ESOP trustee must evaluate the slate of potential directors, determine whether their qualifications are acceptable, and vote the trust's shares as he or she believes is in the best interests of the plan participants. While it would be very rare for a trustee whose actions are directed by employees or another entity to override these directions, ERISA does provide that if the trustee believes that not doing so would violate the law or the plan, or is clearly not in the best interests of plan participants, then the trustee should act to protect those interests.

From Chapter 7, "Don't Be Fooled: Sarbanes-Oxley Applies to Private ESOP Companies"

Let's consider the spectrum of public companies to private companies. At one end is the widely held public company. Its board of directors oversees the management of the business in order to enhance shareholder value. The board's actions have an impact on a broad ownership population. With the enactment of Sarbanes-Oxley, public companies are now required to comply with extensive and often costly governance requirements in order to assure that the directors and managers are properly accountable to the shareholders.

At the other end of spectrum is a private company that is owned by a single shareholder who is the president, CEO, and sole member of the board of directors. This person could operate the businesses with complete disregard of acceptable governance and executive compensation best practices, and would argue that he himself is the only person who is hurt by a loss of share value. Even less closely held private companies are not subject to Sarbanes-Oxley or any of the other public company corporate governance regulations. Consequently, private owners have greater freedom to operate their businesses as they choose.

We would argue that on this spectrum ESOP companies are much closer to public companies than to other private companies. The boards of directors and managers of ESOP-owned companies are responsible for preserving and enhancing share value for a broad-based group, which includes the ESOP participants and beneficiaries, who have a beneficial interest in the company through their ESOP accounts. Unlike the sole owner of a private business, the directors and managers of an ESOP-owned company are accountable to a broad group of owners. Failure to operate the business for the benefit of all current and future stakeholders may result in personal liability.