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Non-Management Employees and ESOP BoardsIn recent years, many ESOP companies have strengthened the role of their boards, adding outside directors and holding more frequent and structured meetings. According to the NCEO's 2016 Governance Survey, 74% of ESOP companies now have at least one outside board member. Almost all have officers on the board. Thirty-seven percent also have nonofficers on the board. These are most often managerial employees, but many companies provide formal roles for non-management employees as well. Thirteen percent of the companies allow employees to vote for the board.
There is a variety of ways companies can involve non-management employees at the board level, from informal participation to actually having a seat at the table. This kind of involvement can lend credibility to the governance process, help outside board members understand the company better, and provide useful feedback on how the company is doing. Below, we discuss some of the various approaches.
A Seat at the TableNon-management employees can get a seat at the table by being appointed by the board or an ESOP committee, or there can be elections. Companies that allow employees to vote for the board have traditionally found that employees are reluctant to run, although there are some exceptions. So if the board wants non-management employees on the board, it usually has to reserve seats.
In 2014, Carris Reels in Vermont added employees to its board. Dave Fitz-Gerald, CFO of Carris, says that "when there is an opening, we advertise internally for applicants. HR screens the applicants to confirm the criteria to serve are met. Then a subcommittee of our Corporate Steering Committee (CSC) [Carris' ESOP Committee] reviews the applications, talks with supervisors and HR at the employee-owners' site, and interviews the candidates." Based on the work of the subcommittee, the CSC names up to four candidates for consideration to be on the nomination slate. The board of directors receives the vetted candidates, and the board in its entirety serves as nominating committee. The board as nominating committee then sends a slate back to the CSC, which will include the one candidate it selects to be added to that slate. The CSC then directs [by a vote among CSC members] the ESOP trustee committee to vote for the slate. The trustee committee meets to discuss the instruction they received, as a directed trustee, and to decide whether to follow the instruction. Then, at the annual meeting the trustee votes for the slate, as the sole shareholder.
CALIBRE Systems, Inc., an employee-owned company, has an ESOP committee that is elected by the workforce. The Employee Owners Advisory Committee's (EOAC) charter includes promoting a broad-based understanding of CALIBRE's ESOP and supporting a vibrant culture of employee-ownership. They have created thoughtful programs that link education to where people are in their employment lifecycle: information about eligibility for new employees, early diversification, and distribution rules for those approaching retirement.
One of the other functions of the EOAC is to elect one of its own members to serve on the board of directors of the company. The committee takes into account the person's tenure, his or her understanding of the business, and the suitability of the person's skills and experience to be a productive member of the board. As a director, that employee can provide insight into the concerns and ideas of the workforce, and often serves as a conduit for innovative ideas to travel from the workforce directly to the boardroom.
At NMR in Massachusetts, the board, which has two outsiders, asked the ESOP Communications Committee to decide how it wanted employees to be represented on the board (elections, appointment by the Committee, or some other option, as well as if the person should be voting or advisory). They ultimately decided they wanted a voting seat and for the person to be appointed by the committee. Board members also meet with two different employees at lunch at each meeting.
If a company adds one or more nonmanagement employees to the board, it needs to make sure that they, like every other board member, get the necessary training to do the job well, understand the fiduciary risks involved, and have the ability to understand financials. Employees might often be excluded from some executive compensation discussions. A halfway approach would be to have employees sit on the board in a non-fiduciary, non-voting capacity.
Non-Fiduciary RolesAt Barclay Water Management in Boston, CEO Don Carney started a practice of having the ideas team make a presentation at each board meeting. Carney believes this sends the right message to the team and the company that generating ideas from employees is the essence of an effective culture. The team takes about an hour to make its presentation. The ideas can often then be fodder for the board to think about strategic issues management might not have thought to raise.
Barclay also invites two employees who have won a performance award to come for a short conversation with the board. That provides additional recognition and a chance for board members to get a better idea of what day-to-day work is like in the company. At Radian Research in Indiana, the ESOP Communications Committee makes a 30-minute presentation on its activities for the year. CEO Tim Everidge believes this sends the right message to the committee about the importance of its activities.