Start Here: Corporate Governance and Employee Ownership
The relationship between employee ownership and corporate governance depends on the legal form of employee ownership–see below for specifics about ESOPs, equity compensation plans, and other forms of employee ownership. Introduction to Corporate Governance covers the key legal concepts and practical considerations.
The most obvious way that employee stock ownership plans (ESOPs) affect corporate governance is by creating a new shareholder: the ESOP trust. Trustees must ensure that ESOPs meet the standards in the Employee Retirement Income Security Act (ERISA), which specifies many of the corporate governance requirements for ESOP companies.
When planning the ESOP transaction (in which the ESOP acquires company shares), boards of directors must carefully consider who should be the trustee, because the trustee is under a high legal standard to protect the interests of the employees who will become plan participants. A vital part of that responsibility is ensuring that the ESOP pays no more than fair market value for the shares it acquires by having a valuation performed by an independent appraiser.
Once the ESOP has acquired shares, the company and the trust have an ongoing obligation to ensure that the plan is properly administered and that it complies with all legal requirements. The results of the NCEO’s corporate governance surveys show the range of common practices.
Federal law allows plan participants to direct the vote of the shares in their accounts on a limited set of corporate shareholder decisions, but most of the rights of ESOP participants focus on information about the requirements to receive benefits under the plan and about the value in their accounts. Many ESOP companies choose to make decisions participatively and to share financial information (see Ownership Culture), but ESOPs do not create a legally mandated role for employees in management decisions or provide them access to information about company performance.
Shareholders generally must approve the program under which companies grant equity compensation awards, but boards and management teams have flexibility within those programs to award equity compensation. Unlike ESOPs, equity compensation plans do not generally change the nature of the corporate governance of companies. Employees who hold stock options (i.e., before they have been exercised to buy shares) and employees who hold non-stock equity compensation awards (such as stock appreciation rights, phantom stock, and restricted stock units) are not shareholders.
Other types of employee ownership
In worker cooperatives, all members participate in governance on a one-person/one-vote basis.
Perpetual trusts have flexibility in the extent to which employees have governance rights over the trust and over the company.
In Limited Liability Companies (LLCs), governance arrangements are extremely flexible and are governed by the operating agreement, rather than being inherently associated with ownership.