Newsletter Article
January 2023

Things to Do in Your First Year as an ESOP


ESOP governance involves both the board and the trustee. Most ESOP companies add independent directors to their board in the first year. It is widely considered best practice, and outside trustees may require it. The NCEO has a board toolkit that has lists of potential board candidates, necessary documents, and other useful resources. The NCEO’s ESOP Company Board Handbook is a useful summary for new board members of their duties.

There are a number of tasks that the board and the trustee need to make sure they complete every year. Merri Ash, a longtime ESOP trustee, provided us with a useful checklist that serves several functions. First, it provides questions to ask of candidates under consideration to serve as the trustee, one set for an external trustee and one for internal trustees. Second, it provides a checklist for trustees to fill out every year. Finally, it provides a checklist for boards to monitor trustees, one of their added duties as a board of an ESOP company.

Boards should adopt policies early on about how they will respond to offers to buy the company. The policies are meant to discourage unwanted buyers and to make it clear that buying an ESOP company, while possible, will be a long, expensive, and uncertain project. The NCEO document library has a sample initial response letter and a sample follow-up letter.

Culture (ideas teams, communications committees)

One of the most important things you can do in the first year is to set up a communications committee and an ideas team. Ideally, these teams should be made up of different people. Usually, these teams have three to five people. In some companies, they are made up of whomever the company can get to volunteer for them; in larger companies, an effort is made to get people from various areas of the company.

Neither committee needs to reinvent the wheel. There is a lot of material from the NCEO to get started. The ESOP Communications Committee Guide includes step-by-step examples and sample committee charters. The ESOP Communications Sourcebook has lots of ready-to-use materials you can adapt for your own needs. The NCEO will soon have a service to send subscribers monthly communications templates you can use. The committee should strive to create a regular rhythm of communications, such as every month, of relatively short communications on discrete topics presented in varied formats.

The ideas team’s focus is creating structures for employees to identify problems (even if they do not have a solution for them) and generate ideas. The companies that do the best are the ones that generate the most ideas from the most people, but you need more than permission and encouragement to do that. You need structures. You can borrow ideas from other companies. Our book Beyond Engagement: How to Make Your Company an Idea Factory provides lots of very specific examples from great companies on how to do this.

Plan Administration

One of the first tasks is to contact your third-party administrator and set up a schedule of tasks with the human resources department. The NCEO has a detailed workbook that lays out the annual tasks and when they should be done, the required documentation, and when they need to be completed.

You also need to decide if you want to have an ESOP Plan Administration Committee. Whether done by the board or a separate committee made up of employees, the committee must, among other tasks, review the trustee’s assessment of the valuation, decide whether to keep or remove the trustee, make sure plan rules are communicated to employees, work with and oversee the plan administrator, answer questions  on the plan from participants, and make decisions about changes in the plan. A sample committee charter is in the documents library.

Benefits of having a separate committee include giving the board more time to focus on other issues and getting more employees deeply involved in the ESOP. But companies must be willing to let employees take the required time and to provide them with adequate training.

Getting People Educated

Finally, companies should decide how to educate board members, company leaders, and members of various employee committees about employee ownership. Who needs to learn what and what are the best ways for them to do that? The NCEO has weekly webinars, for instance, on just about every ESOP topic. They are recorded and can be viewed any time. There are lots of local and national meetings. Many ESOP companies send multiple people to these events, sometimes sending new people each year. That can be a great way to learn and build a sense of excitement, but there are obviously costs that have to be considered. A great opportunity in the first year is to send people on employee committees to visit ESOP companies in the area. The ESOP community is very open to sharing, and the NCEO can help connect you with other companies.

All of these tasks may seem like a lot to take on, but the research shows that companies that take the idea of employee ownership seriously perform much better and have far better retention. It is a good investment to make.