Practical Tip: The Board, the Trustee, and Valuation

ESOP company boards have a fiduciary obligation to monitor the ESOP trustee to make sure that the trustee is properly assessing the valuation process. That raises a number of questions. Should the board read the valuation report? Some outside trustees say no, because the board should not be involved in the process. But if the board does not read the report, how is it to assess the trustee? Is it sufficient to just assess the process reported by the trustee? In our view, reading the report provides critical information for boards on this issue as well as how the company is performing.

But what if on doing that the board believes there are problems? The board should not directly approach, much less replace, the appraiser. That is the trustee's duty. But the board can ask to meet with the trustee to raise the issue and ask how the trustee has approached it. The answers may resolve the concern, or perhaps raise an issue the trustee has not considered, such as there not being an assessment of the repurchase obligation in the valuation. The trustee would then decide what steps to take next. The board should replace the trustee only over this issue in extreme cases in which it is convinced the trustee is acting well outside standard ESOP practices.