July 22, 2022

Brush Up on ESOP Corporate Governance

Business Consultant, The Beyster Institute 

Robust and cohesive corporate governance is key to ensure that companies function effectively. Corporate governance is an umbrella term that includes specific issues arising from interactions among senior management, shareholders, the board of directors, and other corporate stakeholders. These interactions result in decisions that steer a company toward success or failure, making it crucial to understand the roles and responsibilities of each stakeholder. 

The board of directors needs to fulfill its primary fiduciary duties of care and loyalty in light of the business judgment rule. This “fiduciary” status means that directors are expected to obtain adequate information about topics that come before the board and to exercise their “business judgment” for the benefit of shareholders. Beyond that, board members also play an important role in contributing to the organization’s strategy, culture, and long-term sustainability.

As in any company, ESOP company board members must also perform legally mandated duties requiring a deep understanding of the unique mechanisms that govern an ESOP. The particularities of an ESOP company can bring challenges that are not so obvious to board members, regardless of whether they are new to or experienced in ESOPs, and can hinder their ability to properly carry out their fiduciary duties. ESOP company directors must understand a wide variety of issues to fulfill their fiduciary obligations, including:

  • Unique ESOP legal and tax issues that may arise for the company, trustee, shareholder(s), and other key stakeholders
  • Implications of strategic decisions, including acquisition and growth of shareholder value and ESOP participants’ accounts
  • Strategies to build sustainable long-term value for the shareholders as an ESOP-owned company, compared to generating wealth for ESOP participants 
  • Key company metrics, how to steer them in the desired direction, and potential tradeoffs such as repurchase obligation vs. cash flow
  • Company culture and the potential effect of ESOPs on employee performance
  • Annual valuation reports, including financial projections and what will drive company value in the future
  • Internal controls to grant executive compensation through synthetic equity instruments such as SARs and/or phantom stock
  • ERISA fiduciary requirements for appointing, monitoring, and if necessary, removing the ESOP trustee.

As the number of ESOPs grows, more companies are in need of a board with deep ESOP knowledge. With that in mind, the Beyster Institute has invited key leaders from the ESOP community and created an eight-week corporate governance course. This course is intended for both new and experienced board members in ESOP companies, as well as executives that want to expand their knowledge of this unique business structure. It starts on August 30 and consists of two parts. The first three weeks will cover a broad range of topics related to overall corporate governance, and from the fourth week onward it will focus on specific topics regarding ESOP companies. In the final week, participants will have the option to attend a two-day workshop in La Jolla to meet speakers and fellow classmates, and discuss topics covered in earlier sessions. 

Click here to learn more about the course, which takes place on Tuesdays starting August 30 and concluding October 11, or email [email protected] for more information.