Employee Ownership Trusts – In search of best practice: Seven key takeaways from research paper on the governance of employee-owned businesses
New research is published today to offer comparative insight into how employee-owned businesses are structuring their employee ownership trusts (EOTs).
The study into the governance of EOTs, titled ‘Employee Ownership Trusts – In search of best practice’, has highlighted a series of key findings on common practices.
The employee ownership sector is growing at an incredible rate and that growth has been driven by the introduction in 2014 of the employee ownership trust (EOT), which holds company shares for the benefit of all employees.
Many companies in the sector are small or medium-sized businesses (SMEs), who share ownership and voice with all employees via an EOT. With little insight or hard evidence into the ownership mechanics of those companies, a survey on EOT governance was seen as “timely”.
“We set this out as a pilot survey,” says Sue Lawrence, co-author of the paper with Simon Carter, who used their significant expertise around governance structures to gain a snapshot of the sector.
“Because of the growth of the market so many SMEs were transitioning to employee ownership, and we knew there would be a lot of focus on the sector and wanted to see whether there was any good practice or similarities in the way governance is applied within EO companies.”
Working in partnership with independent think tank Ownership at Work – the research partner of the Employee Ownership Association (EOA), Independent Directors & Trustees Ltd, which was founded by Sue in 2018, instigated and sponsored the study into SMEs.
In the report, governance is defined as the “interaction between the three main components of an employee-owned organisation, namely the operating board; the trust and trustee directors who represent the employees as its beneficiaries; and the employees themselves.”
The EOA put the authors in touch with companies that had transitioned to an EOT model in the past 2-5 years, with a headcount of between 50-150 employees, and data was collected through a survey questionnaire and a follow-up 90-minute confidential interview.
Emerging good practice with areas to watch
It is hoped the report will help companies adopting employee ownership or reviewing their existing structure, and be the foundation for future studies.
Here are seven key takeaways:
- Support needed: The findings suggest areas where early stage EOT businesses are having to “feel their way” and where there is an important role for the sector to play in “supporting businesses to better understand what good practice looks like” to help them “deliver the significant benefits employee ownership can bring”.
- Change: Creating a trust does not necessarily change everyday business and operations. But nearly all companies spoken to had, in the process of transition, introduced change; from the way the senior management was structured, to more communications being pushed out, creating an employee council and appointing employee trustees.
- Re-styling senior roles: The report said almost all companies re-styled senior management and executive roles to “grow or formalise an operating board”, adding: “Companies appear to progress fairly quickly transferring responsibility from founder to MD and establishing a directorship function, although few had gone back to formally evaluate leadership effectiveness as part of the journey.”
- Founders: The report noted founders tend to stay active in the company for some time post-transition before stepping back into either a trustee role, minority shareholder position, or exiting. The study asked whether this “continued strong presence of founder-owners has a positive or negative impact on whether employees feel they have a meaningful voice as new owners”.
- Employee participation: All companies were able to cite examples of employee-generated ideas that could, in part, be attributed to a culture of employee ownership. However, the report adds: “Many respondents were finding combinations of more communications, an employee forum, and a cycle of meetings did not, in themselves, generate greater participation. The governance system seems to need something more to spark an ongoing conversation.”
- Trust board: All respondents had a combination of founder, director/management, and employee members, and in most cases also an independent trustee, on the trust board. The report says: “Effective trusteeship seems to bind the system and is its safeguard.” However, it added that the practice of trustees holding operating boards to account for how effectively they run their businesses “is still an area of development”, and that trust boards “appear not to be coming under any particular scrutiny from the beneficiaries they represent”.
- Embracing EO: The report noted “some consistencies” across SMEs in their approach to how employee ownership can work for them and the governance framework in place to create this. It concluded: “The companies surveyed are typical of the sector in that their ethos and underlying core values drives them to want to make employee ownership work, and for the company to build on its past in a more collegiate, transparent manner.”
Sue Lawrence speaks about governance and the report findings in Episode 3 of the EOA Podcast. Listen here >>
Member-exclusive article on the Hub >> Five tips to create ‘Good Governance’ in an employee-owned business
See a list of Ownership at Work’s publications here.