At the last EOT Roundtable event hosted by Geldards in the Autumn the topic for discussion was the issues that can arise when managing the relationships between the trust board, the trading company board and sometimes the seller or founder. Getting the relationship right can have a major impact on the success of the EOT and trading company as disputes between the boards can distract from the day-to-day operation of the business.

A key issue is understanding the roles of the two boards and setting parameters or guard rails for each board. The input from attendees at the Roundtable came up with the following key responsibilities of each board:

Trading company board

• Sets strategy and business focus
• Prepares business plan and budgets including cash flow forecasts
• Makes day-to-day operational decisions including HR, health & safety
• Approves business contracts
• Upholds the values of the company and leads by example
• Reports to the employees on performance

Trustee board

• Acts as shareholder
• Ensures compliance with EOT deed
• Fulfills fiduciary duties as a trustee
• Listens to the views of the employees
• Supports the trading board in achieving the business plan
• Holds the trading company board to account in terms of performance and company values

The relationship will be harmonious when business is going well. However, relationships can be strained during times of economic uncertainty and when the company is facing business headwinds. It is during these times that the trustee board has to hold the trading company board to account and consider whether it needs to replace the trading company board if it is not fulfilling its duties.

An independent chair?

Most of the attendee companies had appointed an independent chair for the trustee board. They recognised the good governance that could be brought to the trust and the ability to step back and comment from an outsider’s point of view. Employee trustees attending the session commented on the importance of the independent chair acting as an interface between the employees and the seller or management trustee directors, at least while the employee trustees “found their feet”. The difference between a trustee chair and a non-executive director (“NED”) of the trading company was recognised with a NED having much greater responsibility for the day-to-day operations of the company and its financial success.

The role of the seller/founder

One area of concern for the attendees was controlling the seller or founder, particularly when the founder retained a key role in the management of the company. In the majority of the cases, the founder had recognised that they no longer controlled the company and had to report to the trustee board. The provision of an employment contract for the founder was a useful way of setting new parameters and emphasising the different roles.

Heavy reliance was placed on the independent chair particularly in supporting the employee trustees when challenging the founder. The change in EOT legislation to ensure that new EOTs cannot be controlled by the sellers was welcomed.

Where the founder was no longer involved in the day-to-day running of the business, the attendees acknowledged that a founder could be useful in providing guidance and support when requested. A consultancy agreement was considered useful in these circumstances in setting boundaries and acting both ways by setting expectations for time commitments at the outset.

Dealing with tensions

Trustees needed to understand the extent of their powers before confronting the trading company board or the seller. The need to bring in outside parties was recognised. It was important to consider where the powers to change the EOT trustee lay, particularly if the trustee company was limited by shares – who owned the shares? If ownership was in the hands of the trading company, then the trading board could have the power to remove the trustee or the trustee board directors.

Some attendees had used an outside mediator to facilitate a renegotiation of the sale terms including variations or reductions in the purchase price. It was noted that HMRC were examining the valuations of companies sold to EOTs and challenging valuations particularly when the trading company faced financial difficulties.

Next EOT Roundtable event

The topic for the next Roundtable event will be on incentivising the senior leadership team; are incentives required or appropriate for an employee-owned business? What form can the incentives take – cash or shares? If shares, what valuation issues need to be considered alongside performance measures?

The next events will be in Cardiff on 12 February and Narberth on 26 February. Please click here to register to attend the Cardiff Event. Registration for the Narbeth event will open shortly.