How does management continue to effectively run a company when it is owned by the employees?

A look at the key structuring and decision making processes which are put in place for a successful employee owned business.

Following a transition to employee-ownership a trading company will continue to be run by the directors and its senior management.  (There may be a need to recruit new managers before the change if the outgoing owner is no longer wanting to be a part of the business, or indeed they may stay on for a short period to help with the transition or even continue as before but with more accountability to the employees).  Managers should be  committed to greater transparency and will hopefully obtain greater engagement from employees.

Employee engagement is not a given.  The transition does bring about a change in the running of the company as the employees will have more of a say in the future of the business and certain key decisions may be subject to their approval going forward.  This is a cultural transition which affects all employees and should be carefully planned for to make it work at the same time as the legal transition takes place.

In an Employee Ownership Trust (EOT) - owned company (for more on the different structures available for employee ownership, see here) there is usually one or two employees (depending on the trading company’s size)  selected to sit as a trustee director on the board of the trustee company (alongside a trustee director nominated from amongst management and, often, an independent trustee director).  The role of the trustee directors, however many in number and from wherever they are appointed, is to ensure that the EOT owned trading company is run for the benefit of the beneficiaries (in this case, the employees).  When putting the structure in place there will be a trust deed which, together with the articles of association of both the trustee company itself, and the underlying EOT-owned trading company which will govern the responsibilities of the EOT.  Directors of the EOT-owned trading company itself will have to gain the consent or approval of the EOT (in its capacity as shareholder) and sometimes the employees themselves, to certain decisions or actions.

Some examples of the sort of decisions which may require the consent of the EOT or the employees are:

1. any resolution to wind up or dissolve the trading company or any subsidiary of the trading company;

2. any substantial change in the nature of the business of the trading company and its subsidiaries (if any) taken as a whole;

3. any amendment to its articles of association;

4. declaring or paying any dividend or making any distribution by way of bonus to employees;

5. any sale of the trading company and/or any subsidiaries of the trading company;

6. the provisions of a remuneration policy;

7. appointment of trustee directors for the EOT.

Where an outgoing owner is owed deferred consideration for the sale of the shares to the EOT, the governing documents will also include restrictions relating to these actions which mean that the outgoing owner may also need to consent, until such time as they are paid in full (or to a certain threshold).  A preference share is often issued to the outgoing owner to give them enhanced voting rights in order to assist with these protections.

If there are sufficient numbers of employees then an employee council can be set up, which will consult with management on various matters as set out in the articles of association.  Where the employee numbers are small then instead there will usually be a right for the employees to be consulted as a whole, with a minimum threshold (e.g. 75%) of consent needed to proceed with certain actions.

Which decisions require employee consent and which are retained by management is at the discretion of the trading company when putting the employee-ownership documentation into place.

Where a direct ownership structure is used, rather than an EOT, the employees will be direct shareholders and will have all of the attendance and voting rights given to those shares in the articles of association of the company.  The statutory directors' duty of making decisions which are for the benefit of the company, for its members as a whole, will therefore encapsulate those employees who are then shareholders and the directors will be answerable directly to them as with any other shareholder.