Level Up: The Stages of Growth for Boards of Directors at ESOP Companies

For companies with an Employee Stock Ownership Plan (“ESOP”), the need for governance is greater than other private closely-held companies. At the heart of long-term employee ownership is a high functioning, effective Board of Directors (“Board”). ESOP ownership begins at the purchase of stock by the ESOP but is sustained and achieved through generations of successful leadership transitions. Guiding these transitions is a high-functioning Board.

Unlike a child, there is no internal biology to generate the growth and maturity that will allow a Board to operate at peak performance. Instead, a Board must evolve over time. This evolution is not defined by the age of the company but rather by the Board’s attributes and its individual members. The goal for an ESOP company is to grow the Board thoughtfully and carefully from an infancy stage to full maturity. In general, Boards at ESOP companies fall into one of the following stages of maturity:

In order to grow a Board to its most mature stage, finding potential independent members is crucial. When networking within an industry or utilizing resources provided by ESOP groups and associations, such as the National Center for Employee Ownership or Private Directors Association, ESOP firms should be strategic about what attributes the company requires in a Board member. For instance, Boards may need to be rounded out with members who have expertise in the company’s industry, leadership development, succession planning, financial reporting, mergers and acquisitions or cybersecurity, among others. By seeking out individuals with a variety of backgrounds and expertise, an ESOP company can build a mature Board that will further the strategic initiatives of the firm.  

Unlike human biology, Boards can regress to an earlier stage of maturity. An unplanned loss of an independent board member, or sudden change in executive leadership, could send an “adult” Board back to the “adolescent” stage or a “sage” Board back to the “adult” stage. Thoughtful and strategic succession planning at the Board and executive levels is essential to provide continuity of leadership in order to sustain employee ownership over the long term.

Progressing through the stages of growth typically takes at least a few years to achieve. The addition of an independent director fosters the opportunity for development to the “adult” stage. Once that occurs, we generally see a marked shift in the content of Board meetings to more executive leadership and strategy. For ESOP companies, this is an important milestone to ensure a strong foundation of employee ownership for future generations of employee-owners.

Hillary Hughes is a Director at Prairie Capital Advisors, Inc. She can be contacted at 319.366.3045 or by email: hhughes@prairiecap.com.

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