Building Employee Understanding of the Trustee’s Role

By Jennie Msall, Ventura Trust, and Lindsay Schafer, Praxis

View the full article posted by the ESOP Association. The following is a section has a large contribution from Neil Brozen. Download the PDF this section or read on to learn more.

A unique thing about ESOP companies is that the trustee is the shareholder of record for the corporation, not the ESOP participants, who are beneficial owners. The trustee is a critical player, but the concept of a trustee can be confusing and unfamiliar to employee-owners. At most ESOP companies, a small group of employees, such as the CEO and CFO, regularly interact with the trustee through their functional roles, but otherwise employees don’t naturally interact with or get to know the trustee in the normal course of business. However, building understanding of the trustee’s role and creating opportunities for employees to get to know their trustee can help build and strengthen your ownership culture.

In particular, building a connection to the ESOP trustee:

  • Increases transparency – participants learn more about the implementation of the ESOP, including the role of the trustee as a buyer of company stock on their behalf

  • Increases trust – participants learn that the trustee has a fiduciary obligation to them and their interests, and ensures the ESOP transaction was negotiated fairly and with expertise

  • Increases understanding of the ESOP structure overall, including what it means that the shares are held in a trust, that participants are beneficial owners, and the annual lifecycle of the ESOP

  • Increases understanding of how the share price is determined through the annual valuation update, including the role of the trustee and their financial advisor

What do employee owners need to know about the trustee?

First, in a transaction where the ESOP acquired shares of company stock, the trustee acted as the buyer on behalf of the ESOP and the participants. The trustee:

  • Had legal and financial advisors to help negotiate a fair transaction

  • Is not allowed to pay more than fair market value for the shares

  • Had to make sure the overall transaction terms were fair to participants

Once the ESOP is established, the ongoing trustee is the legal shareholder of company stock. They:

  • Have a duty to act in the interests of plan participants, ensuring the ESOP benefits plan participants fairly and broadly

  • Elect and monitor the Board of Directors

  • Vote shares of company stock on any major corporate decisions that require a shareholder vote

  • Determine the fair market value of shares on an annual basis

  • Hold and oversee plan assets, including company stock certificates, bank and investment accounts

It’s also important to clarify what the trustee does not do in their role. The trustee does not:

  • Sit on the Board of Directors

  • Get involved with business operations. For example, they don’t make decisions about hiring or firing employees, employee compensation, where to source supplies and materials, or whether to expand into new services, products, or geographies.

  • Make the decision to sell the company

Introducing employees to the trustee

The trustee is best positioned to explain their role and what their responsibilities entail. There are many ways that companies can introduce employees to the trustee and build the trustee-employee relationship. Opportunities include:

  • The initial rollout meeting where the ESOP transaction is announced and explained

  • A “Meet the Trustee” lunch, where participants get to have informal conversation with the trustee, as well as hear more about their role

  • Involving the trustee in an annual presentation on the share price update, where they can explain how the share price is determined and what factored into the year’s update

  • Recorded video introducing the trustee and their role to employees

  • Bulletin board or newsletter materials with “Meet the Trustee” information

  • Trustee office hours while onsite for other meetings, where participants can meet the trustee and ask questions about the ESOP in-person, or via virtual “fireside chat” with the trustee hosted by the Communications/Culture Committee

Conclusion

Whether you are a new ESOP, a mature ESOP, or somewhere in between, there are many benefits to demystifying the role of the trustee. While employees may not remember every detail about the trustee’s role, the effort to increase transparency can help build trust between employees, leadership, and the ESOP. Education about the valuation process can help employees understand the annual share price and serve as a segue into important conversations around value drivers and connecting employee actions to share value. There is very little downside to building employee understanding of the trustee’s role, which can lead to strengthening your shared ownership culture.

Neil Brozen