The Board and Trustee in ESOP Companies: Roles, Responsibilities, and Collaboration
In an Employee Stock Ownership Plan (ESOP) company, the relationship between the Board of Directors and the ESOP Trustee is essential to strong governance and long-term success. In her presentation at the 2024 Regional Midwest Conference, Jennie Msall, Director at Ventura Trust Company, outlined how these two stakeholders can work together effectively by understanding their distinct responsibilities and maintaining open communication.
Corporate governance in an ESOP company defines the structure of relationships among shareholders, directors, and officers. Once a company becomes 100% ESOP-owned, the ESOP Trustee becomes the sole shareholder. The Trustee appoints the Board of Directors, which then oversees the officers and management team. While ESOP participants are represented through the trust, they may also have pass through voting rights in certain major corporate decisions.
Boards of Directors evolve over time. In the early stages, a board may be informal and family-run. As the company matures, governance practices become more structured, with a focus on strategy, succession planning, and independent oversight. A high-functioning board—what Jennie refers to as a “sage” board—is strategic, independent, and deeply trusted.
In addition to traditional responsibilities like setting company strategy and evaluating the CEO, ESOP boards have unique duties. They must adopt, amend, or terminate the ESOP, appoint and monitor the ESOP Trustee and Plan Administrator, and oversee repurchase liability and other ESOP-related financial matters.
Best practices for board composition include maintaining a board of five to six members, ensuring independence to avoid conflicts of interest, and fostering diversity in background and experience. Staggered terms, term limits, and regular performance evaluations help maintain accountability and fresh perspectives. Independent directors are especially valuable for their objectivity and credibility, even if they may initially lack ESOP-specific knowledge.
Board members are bound by fiduciary duties under state law. The duty of care requires them to be informed, attend meetings, and understand the consequences of their decisions. The duty of loyalty obligates them to avoid conflicts of interest and act in the best interest of the company. Directors who act in good faith and with due diligence are protected under the business judgment rule.
The ESOP Trustee, meanwhile, is a fiduciary under ERISA and is legally required to act solely in the interest of plan participants. The Trustee’s responsibilities include managing plan assets, overseeing distributions and loan payments, determining the fair market value of company stock, voting ESOP shares, and monitoring the Board’s actions. Trustees must meet the high standard of care expected of a prudent expert.
As the legal shareholder, the trustee votes on shareholder matters.. In certain major corporate events, such as mergers or asset sales, participants may have direct “pass- through” voting rights. In most cases, however, the Trustee votes on behalf of the plan.
Jennie Msall shared several real-world case studies to illustrate how Boards and Trustees interact in practice. These included questions about whether the Board can adjust executive performance targets without Trustee involvement, how to respond when a Board Chair overrides best practices, what role the Trustee plays in a potential company sale, and how to resolve disagreements over share valuation. Each scenario underscored the importance of transparency, communication, and clearly defined roles.
In conclusion, effective governance in an ESOP company relies on a strong, collaborative partnership between the Board and the Trustee. When both parties understand their responsibilities and work together with openness and trust, they can protect the interests of employee-owners and help ensure the company’s long-term success.