THE PERFECT FIT: DESIGNING THE IDEAL GOVERNANCE STRUCTURE FOR YOUR COMPANY
One of the key elements of a successful transition into trust ownership is determining the appropriate governance structure and approach to match the needs and culture of your organization.
Governance is the system of rules, practices, and processes by which a company is directed and controlled. For many of the companies we work with to transition to steward ownership, the founder/owners are also active members of the Management Team and the Board of Directors. Moving to a trust-owned vs. a founder-owned company requires rethinking who will be the best leaders of the organization going forward, since governance will no longer be directly tied to ownership. So how do these companies get from point A to point B?
Our general advice to clients is not to radically change their leadership or governance practices when they transition to trust ownership, as some degree of continuity and historical knowledge is usually important to maintaining performance. There will likely be some changes necessary to implement trust ownership (more on that later in this article), but the first order of business is to map/define/assess their current corporate governance structure. That’s point A.
Corporate Governance Structure
The four main types of corporate governance bodies are outlined in the chart below:
Trust Governance
One of the reasons we love trust structures is because they are so flexible in their design. Governance can and should be customized to align with a company’s mission, vision, and values; its culture and leadership philosophy; the company’s strategic game plan, and its financial capacity. While there are differences in what’s required by state, in general, there are four components to governance of trust structures:
Trust Stewards: This group ensures that the assets of the company are being used to further the Purpose and Key Objectives as defined in the trust agreement. In general, their role is focused on outcomes, not on setting strategy, policy or operating goals. In this regard, they operate similar to the Cortex Board described above.
Trust Enforcer: This person(s) is a stand-in for the beneficiary; they are responsible to enforce the Purpose and the terms of the trust in the rare circumstance that things go off track and/or a complaint is lodged by a stakeholder. This is not an active role; they wait in the wings and only act if called upon to do so.
Trustee: This individual (or Trust Management company) is responsible for the proper administration of the Trust, filing of annual trust reports, taxes, etc.
Corporate Board & Officers: Like conventional ownership structures, a trust-owned company will need, at minimum, to appoint a President, Secretary and Treasurer of the corporation. They act as fiduciaries at the company level ensuring corporate compliance. In trust ownership structures, this group may be most similar to a Working Board described above, where members are the Executive Team; or more similar to a traditional Governing Board.
Like corporate board members/officers, Trust stewards and enforcers have fiduciary duties to the shareholder (in this case, the Trust). And while these are baseline requirements, the way each group is seated, who holds seats, whether there is overlap (same people wearing “multiple governance hats”) and how they carry out their responsibilities varies considerably.
Form Follows Function
When contemplating new governance design, we want to understand what kind of oversight and direction setting works best for your company, and who might be best able to provide it? This will depend on a number of factors, including the stage in the company’s lifecycle (start-up vs succession), company size and resources (talent, budget), and the organization’s mission and stakeholders.
Bottom line: there are many, varied versions of what “Point B” can look like for trust-owned companies. That said, we’ve laid out three archetypes of how trust and corporate governance can be successfully combined.
Archetype 1: Mature company in a succession or post-succession stage; well-resourced and experienced with non-managerial governance.
In this framework, the Trust Stewardship Committee focuses on evaluating results to purpose and appointing a capable Board of Directors; the Board focuses on CEO performance and oversight of strategy and operational results; and the CEO/Management Team focuses on operational decision making, culture, and delivering results to the Purpose. This is a “layered” approach, with both a Governing Board and a Cortex Board (TSC).
Archetype 2: Small to mid-size company with founder(s) still engaged; some experience with Advisory Board governance; limited resources to support non-managerial governance.
In this example, there is a “flattening” of governance, with one body taking on the roles/responsibility of both corporate and trust governance. Here a subset of directors wears multiple hats, acting as Stewards of the Trust as well as Directors of the Company. The new Board/TSC would fulfill the functions of both a Governing Board and a Cortex Board.
Archetype 3: Small company with founder transitioning out of ownership and operations; leadership has “acted as a board of directors” up until now.
In this final example, a company with no formal governance structure introduces a new governing body, the Trust Stewardship Council. This group would be charged with a role that would reflect a combination of Advisory Board and Cortex Board functions. This would include evaluating results to purpose, providing advisory expertise on planning and operations, and ensuring a capable CEO is at the helm. The Management Team would continue to play the role of Working Board and Corporate Officers.
What can go wrong?
While the Governing + Cortex Board model is most similar to classic corporate governance (the owner, in this case the Trust, elects a Board, and the Board oversees the CEO/Management) the layers of reporting relationships can add significant complexity and expense.
Furthermore, two distinct governing groups (one for the Trust and one for the company) can also create challenges to ongoing alignment of goals and expectations across bodies. As a result, they can potentially be less nimble/agile than flatter models.
When any new governing body is introduced, you can expect there to be potential bumps in the road as the new group goes through the forming/storming/norming phases. Until relationships and ways of working together are established, effectiveness/productivity may suffer.
In flatter structures, it is important to ensure that the group representatives understand the fiduciary distinctions between times when they are wearing a “trust hat” vs wearing a “corporate hat.” Legal advice to codify roles/responsibilities and operating guidelines may be important on some issues.
Learn and Adjust
In some ways, we think about “good governance” as a transient, ephemeral state. It is a destination to be sought in earnest, but that can be hard to achieve beyond a moment in time. It is generally easier in small enterprises where founders are the owners, operators, and leaders of culture; and becomes more complex over time as companies evolve. What might have been the “perfect fit” just a few years ago may need to be adjusted as the company grows, the landscape shifts, and/or leadership changes. The important thing is to continually think through your assumptions and rationale and adjust as needed, to learn from what worked and what didn’t, becoming a little wiser along the way.
References:
Many Different Types of Boards of Directors, Process PA Team
Different Types of Governance Models, Adapted from the article “Building Effective Approaches to Governance”, Mel Gill, The Nonprofit Quarterly
Board Governance Models: A Comprehensive List, Jeremy Barlow
Governance Models: What is Right for your Board, Nathan Garber
Using the Stages of Team Development, Judith Stein
