EMPLOYEE OWNERSHIP TRUSTS – THE NEW KID ON THE BLOCK
There are a number of ways that companies can structure ownership to include employees, allowing workers to build wealth and capture a share of the value they bring to the business.
In the US, both Employee Stock Option Plans (ESOPs) and worker cooperatives are popular (both of which we’ll talk about in future posts.) But there’s a new kid on the block – the Employee Ownership Trust – that is starting to make waves, and for good reason.
An Employee Ownership Trust, or EOT, is a single-stakeholder form of a Perpetual Purpose Trust, where all or some of the shares of the company are held in trust on behalf of all or some of the employees. Once established, the trust becomes the "steward owner" of the company and it may operate indefinitely, therefore the company no longer needs to invest energy into finding new owners. And because the Trust does not need to maximize its stock value in preparation for an exit, company leadership is free to focus on stewarding the ongoing company health and mission.
In an EOT the employees do not hold the shares directly. The trust holds the shares and the employees are the beneficiary of the Trust. This means that after the company retains some portion of profit for reinvestment and/or as a “rainy day” buffer, the employees are entitled to share in the rest of the company’s profits, paid out either as cash, or as a contribution to a diversified 401(k) plan, or a combination of both.
The most well-known example of an EOT is John Lewis Partnership (JLP), a British company that operates John Lewis department stores and Waitrose supermarkets. Founded in 1894 and held in trust since 1929, this retailer employs over 88,000 workers. The company’s purpose is oriented towards improving the lives of their current workers, and to that end, JLP structures benefits as employee profit-sharing, to deliver real-time rewards vs. building retirement nest eggs. They are equally focused on preserving ownership for future generations of employees, and the trust structure ensures the company will remain independent and stewarded by those closest to the operations in perpetuity.
EOTs are just beginning to gain traction in the US, as a simple and relatively inexpensive way to manifest employee ownership. Two recent examples are Metis Construction and Equity Atlas. Metis is an example of a founder selling his shares to an EOT as a succession strategy. In this scenario, the owner created the legal form (EOT) and then transferred his stock into the trust in exchange for a promissory note. Over time, the promissory note will be repaid (principal and interest) out of the future profits of the company. Equity Atlas, on the other hand, is an example of a company that established an EOT when it was initially founded.
