STEWARD OWNERSHIP, ILLUSTRATED
If you’re a visual learner like me, the diagrams below may be of help as you try and make sense of steward ownership and the many legal entity forms in which it can manifest
In a traditional ownership model built on shareholder primacy, shareholders have ownership rights as their private property to their benefit. Which means two things: they hold both the 1) economic rights (share ownership and dividends) and governance rights (board seats and votes). And the degree to which the mission is invested in – and benefits are shared with stakeholders – is at discretion of shareholders. In companies dedicated to social responsibility, there may be significant sharing with stakeholders and investments in mission. But these commitments can be changed/reprioritized as company leadership or ownership changes.
In steward ownership forms, company ownership is not structured to be sold or transferred, but instead is intended to be held in perpetuity for the benefit of some purpose. One way that can be achieved is through the use of a Perpetual Purpose Trust.
Unlike a traditional (human) owner, a perpetual trust will never die, never retire, doesn’t need liquidity and isn’t interested in maximizing profit or share value. Its only interest and fiduciary duty going forward is to ensure that it’s assets (the company) are used to maximize the purpose that was codified by the founder/owner. In this way, permanent independence and stewardship is achieved.
Prior to placing a company into a Trust, the founder/owner determines who will be the stewards of the mission after they leave, and/or how they will be selected over time. Stewards are generally those who are active in the business and/or are industry peers, rather than shareholders motivated by personal financial gain. This means the company is now self-governed. And this enables the company to focus on running a healthy business, where profits serve purpose and benefit stakeholders, not just shareholders.
Should the company need to take on investment to fuel growth or pay back founders, it can do so without selling ownership and control by issuing non-voting shares. These shares simply entitle the holders to a portion of the company’s profits on balance with the reinvestment in mission, but they do not confer rights to sell the underlying company, or to materially affect corporate governance.
A subset of Perpetual Trusts is a simple form known as an Employee Ownership Trust, or “EOT.”
In this model, the “purpose” of the trust is to ensure that surplus profits of the company benefit the current employees. Simply put, at the end of the year, after obligations are met and reserves are set aside, the remaining profit is shared with all eligible employees. When establishing an Employee Ownership Trust, the founder/owner can design whatever profit-sharing program best suits their culture and strategy (be it flat/equitable, based on tenure, based on position, cash-based and/or retirement plan contributions, etc).
Employee Ownership Trusts are gaining momentum as an alternative to Employee Stock Ownership Plans (ESOPs) because they deliver real-time rewards and incentives to employees to all “row in one direction” to ensure the company’s success.
Similar to Trust models, a nonprofit or foundation can be used to protect the independence and purpose of a for-profit operating company. In this model, charitable donations can be used to fuel the mission, vs. equity investment in the operating company.
Unlike Trust models, where individuals do not hold voting stock, in the Golden Share model, economic and voting rights are divided through the use of different shareholder classes. In the example above, there are four share classes:
Steward Shares: Hold 99% of the voting rights but have no dividend rights. Only individuals active within the company can hold Steward Shares. This ensures self-governance.
Founder Shares: Do not come with voting rights but have dividend rights (in recognition of their early contributions; this is analogous to deferred compensation).
Investor Shares: Structured as non-voting preferred equity, they have dividend rights but no voting rights.
Veto Share: 1% of the voting rights are held by a designated steward, such as an individual,a non-profit, or a trust. Veto shares do not have dividend rights. The holder of the Golden Share is obligated to veto any sale of the company, or significant change in strategy away from the company’s established purpose and commitment to steward ownership principles.
A cooperative may be the most egalitarian model of steward ownership. A cooperative is a legal form designed for the benefit of member-owners, rather than outside investors. The types of cooperatives include worker, producer, and consumer. Member owners are shareholders who hold both voting rights (one member, one vote) and economic rights (through a system called patronage).
Typically, a member cooperative represents a single stakeholder group, although there are examples of some multi-stakeholder cooperatives emerging. These are not common due to the complexity of governance and allocating patronage across disparate member-types.
It is possible for co-ops to “demutualize” in order to sell the company or transform it into a non-cooperative structure. Therefore, to ensure permanent independence, cooperatives need to put additional protective provisions into place. One option is to issue a “Golden Share” to act as a veto if needed to prevent a sale. Alternatively, a “poison pill” can be included in the charter that prevents members from personally profiting from the sale of the company (i.e. the charter might mandate that all proceeds from a sale must be donated to aligned charities).
Remember, Steward Ownership is an umbrella term. In practice, it can take many forms. The form that’s right for your company depends on your existing structure, your goals, the potential beneficiaries, liquidity needs, and more.
