THE 411 ON PERPETUAL PURPOSE TRUSTS

In our previous blog post Steward Ownership in a Nutshell, we painted a picture of the philosophy and principles of steward ownership. Now we want to put a little bit more meat on the bones. We mentioned that steward ownership can take many forms, and to start, we’re going to dive a little deeper into Perpetual Purpose Trusts. (That’s a mouthful, isn’t it?)

You’re probably familiar with the concept of trusts as they relate to wealth management and estate planning. Trusts are a common practice to protect the ownership of assets, for the benefit of a specific trustee (often an individual or a group of family members.) With Perpetual Purpose Trusts (PPT for short) the beneficiary is the purpose of the business. Ownership of the company is placed into the Trust, and in doing so the business can no longer be bought and sold, hence it becomes permanently independent. And because the trust will never “exit” and the business will never be sold, there is no longer any need to expend energy and resources on providing liquidity for shareholders or finding new owners. Going forward, the leaders of the company can put all their focus into running a healthy and sustainable business for the benefit of all their stakeholders.

You may wonder what governance looks like for a company under trust ownership. With PPTs, there is a great deal of flexibility in how trust agreements can be structured, including the manner in which the purpose and stakeholders are defined, how the profits will be distributed, and the mechanisms of governance. So the answer is: it depends. If the company already has developed a strong muscle around governance via a board of directors, then it’s often kept in place and continues to have oversight of the operations of the business. With the shift to trust ownership, an additional governance group is introduced – the Trust Stewardship Committee (or TPC). They are the compass and the “keepers of the mission,” ensuring that the company stays on track to its purpose. 

In addition to an operating board and a trust stewardship committee, stakeholders also play a role in governance. The nature of that role is determined by the company when setting up the trust; at one end of the spectrum stakeholders might have the ability to directly elect TPC members, or at the other end of the spectrum, they might simply have the opportunity to participate in an annual meeting of the trust where their feedback and/or concerns can be heard. 

You may also be wondering how a business makes a transition from conventional ownership to steward ownership. In simplest terms, the existing ownership of the company must be bought out, which can be financed through debt, equity or a combination of both. What’s critical for a steward ownership transition is that the recapitalization not be tied to dividend rights, voting rights or control. This way, no individual is personally motivated to maximize profit at the expense of purpose, the way it is under the dominant paradigm of shareholder primacy.