COMPARE AND CONTRAST: WHICH STEWARD OWNERSHIP FORM IS RIGHT FOR YOU?
As we’ve said many times before, steward ownership can take many forms, but what they all share is a commitment to two key principles: profits serving purpose and permanent self-governance. These ownership structures free company leaders to focus on shepherding the health and vitality of their business, not on extracting maximum profits for shareholders.
So why would a business owner choose one form over another? Here and in the chart below we compare and contrast the predominant steward ownership forms.
How flexible is the design?
While some owners would be happy with a turn-key option, others want the ability to design a structure that aligns with their mission and values, culture, business strategy and financial management needs. Purpose Trusts are often chosen for this reason, as are Golden Share models.
What is the relative cost and complexity?
Purpose Trusts and Foundation models are generally the most complex and costly to set up and administer. Employee Ownership Trusts, which are more turn-key, tend to be less expensive. Golden Share models can be less expensive, depending on the number of share types issued.
Can multiple stakeholder groups be represented in governance and participate in economic rewards?
The models best suited to a multi-stakeholder approach are Purpose Trusts, Golden Share and Foundation. Cooperative models are most commonly formed around the common interests of a single stakeholder group, such as employees. And by their nature, Employee Ownership Trusts are designed to provide economic rewards to employees exclusively.
Can voting shares be held by individuals?
For some owners, having all the common stock (voting shares) held either by a trust or by a foundation provides a necessary level of certainty and finality. For those who want to retain some portion of common stock for themselves or other investors, Golden Share can be a good option. For owners that want to implement a more democratic workplace with ownership shared broadly, a Cooperative could be the answer.
Can preferred shares be issued at the company level?
All forms have the ability to raise capital by issuing equity at the company level in the form of non-voting preferred stock.
Is there a need to assign a veto share to block any potential sale of the company?
A veto share is a necessary element in the Golden Share model to ensure that a company is truly steward-owned. The veto share is held by a non-profit or foundation that stands ready to veto any move to sell the company or to make significant changes to the company’s purpose. Likewise, for a Cooperative to be considered steward-owned, it would also need to add a veto share (or some other “poison pill” mechanism) to ensure that the membership cannot vote to demutualize. In trust and foundation models a veto share is not necessary, as the trust/foundation fulfills this protective role.
What is the fiduciary obligation of directors of the company?
In Purpose Trusts, Golden Share models and Foundations, boards are obligated to maximize the purpose that is codified in the articles of incorporation. In an Employee Ownership Trust, the beneficiary is automatically the current employees of the company, and likewise, in a Cooperative, the fiduciary obligation is to the members.
Can the ownership transition take place gradually over time, or must it happen all at once?
One deciding factor for an owner may be their desire to move quickly – all at once – in establishing a new ownership form vs. transitioning over time. We are however seeing a number of business owners implementing partial Purpose Trusts, that start out in either a minority or majority position, with the intent of moving to 100% Trust ownership over time. Employee Ownership Trusts can also be phased in as well (similar to how ESOPs are often established.) Cooperatives, on the other hand, need to be established or converted all at once, as do Golden Share models.
In Conclusion (and a big caveat…)
We’ve generally found that Purpose Trusts are a good fit for business founders looking to exit (looking for liquidity with legacy) and for active owners looking to restructure, perhaps in conjunction with a capital infusion from outside investors. Business owners who are interested in sharing ownership more broadly with their employees are great candidates for Employee Ownership Trusts. Cooperatives are well-suited for highly democratic organizations who prioritize distributed ownership and decision-making. Golden Share models often make sense for start-ups who want a low-cost, relatively simple method to lock in purpose and independence. And Foundation models are recommended for social entrepreneurs who plan to leverage both philanthropic donations and investment capital to deliver on their mission.
However – and it’s a big however – these are broad generalizations. The eventual form a founder or owner pursues will have as much to do, or more, with their values and belief system, as they do about where they sit in their business life cycle or what their investment needs are.
