When I joined the board of a holding company as its first outside director, the company was already 100% employee-owned. At one privately held architecture firm, the job was different: guiding a fully private architecture firm to 42% ESOP ownership, which meant buying out four founders over five years without taking on risky leverage. The two boards started from different places, but they taught me the same lesson.

Governing an ESOP company is not the same as governing a closely held one, and it takes directors who understand the difference.

The circularity problem

In many ESOP companies, the board appoints the ESOP trustee. The trustee votes the plan’s shares, and those shares elect the board. That loop is not a flaw in the structure, but it can quietly become one. Without independent voices, a board can end up overseeing a trustee who is, in effect, overseeing the board.

An independent director breaks the loop. The point is not distrust of management. The point is that participants, lenders and regulators all need to see that decisions about share value, compensation and capital are made at arm’s length.

Valuation is a governance event

A private ESOP company obtains an independent appraisal every year, and that number flows directly into every employee-owner’s retirement account. Boards should do more than receive the valuation; they should understand it.

• Are management’s projections consistent with the strategic plan the board approved? Optimistic forecasts lift value today and create problems tomorrow.
• How do debt, founder notes and synthetic equity affect per-share value? Each one shifts value between groups of owners.
• Is the appraiser truly independent, and when was that last tested? Familiarity is not the same as independence.

I serve on the firm’s Valuation Committee, and that committee exists for exactly this reason.

The liability nobody books

Every ESOP company eventually buys back shares from departing employees. That repurchase obligation grows as the company succeeds and as the workforce ages. Boards that don’t model it end up choosing between growth capital and honoring commitments to retirees. Repurchase studies belong on the board calendar, right next to capital planning.

Transitions reward patience

The founder buyout took five years. Moving faster would have meant more debt and more risk to the very people the ESOP was meant to benefit. The board’s job was to keep the transaction aligned with the firm’s strategy — new-platform development, acquisition plans and a majority of shares that stayed privately held and tradable — without letting deal pressure set the timeline.

What NACD certification reinforces

Earning my NACD Directorship Certification put a formal framework around principles I learned in these boardrooms: clear fiduciary lines, genuine independence, disciplined risk oversight and a board that governs rather than manages. In an ESOP company, those principles protect more than shareholders. They protect every employee whose retirement depends on the outcome.

If your firm is considering an ESOP, or already has one and has never had an outside director, I’d welcome the conversation. 

ABOUT THE AUTHOR

Cindy Anderson, CPA, NACD.DC, is Founder & CEO of Thinc Strategy, an advisory firm serving owners and executives of engineering, design, construction and technology companies on growth strategy, M&A and ownership succession. She serves as an independent director of a privately held holding company and an outside director of a regional architecture firm, and holds the NACD Directorship Certification and the CERT Certificate in Cybersecurity Oversight from Carnegie Mellon University’s Software Engineering Institute. She has advised on more than $1 billion in transactions over a 30-year career.