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Mini-cast 113: Shutdowns, Trustees & the BoD

Office with sign saying "Closed due to COVID-19"

Bret Keisling looks at government-ordered shutdowns, and the role of the trustee and board of directors if a company violates them.


Mini-cast 113 Transcript

Bret Keisling: 00:06 Hello, my friends. Thanks for listening. My name is Bret Keisling and as it says on my business cards, I'm a passionate advocate for employee ownership. Last week on December 12th, 2020 Pennsylvania issued shutdown orders that will last about three weeks. It affects a number of businesses, most notably restaurants, gyms, and casinos. These are not guidelines. These are shutdown orders with the force of law.

Bret Keisling: 00:33 Two things have happened since then which trouble me. A small number of restaurants publicly and loudly announced that they won't follow the shutdown orders and will continue to allow indoor dining. Although the vast majority of restaurants have followed the orders, a second group of restaurants have now opened up who had shutdown, but because their competitors are open, they feel compelled to do the same thing.

Bret Keisling: 00:57 This got me thinking back to when I was an ESOP trustee and I wondered what my responsibility would be if one of my client companies violated shutdown orders, I reached out to a couple of folks who I worked with quite a lot. when I was a trustee, one's an ESOP attorney, the other a valuation expert. I really appreciate their help, but I won't mention their names because I'm discussing my conclusions and I don't want anyone to inadvertently think that my thoughts are those of either of my talented friends.

Bret Keisling: 01:25 I'm going to take a moment and jump to the conclusion and then take you through some of the steps I use to get there. Ultimately, and sorry if this seems like I'm punting, but it's not clear that violating a shutdown order will rise to a fiduciary duty for the trustee. And if there's no duty to act, then the trustee generally has no say on the matter. It may be quite different from members of the board of directors. But first I want to make a point that differentiates between a trustee's personal opinion from their professional duty.

Bret Keisling: 01:58 To do that, I'm going to tell you what I personally feel about companies that violate shutdown orders and probably blow off a little bit of steam. I hate the companies that are violating the shutdown orders, I hate it a lot! In Pennsylvania, lots of people on social media celebrate the restaurants who violate the orders like they're patriots. I see lots of references to the Boston Tea Party and a perception that these restaurant owners are somehow standing up for liberty. Honestly, it feels more to me like they're profiteers. If someone drives out of their way to patronize a restaurant because they're violating the shutdown order, I wonder if that patron notices all the restaurants they pass along the way, also struggling to stay open, but they're only offering pickup or delivery because those are the rules.

Bret Keisling: 02:49 Almost every restaurant owner who stayed open and been interviewed in the media say they have to take a stand so their employees can earn a living. In almost every other instance, they'd be singing my tune and I'd be right there with them; help the employees keep earning a living. But I take the comments about looking out for the employees with a bit of a grain of salt. Here's what would impress me: If a restaurant owner announced that they were staying open in violation of the shutdown, how about if they also announced that all of the net proceeds each day were divided evenly among every single team member with the owner of the restaurant getting only one equal share. But it's business as usual. In Pennsylvania servers are paid two something an hour, and then they have to rely on tips, which generally are reported to be down significantly during the pandemic. You also have the kitchen staff and other support staff who don't make a lot of money either. So like I said, if you want to impress me, share the pie every day with all of your employees.

Bret Keisling: 03:52 One final point about why I feel they're profiteers. As I said, there are references that staying open is sort of like the Boston Tea Party. It's treated like a heroic fight for liberty. There are two major differences. The Boston Tea Party was very much part of the taxation without representation movement that took place in the colonies. England taxed us and we didn't have any say about it. Every single state that has guideline or shutdown orders also have the elected representatives making those decisions. That's not anything like taxation without representation. I also can't help, but wonder how we would feel about the Boston Tea Party. If we found out that it was engineered by three people named Lipton, Tetley, and Snapple, would you feel the same way? If tea was dumped in the Boston Harbor by people trying to make money selling their own tea?

Bret Keisling: 04:49 If it were up to me personally, every company would follow shutdown orders and there would be significant penalties if they did not. That's my personal opinion. Now let me put on the ESOP trustee hat that I wore for seven years.

Bret Keisling: 05:02 The ESOP trustee has a lot of responsibilities to make sure that participants current and former employees are treated fairly. The trustee doesn't run the company and the trustee can't demand that the company act one way or the other. Now I said at the top that violating a shutdown could be a fiduciary issue, but just as easily might not be. Right now, Pennsylvania's shutdown is for three weeks. If the shutdown isn't extended, then it's quite possible that the trustee would not even be aware that the company is violating the shutdown orders. I certainly hope that wouldn't be the case, but let's say, god forbid, the shutdown gets extended for an extra month or two or, worse yet, becomes open-ended. At some point, the trustee must know whether the companies are following the rules or they're not a very good trustee. There's not necessarily a duty for a trustee to canvas their clients to see if they're following the law and, again, in this case, the shutdown orders have the force of law.

Bret Keisling: 06:04 Let me give two examples that aren't pandemic related. As a trustee, I'd know if a company paid its taxes or not, because of all the documentation that I get, but barring some triggering event it certainly isn't the trustee's duty to review the taxes to make sure they're prepared properly. That's a company function. If the trustee found out taxes were illegally going unpaid, that could certainly be a fiduciary issue, but policing routine company functions isn't part of it.

Bret Keisling: 06:34 Similarly, a number of my clients used chemicals in manufacturing processes. I knew as trustee that these companies follow EPA guidelines for chemical storage and disposal, but just like with the taxes, it wouldn't be incumbent upon the trustee to do a deep dive into the processes the company used, which vendors, et cetera, et cetera. The trustee would rely on the fact that management and the board of directors are doing the right thing. What I would be doing if I were still a trustee is to be proactive with all my clients. So for example, if I had any Pennsylvania restaurant clients, I hope that I'd have a sense during my regular communication with management of how the company plans to proceed if there were a shutdown looming that way, when the shutdown did occur, I'd circle back and find out if they implemented the plan in place and if they didn't, what changed. If one of my clients reached out to me to ask for advice as trustee, I can't sanction violating the law -- any law. So I'd make sure that I was on record as being opposed to the company staying open. But in some cases, staying open can be viewed as a company decision, again, not as a fiduciary one.

Bret Keisling: 07:44 You often hear at conferences and even on this podcast, that in the event there's major wrongdoing that a trustee could take the company to court. As I've discussed often, it's technically accurate, but highly unlikely. As in other situations, if a company's conduct was something that I couldn't agree with, then I'd be more likely to resign as trustee and here's the important part, I'd send a detailed memorandum to the successor trustee outlining the fiduciary issues. That way it's on the record and hopefully the successor trustee would recognize fiduciary issues and address them as well. By the way, the thinking here is if a trustee raises a fiduciary issue and management doesn't like it, they may want to make a change. If the second trustee shows up and says, hey, it's the same fiduciary issue, management might begin to understand this. Isn't a trustee preference thing, it's fulfilling fiduciary issues.

Bret Keisling: 08:44 In the context of shutdown orders, I've concluded that generally my approach would be to put a strongly worded letter into the record that I'm opposed to violating orders, but probably wouldn't take any other action nor look to resign as trustee. But let me give you an example where I might have to take action. There are certain industries, whether it's manufacturing plants or huge warehouses, logistical companies, where lots of employees have been stricken with COVID and sadly many have died. If one of my clients were one of the super big companies with an a couple of thousand employees got sick or even died that may well constitute something that would require extraordinary measures.

Bret Keisling: 09:26 Let's turn for a moment away from the trustee and to the board of directors. I think it's a whole different story for them. Like the trustee, the board has a duty to make sure taxes are paid. Unlike the trustee, board members have the duty to make sure the right taxes are paid. If I were on the board of directors of a company that wanted to violate government shutdown orders, I'd probably feel much stronger about trying to stop it and probably would feel compelled to resign my seat as a board member, because I wouldn't be able to sign off on the behavior of illegality. Because unlike as a trustee, if I were the board member, I'd be complicit in the illegal actions and that shouldn't happen.

Bret Keisling: 10:11 I hope this is a philosophical analysis on my part and that the shutdowns and lockdowns and everything smooths out sooner rather than later, I'd be very sad if this episode were still relevant six months from now, just because it means the pandemic is still out of control.

Bret Keisling: 10:27 Going back to the personal feelings that I've shared, as much as the shutdowns are horrible, I don't have any better ideas. And those who are fighting the hardest against shutdowns don't have any better ideas either. They just don't want the shutdowns. That doesn't seem to me like a good plan at all.

Bret Keisling: 10:47 Meanwhile, as I'm recording this, in the twelve minutes it took you to listen to this episode an average of 20 more people will have died from the novel coronavirus in the United States. My heart goes out to everyone who has had to deal with death or even the diagnosis of COVID. And very truly, no one wants everyone back to work and earning livings more than me, but we're not going to get through the pandemic unless we all take a page from employee ownership and get through it together.

Bret Keisling: 11:17 Thank you so much for listening. This is Bret Keisling. Take care of yourself and those around you.

Bitsy McCann: 11:25 We'd love to hear from you! To contact us, find us on Facebook at KEISOP, LLC and on Twitter @ESOPPodcast. To reach Bret, with one "T", email, on LinkedIn at Bret Keisling, and most actively on Twitter at @EO_Bret. Again, that's one "T". This podcast has been produced by The KEISOP Group, technical assistance provided by Third Circle, Inc. and BitsyPlus Design. Original music composed by Max Keisling, archival podcast material edited and produced by Brian Keisling, and I'm Bitsy McCann.

Standard Disclaimer: The views expressed herein are my own and don't represent those of my own firms or the organizations to which I belong. Nothing in the podcast should be construed as guidance or advice of any kind in any field and the fact that I mentioned an organizational website or an advocate or a company on a podcast does not reflect an endorsement, but if you've heard your name or your group's name mentioned on this podcast, I'd love to have you come on and talk about it yourself.

A note on the transcript: This transcript was produced by Temi, an automated transcription service. While it has been reviewed by The ESOP Podcast, we can not guarantee the accuracy of the transcription. Please refer to the original audio when citing sources.


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