Bret Keisling discusses Independent Board Members for ESOP Companies, including a definition of "independent," why it's important for the company as a best practice and fiduciarily, the number of independent board members to consider, and what criteria to consider when choosing independent board members.
... or watch the video below.
Mini-cast 244 Show Notes
Links and resources referenced in this episode:
The EsOp Podcast Episode 138: Tracy Till - EO Companies, Boards, & Orgs.
Investopedia: Independent Outside Director: What it is, How it Works.
Idealsboard: The Benefits of Independent Directors.
Mini-cast 244 Transcript
[00:00:00] Bret Keisling: Welcome to the EsOp Mini-cast. Thank you so much for listening. My name is Bret Keisling, and as it says on my business cards, I'm a passionate advocate for employee ownership.
[00:00:18] One of the questions that I often get revolves around independent board members. Are they necessary? What's the point? Et cetera, et cetera.
[00:00:27] We did in early in 2021 have a full episode on this, Episode 138 featuring Tracy Till called EO Companies, Boards, & Orgs. You can find that and all of our archived episodes at www.EsOpPodcast.com.
[00:00:42] But since it's been a while since we talked about it, I wanted to spend a few minutes today covering the topic.
[00:00:48] So, the first thing we're going to do is define independent board members, then we're going to talk about what's their importance is, and then we're going to discuss how they fit in with ESOP companies.
[00:01:00] So, and I've relied on Investopedia.com, we'll include a link to this in our show notes for this definition, an independent outside director are members of a firm's board of directors who are unaffiliated with the company itself. Now, for ESOPs, that also means unaffiliated with management or previous owners selling shareholders, et cetera.
[00:01:22] Going back to Investopedia, best practices for good corporate governance encourage the addition of independent outside directors to boards in order to maintain accountability and objectivity. In contrast to insiders, outside directors are thought to be more objective and bring a different perspective to the management of a firm.
[00:01:43] Researching for this Mini-cast episode, I came across a great definition on Idealsboard.com, and we'll include a link to that in our show notes as well. But from Idealsboard, they say quote, "Without someone from the outside looking in, offering their own take, it's too easy to fall into the same patterns and traps that keep a company stagnant. The independent director brings clarity and objectivity to the table that compliments the rest of the board's understanding of what came before," unquote.
[00:02:13] So, the whole point of the independent directors is to bring somebody whose livelihood is not contingent on agreeing with management or agreeing with the other board members, but rather they can offer that unbiased opinion that is unvarnished and sometimes they're the lone voice or voices for objectivity.
[00:02:33] In terms of board composition, I'm not suggesting that independent directors make up the majority of the board, although there's absolutely nothing wrong with that at all.
[00:02:42] Back when I was in ESOP trustee, I'd like to think that the ideal board sizes were five or seven members, keeping in mind you want an odd number so that there are no tied votes. But I think five or seven members was ideal.
[00:02:57] If you have a seven member board, try to have two or three of them be independent directors. Same thing with a five member board, to be honest with you, at least two, if possible. But you definitely want an independent director on every single board.
[00:03:10] And by the way, on a functional basis, the independent director, from an ESOP perspective, is often put in charge of the compensation committee, working to set the salaries of upper management in that board role. You don't want to have anybody financially beholden to upper management involved with setting their salaries. So, it's great from that perspective.
[00:03:32] What skill set, other than independence, should a company look at? Well, that's the beauty of it. Board members should be chosen on their skill sets, their talents, their expertise. What they bring to the table.
[00:03:45] So, for example, if nobody on the board has any marketing expertise, it'd be wise to put, make a board member with that marketing expertise, banking relationships, manufacturing relationships.
[00:03:58] Let's say you're a manufacturer, or in any field or industry for that matter. Get somebody who's in your same field or industry, but maybe located across the country, not a direct competitor. Maybe get somebody who is in your vertical pipeline.
[00:04:12] Oftentimes, ESOP companies will choose somebody with ESOP experience as their independent board member and that's a great way to tie in compensation, ESOP expertise, et cetera, et cetera.
[00:04:24] But the important thing is that independent directors, first of all, are going to look good from the fiduciary perspective, from the Department of Labor perspective, it's going to be viewed as a positive thing. And certainly, no independent directors, all things being equal, could be problematic. But from there, pick the skill set, pick the experience that the company needs to help grow, and you'll be in good shape.
[00:04:49] So, I hope this brief look at independent board members was helpful. If you have any questions, feel free to reach out. We'd love to answer them for you.
[00:04:57] With that, we'll wrap up this episode of the Mini-cast. Thank you so much for listening. This is Bret Keisling. Be well.
[00:05:04] Bitsy McCann: We'd love to hear from you! You can find us on Facebook at EO Podcast Network and on Twitter [X] @EsOpPodcast. This podcast has been produced by Bret Keisling for the EO Podcast Network. Original music composed by Max Keisling. Branding and marketing by BitsyPlus Design. 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 Descript, an automated transcription service. While it has been reviewed by The EsOp Podcast, we cannot guarantee the accuracy of the transcription. Please refer to the original audio when citing sources.