Good Governance in employee-owned (EO) companies | Fieldfisher
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Good Governance in employee-owned (EO) companies

Neil Palmer


United Kingdom

The number of companies becoming employee-owned has been rising exponentially since the introduction of EOTs in 2014.

This is good news for the sector but, at the same time, it is increasingly important to consider the meaning of "good" employee ownership, to ensure that the growth of the sector is not achieved at the expense of the integrity of the key principles which underpin a holistic approach to EO companies. This article offers some commentary on one of the pillars of "good" employee ownership– "good" governance. Here we will consider:
  • what is governance?
  • the importance of good governance;
  • what are the key elements of good governance?
  • some final thoughts.
What is "governance"?
Governance is a big word which people often interpret very differently. It can also be a scary word which people are tempted to run away from. There is no need to be scared or to run away! For us governance is the rules which bind all parts of an organisation together, which explain people's roles and powers, how the organisation is run and how it interacts with its stakeholders – in this way it sets a framework to help the organisation succeed. Governance is therefore a good thing, and set up and used in the right way, greatly enhances how an organisation operates. In an employee trust-owned business, governance is essentially the framework which underpins the relationship of a trading business, its employees and the EOT which owns it.
Why is governance important?
Governance is important because all organisations should have some rules; a starting point or reference point so that everyone knows where they stand and where they can look for the framework of how a business interacts with its stakeholders.  Just like any activity, such as sport, it is important to have some regulation of what you do, otherwise everyone does what they like and there is potential for conflict if not everyone is on the same page.  For us, an organisation's governance framework is a central point or anchor– a bit like saying "this is where we start" or "this is who we are". 
Although this sounds quite serious and permanent, the beauty of governance is that it is never set in stone. An organisation always has a chance try something and to change, refine and improve it over time.  You may start with something that works for a while or ultimately is not fit for purpose, or could be improved, but you can always change it for the better.  What is there not to like about something that can continuously be improved and that can adapt to changing circumstances and the evolution of a business?
As governance advisers we are always learning, adapting and evolving our advice in order to meet new challenges or address deficiencies in systems. Governance can be continuously improved and there is a lot we can learn from the experience of others. Governance is flexible and willing to be changed.
That said, it is important not to trivialise the governance concept. Just because something can evolve does not make it weaker. In fact it is an important strength. And in support of this, governance will contain checks and balances which regulate what powers that the key parts of organisations will have. The result is to add balance and harmony to an organisation and create standards of accountability and boundaries on the exercise of powers.
Governance is about actions, not words. It is all very well having a constitution based on lots of fine words, but less good if the people within the organisation never comply with them, or even look at them or know when to find them. Simple but workable rules which are applied in practice are much better than complex systems that are ignored.
What are the key elements of good governance?
  1. It should be functional, workable, practical, and simple to use.  It should not be so complicated that you need a degree in rocket science to work it out.
  2. It should be purposeful. It should create structures and systems because you need them; not because they sound good.
  3. It should promote good decision-making. It should provide structures which allow the people best suited to make the best decisions, supported by people who can provide meaningful input.
  4. It should deliver accountability and good practice. It should contain checks and balances and act as a constraint on powers whilst seeking to empower where appropriate.
  5. It should be respected and revered.  It can be changed and adapted. But it represents the heart of an organisation and demonstrates what its values are.
  6. It should try to connect all parts of the organisation and its stakeholders and represent all constituencies.  It should be the glue that binds everyone together in an organisation.
  7. It should be written in Plain English and jargon free (this is a plea to the lawyers!).
  8. It should promote clarity. As a general rule, governance is a delegation of power which in commercial companies flows from the shareholder to the board, and then to committees and to management and employees. It should not aim to confuse.
  9. It is best delivered in bite sized chunks which are manageable and digestible. It does not need to be in one document. It might be more manageable if it is separated. Therefore, an organisation might have a governance structure which is comprised of:
    • articles of association;
    • a values statement;
    • standing orders; and
    • terms of reference for committees.
Here governance is set out in different tiers that collectively make up a framework. The rule is that if you do this, try hard not to make it too intricate or to allow different documents to conflict.
  1. It should look ahead and anticipate challenges that might be faced in the future. The term here is "future proofing" but not everything can be anticipated. And where issues do arise, an organisation can always change its structures and adapt.
Final thoughts
"Good" governance can really make a difference. When it is done well, and is known and understood by people within an organisation, then it can be a force for change and represent and demonstrate the DNA of an organisation. It is really there to be used to help an organisation to function to the best of its abilities, and an organisation should not be afraid to evolve and adapt its structures where it sees a need for improvements.

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