Alternative governance structures

Most public corporations have fiduciary duties to their stakeholders to create return. However, there are many companies that attempt to maximize value for all their stakeholders by adopting alternative governance structures.




Let's take a look at some of them:



Employee Ownership (ESOP):


 It is a type of employee stock ownership plan that allows employees to acquire shares in a closely held firm to help with succession planning. They also give tax benefits to corporations, motivating owners to provide them to employees.


Employee stock ownership programs are frequently used by companies to recruit and retain high-quality employees. Companies that provide ESOPs have long-term goals in mind, they  want to keep their employees for a long time, but they also want to turn them into shareholders. The majority of IT firms have frightening turnover rates, and ESOPs may be able to assist them in reducing such high retention. 


Some of the benefits would include:

  • More employees reported that they were not likely to search for a new job

  • Feeling of being proud to take part of that business

  • Coworkers have enough interest in company issues to get involved

  • Companies grew employment 10,9% more per year than conventional ones

  • Sales of these firms grew 6% more per year and the median hourly wages by 5-12% more.



Cooperatives:


Another form of ownership by employees and customers. They are different from ESOPs because they raise capital directly from their employees and customers.


Co-ops are democratically administered by its members, and unlike standard businesses, each member has a say in how the company is operated.  The services or goods benefit and serve the co-members. 


The 7 Cooperative Principles show how co-ops vary from regular enterprises:

  1. Membership is both voluntary and open.

  2. Members of the Democratic Party have control over their economic participation.

  3. Independence and autonomy

  4. Cooperation Among Cooperatives in Education, Training, and Information

  5. Concern for Community




Benefit Corporations:

The structure of a benefit corporation is similar to that of a typical for-profit business. Each corporation has its own board of directors, officers, and shareholders who own shares in the company. The firm is controlled by the officers and directors, but the shareholders can hold them accountable for their actions.


Their purpose relies on creating public benefit. Their board of directors and officers are obligated by law to evaluate the impact of their choices on stakeholders, society, and the environment. They must use a competent third party to issue yearly reports explaining their social and environmental performance.


A benefit corporation has a financial motive, but it also has a larger public benefit goal: to have a significant good influence on society and the environment. Managers must strive toward this goal, and as a result, they have the freedom to make decisions that strike a balance between profitability and social and environmental concerns.




B-Corps:


They are for-profit businesses that have been certified by the non-profit "B Lab" to fulfill high, long-term performance, accountability, and transparency requirements on everything from employee perks and charity giving to supply chain processes and input materials.


Unlike typical corporations, which focus solely on financial success, B Corps consider the triple bottom line and use the power of business to solve social and environmental issues. Companies that desire to obtain this certification must complete a B Impact Assessment as well as a stringent certification procedure.



Differenciations between Benefit Corporations & B-Corps:




“Worse before Better”: Investors and Governance


Investors' support can be enormously catalytic in driving sustainability. Performing within investment reduces current performance but lays the foundation of future terms. Short-term losses for future gains.


Firms must ensure that investors, board members, and owners are all willing to accept short-term losses in the interest of future gains .



How to communicate with investors? Use of:


  • Financial metrics: provide a limited view of the company’s value and it’s very broad (human capital, brand values,...)

  • ESG Metrics: (environmental/social/governance) They give investors a more holistic view of a company's operations. It helps investors value firms that invest in cohessing those issues.


There is increasing evidence that firms that perform well against ESG metrics (see article) also produce superior financial returns. This dynamic is leading more investors to focus on ESG metrics as they make investment decisions.



Why would ordinary investors be interested in ESG metrics?


  • Investors are being pressured by the asset owners whose funds they manage to focus more on sustainability and alignment with values

  • ESG metrics are becoming increasingly central to investment strategy, as ESG are correlated with financial returns.


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