More and more business owners are realizing the need for conscious capitalism as opposed to the solely profit-driven model dominating our world today. At the end of their careers, a business owner is confronted with the founders’ dilemma. They have to choose between liquidity and legacy. Thankfully, there is a groundbreaking way to maintain profitability while ensuring that your business’ purpose will be carried out even as you give up control.
Sarah Joannides joins us in Episode 137 of the Her CEO Journey™ podcast to share valuable information on steward ownership. She breaks down what this ownership structure entails, when it makes sense to implement, and what founders need to prepare for the transition. Sarah also clarifies misconceptions about this form of ownership, especially regarding its profitability. Make sure to tune in to Steward Ownership: A Method for Preserving Business Owner’s Legacy and Purpose to learn more.
Here are Three Reasons Why You Should Continue Reading:
Understand what steward ownership is and how it makes sense for a mission-driven business owner.
Discover the four models of this alternative ownership structure.
Find out what you, as a business owner, need to prepare for it.
Resources
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[05:59] Sarah’s Journey
Sarah charted a winding road of corporate jobs and business ownership. She is currently the managing director of Alternative Ownership Advisor.
She worked with big brands such as Nike and American Express before being a business owner of a restaurant with her husband.
Seeking steady paycheck work that she can be proud of, she got a job working closely with the CEO of an organic grocery store.
She helped the company become B Corp Certified. While great, these certifications have a flaw: companies can walk away from their commitment at any time.
Then, a CEO friend who just transitioned to trust ownership asked Sarah to join a consultancy aiming to help other owners do the same.
[08:40] The Founders’ Dilemma of a Business Owner
A mission-driven business owner may experience the founders’ dilemma. They reach the end of their careers without knowing what to do with their companies.
The business owner wants liquidity but doesn't want to water down their legacy. Steward ownership can solve this problem.
[09:21] About Steward Ownership
This type of structure aligns ownership, governance, and financing to lock down purpose and independence. It has two key principles.
First, the profits of the company should primarily be reinvested in the business and shared with stakeholders. That is, profits are not just extracted by shareholders.
Second, voting rights are held by stewards who are actively involved in or close to the business. This structure actively disconnects voting and economic rights.
“This means that the profit-maximizing incentive is switched off. A company can focus on running a healthy business where profit serves purpose and benefits stakeholders, not just shareholders.”
Steward ownership can take on many forms. They all operate under the premise of ownership not equaling control.
[10:53] The Founder and Business Owner’s Options Under Steward Ownership
A founder and business owner can take on several roles under this ownership structure.
If they want to retire and walk away altogether, they can help select the organization’s stewards and get bought out of their ownership.
If they want to retire but still be involved in the company, they can be one of the stewards.
Meanwhile, there are also founders who don’t want to retire; they only want to restructure their organization. Alterative ownership works for these situations as well.
[12:58] When Does Steward Ownership Make Sense?
There are a few triggers for this restructuring. The first is the founder or business owner nearing retirement.
Entrepreneurs who are taking on capital for the first time also need to think about ownership.
Even well-intentioned, well-aligned investors may pull them off course. Investors might be driven by maximizing profits.
Mature companies can also decide to change their ownership structure if they decide it isn’t serving them well.
Organically Grown Company switched from employee stock ownership to trust ownership. Tune in to the full episode to know why.
[15:40] Preparing for the Transition to Steward Ownership
Founders need to get a transition team composed of trusted advisors on board.
It’s also beneficial to find a community of organizations forwarding this work to help with the process.
They also need to get their leadership team to agree before making a final decision.
Co-creating their future state with all of their stakeholders makes the process easier during and post-transition.
It also gives them a competitive advantage, as it gives the company stability and resilience.
[18:29] Financing Steward Ownership
Some business owners can afford to buy themselves out. For example, they can transition common stock into non-voting equity to receive a dividend stream later on.
Investors come into the picture when the business owner cannot manage to self-finance.
These investors are interested in financing this shift because they are passionate about the company’s mission.
On the other hand, some investors are passionate about alternative ownership.
“It needed to be a kind of investor that was happy enough to take a very solid, predictable return and that wasn't as driven by having a big upside.”
Sarah calls these types of investors “impact investors.” Listen to the full episode to find out more about them and examples of how to structure equity.
[23:27] The Four Major Models of Steward Ownership
A perpetual purpose trust is flexible in structuring how stakeholders benefit from and govern a company. Within it exists the employee ownership trust.
Companies can also be nested under a non-profit or foundation. Similar to trust ownership, an entity holds common stock in this model.
Other types of alternative ownership allow individuals to hold stock. One is cooperatives. You can either have a limited cooperative association, which prohibits demutualization.
“One of the drawbacks of cooperatives from a steward ownership perspective is that the members can vote to demutualize, so to break up the coop, so it can be sold.”
You can also set up a traditional cooperative, but instill a “poison pill” to ensure that the company won't be sold.
Lastly, the golden share model establishes different share classes to separate voting and economic rights. Crucial in this model is the golden share. This exists to veto any attempt to change the purpose of or to sell the company.
[29:40] Choosing the Right Form of Steward Ownership
When deciding on a new ownership structure, a business owner needs to consider their head and heart.
The head is all about strategy: business strategy, financial model, and competitive advantage.
Meanwhile, the heart is about the company’s mission, values, and culture.
[31:23] When to Consider Steward Ownership
Sarah cautions young businesses against hastily making a decision as permanent as alternative ownership.
Usually, the decision boils down to the business owner and a handful of individuals.
Founders need to sort through how an ownership structure fits with a company’s business model.
In addition, they also have to understand the role they want to take in the future and their willingness to share business governance and profits.
In Sarah’s experience, it’s difficult for companies to buy back ownership from private equity firms. Tune in to the full episode to hear an example!
[37:38] Giving Up Control in Private Equity vs Steward Ownership
Alternative ownership allows you to design the governance structure of your company. This ensures that your purpose is still carried out.
For example, one of Sarah’s clients created a stewardship council to oversee the trust. The agreement specifically states that the business can't be sold.
In the trust agreement, the purpose statement is codified. It generally comes with a list of objectives to ensure that the company is moving in that direction.
Founders won’t be able to control this outcome in a private equity situation.
“It's not that the private equity folks are bad people by any stretch of the imagination, but they are beholden to their investors.”
For Sarah, it all boils down to whether or not the founder is concerned about the future of their company.
[40:22] The Profitability of Steward Ownership Businesses
Transitioning to steward ownership doesn’t necessarily mean founders will get less than they would in other ownership structures. It’s all about the value of the company.
Investors can pull levers to increase a company’s profitability, such as reducing staff and cutting other costs. However, these things are what many founders wouldn’t change.
“That ability to look in the mirror at the end of the day, when it's all said and done, and say I did right by the future of this company. And I did right by the people that helped to build it, and I shared the value with them. That's maybe harder to put a dollar value on.”
Steward ownership businesses are not non-profits. They just have a different view on profits and how these should be shared.
Alternative ownership is also not a solution for distressed businesses. A business with no financial security will find it challenging to buy out the business owner during the transition.
To choose this structure, a business must be philosophically aligned and have a proper financial foundation.
[44:57] Steward Ownership for Technology Companies
It’s challenging to implement alternative ownership in tech companies because it takes many years for them to get to profitability.
There are evergreen funds that have a longer timeline allowing for mechanisms such as the golden share model to work in tech.
A group of people in tech have started a movement called “Exit to Community.” They aim to help businesses be more thoughtful about how to get independence later on.
If you're a tech platform, they advocate getting to the point of building ownership equity for users who are paying to use the platform.
[48:28] Steward Ownership Business vs Public Benefit Corporation
A public benefit corporation (PBC) allows the company to include specific public benefits in their incorporation documents as legally defined goals.
It differs from steward ownership in the way that shareholders retain control of both governance and economic rights.
In addition, ownership can be sold. The commitment to a PBC can be undone by a majority vote of the shareholders.
In case of bankruptcy in an alternative ownership, you have to include in your trust agreement what happens if the company becomes insolvent.
[51:52] Steward Ownership Around the World
Forms of steward ownership have been around in Europe, predominantly in the UK and Germany, for over a century.
In 2015, a non-profit called Purpose Economy was founded in Germany to study ownership forms that enable businesses to be independent and purpose-driven.
They were the ones who coined the term steward ownership. They have brought their mission to the US and have started an arm in Latin America as well.
[52:52] The 1, 2, 3s of Steward Ownership
First, put together your transition team.
Second, assess your financial viability.
Third, design your ownership and governance structure.
Lastly, create a roadmap to implement your plan.
The entire process can take up to a few years.
[55:30] Sarah’s Parting Words
For Sarah, what sets steward ownership apart is its idea that ownership is not the sole reason for having the right to profits.
She wants to open up a dialogue about the way we think of business ownership.
Steward ownership is an exciting way to rethink the vitality of everybody in our ecosystem.
About Sarah
Sarah Joannides is the Managing Director of Alternative Ownership Advisor. Their consultancy specializes in helping founders and owners of private companies design and implement ownership, governance, and financing solutions that align with their mission and protect independence.
Prior to this role, she was the Principal Consultant of Joannides Consulting and the Vice President for Social Responsibility of New Seasons Market. Sarah prides herself on being a champion for change and using business as a force for good.
To know more about Sarah, you can connect with her through LinkedIn. You can also send her an email.
Powerful Quotes
“Voting rights aren't allocated based on who controls the company. They're based on who is best to steward the company.”
“[Alternative ownership is about] making capitalism less focused on profit extraction and more on the benefit of rising up and elevating the benefit of all stakeholders.”
“It's not about the underlying value of a company having to be sold at some point to someone else for the investors to get their return.”
“From a steward ownership perspective, the goal is to set the foundation for independence in the future, so not to buy and sell.”
“That to me is really exciting. Just this idea that a different set of players within a company can get value or be paid for the value they bring in a different way.”
Enjoy this Blog?
If you’re a founder or business owner looking for a way to carry on your legacy and the mission of your company for the years to come, transitioning to steward ownership may be the best for you.
This ownership structure allows your purpose to drive your business while still maintaining profitability. If you enjoyed today's episode of Her CEO Journey™ Podcast, then hit subscribe and share it!
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Have any questions about business finance? You can contact me through LinkedIn or schedule a chat with me at any time. You can also suggest topics you're curious about for future episodes to help your business grow. Thanks for listening!
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To fuelling the life you want to live,
Christina