Why ESOP companies add independent directors

Private ESOP companies are generally not required to have independent directors. Many add them anyway, because the ESOP structure creates situations where objective, experienced outside judgment is especially valuable.

Where outside perspective matters most

• CEO evaluation and compensation. Insiders cannot easily evaluate or set pay for the person they report to.
• CEO succession. Directors who have led or overseen leadership transitions can guide one of the board's most consequential decisions.
• Major transactions. Acquisitions, refinancing or a potential sale benefit from directors who have seen them before.
• Conflicts of interest. Where management or former owners have interests that may diverge from those of the ESOP, independent directors can help ensure decisions are made objectively.
• Missing experience. Growth into new markets, capital-intensive investment or operational transformation may call for experience the company lacks.

Signs it may be time

• The board is composed entirely of management and former owners.
• The company is approaching a CEO transition.
• The board expects to evaluate acquisitions or significant capital decisions.
• The selling shareholders have been paid and are stepping back.
• The trustee or advisors have suggested strengthening board independence.

Not sure where to start? Try the Board Needs Assessment.