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Board Governance Best Practices and Stories/Experiences Shared
John Stevens: [00:00:02] One of the things you need to do is tap into that informal channel of communication within organizations and find a champion within that, because there's lots of informal channels of communication that go on within an organization. That's almost as important, sometimes, as the formal channels of communication within the organization when you're trying to change cultures.
Munir Haque: [00:00:26] Hello everyone, and welcome to another episode of The Boardroom 180 Podcast. I'm your host Munir Haque, an executive coach and senior board strategist. I have partnered with Action Edge Executive Development to lead their governance and political acumen division. In each episode, we meet with governance leaders and step into their boardrooms, where decisions shape the world around us. Hello everybody, today's guests will be John Stevens, the president of Camilla Advisory Group, and Jason Vandenberg, who's the senior vice president of Camilla. John Stevens has over 30 years of experience as a senior manager, holding titles like CFO and CEO of fast growing employee owned companies before founding Camilla Advisory Group Inc. in 2020. John is a board member of the Employee Ownership Canada, which grew out of the 2023 merger of the Canadian Employee Ownership Coalition and the Employee Ownership Canada, to form a unified organization under one banner to promote the employee ownership across Canada. In addition to his knowledge of employee ownership, John's expertise in mergers and acquisitions is extensive, having been involved in over 100 acquisitions throughout his career. John holds a certificate as an executive coach from Royal Roads University, and he was also named as E&A pre-finalist for Entrepreneur of the Year in 2013 and 2015.
Munir Haque: [00:01:48] Jason Vandenberg, senior vice president, has held multiple senior management positions, including CFO of various companies. With significant experience in growing businesses through employee ownership, he brings his unique perspective to the work that they do. Having worked together for the past 18 years, John and Jason formed a dynamic partnership of Camilla Advisory Group. Their shared vision of employee ownership has led Camilla Advisory to become the leading advisor for employee ownership plans. Welcome gentlemen to The Boardroom 180 Podcast.
John Stevens: [00:02:20] Thanks for having us today, we appreciate it.
Munir Haque: [00:02:25] You two came to us through mutual connection in episode six, we had Liz McRae from Village Wealth on our show, and I think she hosted a seminar or a session where the two of you presented. One of my partners was at that, Kevin Simpson, and I think even during that presentation he was texting me and telling me, we need to get these guys on here. The stuff that they're talking about is cutting edge and I think it'd be valuable to our listeners.
John Stevens: [00:02:58] We're excited to be here. We were talking about employee ownership trusts, which is one of the things that we do, and it's very timely right now with new legislation this year. People want to hear about employee ownership trusts, and we've been on a bit of a speaking trail with that same presentation we gave in Calgary that you were talking about the last little while, and are going to be doing another one here in December as well.
Munir Haque: [00:03:16] Why don't you start out by telling our listeners a little bit more about Camilla Advisory.
John Stevens: [00:03:22] Camilla Advisory Group, we basically do three things, and maybe I'll start with employee share plans and employee trusts, the topic we're going to be talking about today. Employee share plans, we help companies design and implement employee share plans. We complement what the legal or accounting team can do for those companies. Now with employee ownership trusts, we're going to be helping companies convert or sell to employee ownership trusts as well. That's one leg of our stool. The other two things that we do is, we provide fractional chief financial officers to businesses. It's a model that, I think, makes a lot of sense, where we can provide CFOs to go into business 1 or 2 days a week and provide that strategic, overall financial, leadership to an organization more than a basic accounting team can do. We have several contractors that work for us and they go into businesses and help, so the fractional CFO is the second leg. Then the third leg is, you mentioned in the introduction my experience with the acquisitions and Jason's experience, we've worked together on a lot of different acquisitions, helping companies on the M&A advisory side when they're looking to sell. Our ideal client is a client that's probably going to sell to a strategic buyer. Obviously, those are big, important decisions that the owners of businesses need to make. It can be very trying time, and we help them through that process right from letter of intent, through marketing, through share purchase agreements, all the way through till close, so that's the third leg of the stool. Jason, I don't know if you have anything to add around that out in terms of our services?
Jason Vandenberg: [00:05:03] I think you covered it pretty good, John. I think on the M&A side, we do sell site as well as buy sites. We'll help companies that are looking to expand or grow, whether it's geographically into a different industry, we'll help them find those companies and take them through that process as well.
Munir Haque: [00:05:22] The bulk of what we're going to talk about is the employment ownership. If you can set the stage and talk a little bit, just in general, about what employee ownership means. It's pretty straightforward from the title, but maybe expand on it a little bit.
John Stevens: [00:05:46] We're based out of Edmonton, and I always like to give the PCL example because a lot of people are familiar with PCL Construction that started here in Edmonton many years ago. The employee ownership piece though, started in 1977 where Bob Storey purchased 75% of the business, together with a handful of managers for the other 25%, which was an employee ownership piece, then it just grew from there. You see it a lot in Alberta with construction companies here in Edmonton, Clark Builders, Shandro's, Graham, they had to build on the employee ownership in order to be competitive, to attract managers. The other area that, here in Alberta if you go back a decade or a couple of decades where you see it is, traditionally in the US, Southwest Airlines was always known as employee ownership. When WestJet first started, it started with the employee ownership model. Some people listening to the podcast will remember some of the commercials. What it really does is, it allows your employees to participate in the success of the business, get stronger engagement by the employees, it allows you to attract new employees. Retention is a very important piece with employee ownership because they start thinking like owners, which is important. Employees start thinking about top line, trying to increase revenue, controlling costs instead of just thinking about their paycheck on Friday. It's something that we think can change the culture of a business. It doesn't mean it's owned 100% by the employees. The new employee ownership trust, that is the case. The employees will be the beneficiary of a trust that owns control of it, maybe not 100%, but they need to control it. We'll get into that later in the podcast, but you can have a business where employee owners are 10%, 15% of the business that changed the culture of the business. Listeners may be familiar with Peavey Mart, they have a really robust employee ownership plan, is a good example. We've participated in the past and set it up for businesses. I'm very passionate about it and we think it really increases the engagement of employees.
Munir Haque: [00:08:49] The examples that you mentioned, how far back did they go? When did PCL and southwest?
John Stevens: [00:08:58] Southwest goes back to the early 70s, might even go to late 60s. PCL was 1977, it was owned by the Poole family, and Bob Storey bought 75% together with the other owners. It's been around for 40+ years, almost 50 years. It's a great model, and it's one of the reasons PCL has grown to be one of North America's largest construction companies.
Munir Haque: [00:09:36] You mentioned a couple times now that there's been recent legislation that's changed the employment ownership landscape. Why don't you talk a little bit about that new legislation, as well as who was pushing this legislation, why was there a need for it?
John Stevens: [00:09:59] You mentioned at the beginning, in the introduction, two organizations that merged, Employee Ownership Council and the Employee Ownership Association. The Employee Ownership Council was formed to lobby the government for some kind of incentive to do with employee ownership. Of the G7 countries, we were the last one to have any type of tax incentive for employee ownership. All the rest have had them for several years, the US and UK for quite a few years. Our legislation was modeled as a hybrid between the US legislation and the UK legislation. It was mentioned in budgets in past years, but it was this year that it came into the legislation, was passed in June, retroactive to January 1st. The 'big carrot' is a $10 million capital gains exemption. That is the tax incentive that was put in place. Lobbying, obviously to put it in place, the lobby group felt it was good for Canada. There's so many businesses out there, especially in some of the small towns, small manufacturing, that employee ownership just makes a lot of sense.
Munir Haque: [00:11:41] So a major benefit to the new legislation is the capital gains?
John Stevens: [00:11:47] Correct. The new legislation, the benefit is the capital gains. Obviously, there's also the benefit of owners wanting to leave a legacy instead of selling the business to some competitor that's going to come in and change the the name on the door and maybe eliminate some of the positions within the organization. It allows them to leave the legacy and for their businesses that they've spent decades, in a lot of cases, building to continue.
Jason Vandenberg: [00:12:20] I was just going to add to that. This is very new legislation in Canada, and you'll start to see some companies start to adopt it fairly soon. It may be similar to income trust, if you remember those days where in the early days there was a couple of companies that started to convert to an income trust. Then people started to see the benefits, you started to see a lot more of that. That's probably going to be similar to what happens with employee ownership trusts in Canada. As we have seen, for example in the UK, that's been around for a while. There's a lot of those transactions happening every month in the UK. It's a very popular way for people to sell their business.
Munir Haque: [00:13:34] Is there a bit of sales that has to be done on the vendor, so to speak, to have them go this route? Is it an easier route to go than it would be just to put the business up for sale and sell it to another organization or another individual?
John Stevens: [00:13:58] It's probably an easier route to go in terms of getting the transaction done. The way this is structured is, the founder, the owners, are going to get their money out over time, and so they're going to have to wait for some of that cash to get out of the business. They can take some off structuring, and we can get into some of the details of that. That's one of the things that the owner needs to be comfortable with, is being able to get the proceeds over time, but the $10 million capital gains exemption, plus a deferral on some of the other proceeds over a ten year period, can help with that because you're saving tax as well, so that can be one of the issues. Anything to add there, Jason?
Jason Vandenberg: [00:15:02] I would agree, that's the biggest hump for the owner to get over, is that deferral of the proceeds over time.
Munir Haque: [00:15:07] So that's the major difference between its predecessor to the ownership plan versus the ownership trust?
John Stevens: [00:15:15] No, I was comparing more the merger and acquisition, where it's an outright sale. With the differences between an employee ownership trust and an employee share plan, we typically do two different types of employee share plans. One would be what we call a share purchase plan, where employees dig into their pockets to buy shares, or the company can provide a loan to buy shares or can provide bank financing as well, we work with banks in order to do that. That would be the type of plan, we talk about PCL, PCL is very much a share purchase plan. The other type that we do, and this is to get engagement, is what we call a restricted share plan, where shares are given to the employee, which is a dilutive to the owner that vests over a period of time. It is a different transaction, an employee ownership trust than an employee share plan. It's probably more, the two options you would compare is, am I going to sell my business to a strategic buyer, or am I going to convert it into an employee ownership trust?
Munir Haque: [00:16:56] So what would make a business a good candidate for an ownership trust?
Jason Vandenberg: [00:17:00] As John mentioned earlier, I think a big thing is, the motivation of the owner has to be at least partially about leaving a legacy. Not, if you're selling your business to a strategic that your business may disappear right away. The brand you've built up, the employees you've been working with for the last 30 or 40 years, that can all go away pretty quickly. Same with if you're selling a private equity. An owner that cares as much, or at least partially, about leaving a legacy versus maximizing how much dollars he can get from selling to a third party, that would make it a good fit. The type of business you want, you want to have a mature business that's generating strong cash flows, preferably non-cyclical cash flow business with predictive future cash flows, and that's important. The future cash flows of the business is what's going to pay out the owner over time through a vendor take back. Or if there's bank financing, you need to have strong cash flows in that business to make those payouts, as well as to give distributions to the employees in the future. A strong balance sheet is important. You want to have no debt or a modest level of debt. Probably the right size of business, you're probably looking at somewhere in that 2 million to 75 million EBITDA range and probably 25+ employees. If you're smaller than that, just the transaction costs, it may not be worth it. If you're bigger than that, with that kind of a size, the benefits of the capital gains exemption start to become a pretty small part of the overall size and proceeds from the business.
John Stevens: [00:18:58] Just to add to that, you want to make sure you got a good, strong management team, because part of this is succession for the owner as well. You want a management team that's in place that can take over the governance of the business and take over the management of the business over that period of time, whether that be five, ten years.
Jason Vandenberg: [00:19:16] What I would also say is, if it's a business that's high growth and you need a lot of capital for growth, this is probably not the right fit. It's got to be a mature business where your future capital needs are minimal. You want that free cash flow to, one, go to pay down the vendor take back, or two, to be distributions to the employees.
Munir Haque: [00:19:37] How does an EOT work?
Jason Vandenberg: [00:19:48] Broad question, there's lots to it. I think from a high level, you're going to be selling your business to an employee ownership trust. For you to qualify, or be a qualifying business, there's a few things that you have to be. One is you need to be a Canadian controlled private corporation or CCPC. The owner also has to have been involved actively in the business for at least the last 24 months, so that's a requirement. Overall, if your business is going to qualify for the lifetime capital gains exemption that's already been in place for quite a while, very similar requirements to be a qualifying business for an employee ownership trust. One of the things I would add to that is, when you're selling to an employee ownership trust, you do not need to sell 100% to the trust, but you do need to sell a control position, which is at least 51%. So you could sell 51% and retain 49% as the owner.
John Stevens: [00:21:06] We've been talking to some family offices, private equity firms, that do have an interest in taking up that minority position at 49% interest, because they see the benefits of employee ownership. There's a private equity firm out of the US that focuses on buying companies and partnering with employee owners, not trust, but employee ownership. We see that for the right business, a partner with private equity and obviously the benefit of doing that is, the owner gets more of his cash off the table sooner. I think it's good from a governance perspective to bring in an outside owner like that as well with the employee ownership. I think you're going to see some transactions where there is private equity family offices purchasing that 49% and the employee ownership trust purchasing 51% from the owners as we see these trusts evolve over the next couple of years.
Jason Vandenberg: [00:22:05] Just to add to that, what we think is going to happen is you're going to see the employee ownership trust transactions probably fall into one of two buckets. You're going to have the first bucket, which is, I'm going to call, the legacy, where somebody wants their business to outlast their lives, live on for the next 100, 200 years and be owned by their employees and continue on. I think you're going to have a second bucket, which is going to use this more for the tax advantage, get that $10 million capital gains exemption. Sell a portion to your employees, allow your employees to participate, and then perhaps in 3 or 5 or 7 years, that business is sold to a third party where you've brought your employees that you want to reward along for that ride.
Munir Haque: [00:22:51] You talked a little bit earlier about the ratios of ownership, is that all stuff that is covered off in the legislation?
Jason Vandenberg: [00:22:59] It is. You definitely need to give up control, which is 51%. There are some other ratios and things like that for going forward, for example, to be a beneficiary of the trust going forward, you cannot own any more than 10% of the shares. If you're a former majority owner, you cannot be a beneficiary of the trust. There's certainly percentages on the initial transaction, plus going forward whether you can be a beneficiary that you have to keep in mind.
John Stevens: [00:23:29] Some of the transactions we think we may see as well, just building on what Jason said there, is a combination of employee ownership trusts and other employee share plans. For example, a management team that there's five key managers that maybe have been involved in the ownership of the business in the past and own more than 10% together with the founder. You may see a transaction go forward where there's an employee ownership trust that has control, 51%, for the broader employee group, and all employees that have been there more than 12 months have to participate in the employee ownership trust as beneficiaries. The remaining management team, and maybe they're partnering with a financial institution, have purchased 49% of the business with the five key managers. Use that as an example, but hybrids where there's a management team that has ownership together with the employee ownership trust, I think that you're going to see some of that. With anything new, as Jason mentioned with the income trust going back 20 years, they evolve over time to work for what makes sense for the business. It's been proven time and time again, studies in the US and Canada, that employee ownership, those companies do better from a top line point of view and from a bottom line point of view perspective.
Munir Haque: [00:24:54] So the legislation just came about at the beginning of 2024, is that correct?
John Stevens: [00:24:59] That's correct. It was passed in June of this year, 2024, and it was retroactive to the first of the year. The capital gains exemption is currently in place for 2024, 2025 and 2026. We do believe that might get extended for a year or two. Obviously, we'd like to see it in place permanently. That's something that our group is working with the government, having those discussions. We haven't seen any transactions done yet, we know of some transactions that are being worked on, we've had lots of discussions with a lot of different companies about this structure, but it is very new. The Employee Association Canada is doing a bit of a marketing blitz to get the word out, and as I mentioned we've been on a bit of a speaking tour talking to different groups about this. There's a lot of interest in it, but it's going to have to be the right business and the right owner in order to, and hopefully we'll see a bit of momentum after a few of these are done.
Munir Haque: [00:26:01] How long a process is it to go from a vendor to setting up the trust? Was there anybody who, or any organizations that were chomping at the bit, waiting for the legislation to happen that wanted to jump on it right away? They're still working through the processes?
John Stevens: [00:26:16] I'm not aware of any that were in a holding pattern waiting for the legislation to pass. I would say that it's probably a 3 to 6 month process, depending on how quickly things are put in place and how quickly you move with the legal and accounting teams and such. But you definitely could get it done in 90 days. 90 to 188 days, I would say, from start to finish. Depends on how ready the business is for it. A big piece of it is, on the communication piece is, to back to the employees. That's part of what our firm does, I talked about that at the beginning, is with employee share plans, doing the design piece of it and the communications. To put everything in place, from a legal perspective, that's the easy part. But depending on the number of employees in the organization, getting that that communication piece out. What does this mean for the organization? What does it mean for the employees? It's an important piece of getting it right, because you want to make sure that you maintain the culture and build on it to create a good culture for the organization, and that's where communication comes into play.
Munir Haque: [00:27:25] With the ownership trust, one of the things during the pre-interview we talked about, the structure of some of these organizations afterwards. With the focus of the podcast being around governance, typically these ownership trusts would have a structure with boards of directors. If you could talk a little bit more about how, after you move through this process, what would a structure look like?
Jason Vandenberg: [00:27:55] The legislation does prescribe some requirements for both your board of trustees, for the trust as well as the operating company and its board of directors. To start with the trust, the former owner can be on the board of trustees, but the former owner can only have up to a maximum of 40% of the board seats. If it's a five person board they can have 2, or a 3 person board they can have one, they have to be under 40%. The employees, or representative of the employees, have to be at least a third. Then the remaining directors can be independent. A few examples would be, again, a five person board, if you have two representatives of the former owner, two employee representatives and one independent. As long as you fit in those ratios, you have flexibility. As far as the board directors of the operating company, there's even more flexibility. The former owner can only have up to 40%, the same maximum as with the board of trustees, but there's no requirement to have employees on the board of the operating company. It can be just the former owner and independents. I think a lot of companies may choose to have employee representatives, but there's no requirement for that in the legislation.
Munir Haque: [00:29:09] I think you said earlier that the legislation is not a hybrid, but it's a midway between the UK and the US. Those ratios, are they typical across the board in terms of the other G7 countries?
John Stevens: [00:29:23] We haven't done the research on that, but the biggest difference between the US and the UK is the capital account for the employees, and we can get into that. The way it works, the formula, in terms of what an employee is eligible for as a trustee is based on, you can use a formula based on the number of hours they work, their remuneration, the number of years they worked for the company. But the biggest difference between the US and the UK is when a former employee leaves and that account of capital. That's when we talk about hybrid, they've used a hybrid in Canada between how the distributions are given, both from a capital and income perspective to current employees and to former employees. The UK model is much more like a co-op model where you're beneficiary, but when you leave that organization any value that you've created over time, that capital component, doesn't go with you, and there is some flexibility in Canada to do that. So it's a good question on the board in the US and UK, we should do a little research on that, but I don't know the answer to that. Jason, do you?
Jason Vandenberg: [00:30:38] Not a lot of detail. I know in the US because those capital accounts, there's more regulation so they often have professional trustees that sits on the board. Where in Canada it's much more flexible, it can be individuals or a corporate trustee.
John Stevens: [00:30:55] Good point, Jason. I've attended quite a few employee share plan conferences in the US over the years, and one of the downfalls of the US plan is it is very regulated and there's a lot of governance and oversight that goes into employee share plans. For smaller businesses, the cost can just be prohibitive to become an employee share plan. We've seen folks from the US look up to Canada just to put in place a basic employee share plan using a Canadian company, before in the past, just because of the administrative burden of being an employee ownership company in the US.
Munir Haque: [00:31:36] As with other boards that are regulated by legislation, the bulk of the bylaws, or terms of reference, that the board would follow are legislature. How much room is there for customization, is that where you come in? Do you help them develop customized terms of reference or bylaws?
Jason Vandenberg: [00:32:00] We certainly do, especially if I talk about generic or the legacy employee ownership plans that we have been doing for quite some time. We have a lot of input into how you structure a unanimous shareholder agreement, voting versus non-voting board of directors, etc.. We definitely can provide a lot of that value for employee ownership trust as well. As I mentioned, some of the requirements are legislative, but there's still flexibility that each company is going to have and how they set these things up. The legislation, membership of the board, how distributions are determined, as long as you fit within those guidelines and goalposts, there is flexibility.
John Stevens: [00:32:43] Like Jason said on the regular employee share plans, that's a big part of what we do in the design is work through the unanimous shareholder agreement, what needs to be in there. As you know, it's been a real trend in business, I would say probably the last ten years, for a lot of small businesses to put in place an advisory board that really helps the business go forward. With an employee trust, that's no different. Some of these independent directors, as an owner that you can get to help the employee ownership trust can be people that have good experience and bring good governance to the organization, to help the business move forward. You can look at the new board trustees and board of directors of the operating company and the trust, very similar to some of these independent boards that are put together with representation from the previous owner and or the employees, as Jason mentioned.
Munir Haque: [00:33:34] In preparation for this interview, I went to your website and you directed me to the presentation that you have that you can download there. I'm just looking at one of the sheets right now where you talk about, typically, the five parties that are involved in an ownership trust. Without having a graphic in front of our audience here, is there a way to walk us through that?
Jason Vandenberg: [00:34:01] I can start with that, and John can add anything, but we have five buckets. They're just the five parties or the five key stakeholders in any transaction. You have the shareholder or owner of the business, and they have to make the decision whether to sell to an employee ownership trust and how much to sell. You have the trust itself, which is the buyer. The corporation is also a stakeholder, that's the company that's being sold, and that company is going to be generating the cash flow going forward to pay off the owner or to pay off the debt that's taken on in order to do the transaction. The employees are a key stakeholder. They're going to be the beneficiaries of the trust as well as you're going to have employee representation on the board of trustees. Then a financial institution, which we haven't talked too much about yet today, can provide financing to pay out the owner. When the owner sells his shares to the employee ownership trust, he can do it in a vendor take back, but also the company or the trust can take a loan from a financial institution that's secured by the assets of the company, to pay out the owner up front. Or a combination of the two, which you'll probably see a lot of, is a combination of the two. Partially a vendor take back and partially bank financed.
John Stevens: [00:35:29] Just to build on that, I touched on it earlier in our discussion, but the financial institution, it could be a combination of a family office, private equity firm and a traditional bank. There's lots of banks that are showing an interest in this. Our new organization, Bank of Montreal, has a long history of providing financing to employee owned businesses and they're pretty excited about employee ownership trusts and want to get involved with providing finance. A combination of, as an example, get some financing from Bank of Montreal and a family office comes in and buys a percentage as well, you can generate a fair bit of cash to put in the owner's jeans to offset, what we talked about earlier, the disadvantage of maybe selling to a trust compared to selling to a strategic buyer through a traditional M&A process, is they can get some more cash in their jeans up front and still have that tax savings.
Munir Haque: [00:36:27] Another couple of slides that are on your website talk about the ownership trust flow of funds. There are slides that have a lot of arrows and stakeholders on them, see if you can walk us through it a bit in terms of how the the flow of funds works.
Jason Vandenberg: [00:36:46] We have a couple of examples, I think there's two slides there, but I think the one example is, let's assume a $10 million sale price. You're an individual owner selling the shares of your company to the employee ownership trust for $10 million. In this example, you have a financial institution, provides a loan of $2.5 million to the business. Then in our example here, we assume the business also has excess cash. It's been a successful business, hasn't distributed that cash, and that can be a tax advantage too, to use that cash on hand rather than paying it off as a dividend. $10 million purchase price, we take on a $2.5 million term loan from a bank, the company has $2.5 million. That $5 million gets lent to the trust, and then the trust pays the owner. Then the other $5 million is a vendor take back from the owner. That's just an example, can be a million different scenarios, but an example using a $10 million purchase price. One of the advantages and changes in legislation that came along with this is, normally if you have a loan to a shareholder, there's adverse tax consequences if that loan is outstanding for more than a year. Where with this trust legislation, you can now have a loan to a shareholder for 15 years without triggering a tax issue. So that loan can be paid off over 15 years.
Munir Haque: [00:38:15] Maybe talk a little bit more about the beneficiaries. You've mentioned it to some extent, but who can participate, and who cannot?
Jason Vandenberg: [00:38:25] For sure, we can expand that a bit more. All employees are eligible to become a beneficiary of the plan. You can have a probationary period to a maximum of one year. It can be less than that, but cannot be more than one year. If an employee has been with you for more than a year, they're going to be a beneficiary of the plan. Former owners that own 50% or more of the business are ineligible, they can never participate. Then if you currently own more than 10% of the business, you cannot participate. If you own 8% of the business, you can participate. Or if you used to own 15% of the business and you sold down to 9%, you can start to participate going forward. Those are just some of the parameters on participation.
Munir Haque: [00:39:12] How do new hires work, that probationary period? Where do you get the shares?
Jason Vandenberg: [00:39:18] There's that probationary period that's established up front for up to one year. As far as shares, important to note that in the Canadian model, which is very similar to the UK model, is they're not actual shares. They just become a beneficiary of the trust with a formula for how distributions from that trust are split amongst the beneficiaries. So there's not individual shares that an employee will actually own in the trust, they're just a beneficiary based on a formula.
John Stevens: [00:39:50] As a beneficiary they have a right to a distribution from the trust either capital or income. There's the formula of how that distribution can work, and that's built into the legislation.
Munir Haque: [00:40:06] One of the elements that makes this very enticing is this capital gains exemption and reserve. Is there more detail you can go into about that?
Jason Vandenberg: [00:40:17] I think we touched on some of this, but a little bit more detail. As John previously mentioned, it's currently in effect for 2024, 2025 and 2026, the $10 million capital gains exemption. You have to be a qualifying business, that we talked about, Canadian controlled private corporation and been actively involved in the business for the last 24 months. In addition to the capital gains exemption, there's also the deferral period. If your proceeds are being deferred in the future, the existing rules for where you could take a reserve of up to five years, and that period has been extended to ten years. You can take the proceeds over ten years and have the tax on your deferred proceeds deferred as well. The other thing to note is a disqualifying event. If the trust becomes no longer a qualifying business, or were to, for example, sell to a third party, it becomes a disqualifying event. If that happens within the first 36 months, that exemption for the $10 million capital gains is retroactively denied. That can come back to the existing owner, or at least is shared between the trust and the existing owner, depending on how they have indemnification for each other. If it's beyond the three year period, then the Employee Ownership Trust will pay the capital gains tax upon a disqualifying event.
Munir Haque: [00:41:47] How would you lose your trust status? Is that through constant reporting?
Jason Vandenberg: [00:41:53] An example would be if the active business is no longer controlled by the trust. For example, if you sold it to a third party. After two years, it would be retroactively denied. That would be a common example. If for some reason the company became inactive or was no longer a Canadian based company, those would be a couple other examples.
Munir Haque: [00:42:17] Does it limit your ability to sell your trust internationally?
Jason Vandenberg: [00:42:23] To grow internationally, I don't think there's any restrictions there. There is restrictions on how much of your beneficiaries can be international employees. So if the majority of your business and your employees became international, that could create an issue.
Munir Haque: [00:42:43] Typically when we go through my interviews, I always say that it's always easier to learn from other people's mistakes than it is to learn from their successes. In this case right now, you're still working through where those successes are, but do you see any typical pitfalls, gaps, common problems, major blunders that are happening in the industry, in this space?
Jason Vandenberg: [00:43:10] I think we both have lots of comments we could say about what what doesn't work and what works. As John mentioned, probably the biggest thing is lack of communication or effective communication. You can have the greatest designed employee ownership plan in the world, but it won't work if your employees don't understand it. We see examples of that where employees don't understand what they're being given, and they don't understand why would they stay with the company, or they don't see the long term benefits. The whole point of changing your culture or improving retention, it just doesn't work if they don't understand it. Some of the other challenges we see are economic challenges. You bring employees in as owner and then the businesses struggle, that can be a negative for the employees because they're not seeing that benefit. A reduction in the value of their shares, or in the case of an employee ownership trust, a reduction in distributions or no distributions. That's why, especially for employee ownership trusts, having a business with strong non-cyclical stable cash flows is important.
John Stevens: [00:44:21] One of the things that we think is really important as well is, it builds on a communication piece, financial literacy for the employees. Teaching the employees financial literacy, it's amazing how many employees don't understand the difference between margin and markup and what working capital is, and understanding basic expenses and revenue and ratios in terms of different things. I think building on some of that financial literacy for the employees return on capital concepts so people understand whether you're manufacturing, you're buying a new piece of machine or you're in transportation, you're buying a new tractor or trailer, what's the return on capital we're getting from this capital expenditures? That can have huge benefits, and we've seen that in the past with increasing the financial literacy with employees to understand some of these concepts. Where if you're not an employee owned company, employees, the main thing that they care about is, what's my after tax pay on my paycheck I'm taking home on Friday? I think it's a real opportunity with employee ownership plans, and with trusts, to increase the financial literacy of the employees across the organization for the benefit of the organization in the long run.
Munir Haque: [00:45:41] How have you seen that being done, is that through workshops? Any other tips that you have for the vendor and selling this to the employees in terms of that communication? Do you hire outside consultants to help you with that communication?
John Stevens: [00:46:00] We do a lot of the communication on employee share plans and the trust, but when it comes to that financial literacy piece, there was a fellow that was going across Western Canada helping businesses, doing one day workshops with the employees to increase their financial literacy. The financial literacy part, we can advise some of our clients, we haven't done a lot of that. What we help with more is on the communication piece with the employee share plan. I always like to say that, everybody wants to put together a PowerPoint slide deck these days, which is important and we do that and obviously we refer to the one on our website, but what we find with employee share plans, and this is going to follow with employee trusts as well, is one of the most important things we can put together is a frequently asked questions list. Typically with the regular employee share plan, those lists can have 30, 40 questions on them. The way I like to look at it is, you're going to do that presentation to your employees, and sometimes we help companies and we'll go do the presentation to the employees directly, sometimes the companies are comfortable enough to do those presentations to the employees, but I always say that employee is going to go home from that information session and talk to their spouse. So that frequently asked question document, every question on there needs to answer all the questions that the spouse or partner has at home about the employee share plan. It does become a really great document just to answer all the questions associated with employee ownership plan or employee ownership trust, to educate the individual on the plan.
Jason Vandenberg: [00:47:38] What I would add to that is also important to have. John and myself as advisors, we help with the communication, we'll meet with employees but also important to have internal champions that really know that employee share plan, are passionate about it. They can help answer employee questions, sit down with employees throughout the year as they have questions, just having lots of opportunity and sources of information for employees to learn and be reminded of how the plan works and what the benefits are.
John Stevens: [00:48:13] What we see with organizations is, it typically falls on a combination of the finance and HR teams. There's an HR component to it and obviously there's a finance component to it. As Jason says, having those champions a lot of times from the finance team and from the administration team, but also having a champion, whether it's a manufacturing facility, somebody out on the floor that really understands it and talks to employees. Those are some of the best folks that you can have, so that they're talking to it as a benefit and not as a negative, whether it's a trust or an employee share plan. A lot of that comes with understanding, which goes back to that communication piece and really making sure that you nail that communication piece down.
Jason Vandenberg: [00:48:58] It's part of our engagements as well. We help set up the plan, do the initial communication, but in most cases, we stay involved. We get involved every year if there's annual grants of restricted shares, for example, or if there's any changes with employees. New employees coming on the plan, employees leaving, we often get involved just to help with that administration as well as communication.
John Stevens: [00:49:21] The CEO of one we did recently, I think we're on the third year now with them that we're helping them with the plan. When we get on a call with him, he says that, and this is not a trust this was an employee ownership plan that we put in place for a very small percentage of the business, I think about 50+ employees this organization has, he says the culture change that he's seen in the two years with the organization, we wouldn't believe it. It's unbelievable how his employees now are focused more on trying to get more revenue for the business, focused on controlling costs. That was just putting in a basic employee share plan, where you're diluting maybe 10% of the business. The value that he sees in that employee ownership, in terms of value for him of the business, is tremendous. Just with a little bit of dilution, just changing that culture and educating the employees on what employee share plan is all about and making them care more about the business.
Munir Haque: [00:50:19] I'd say communication is always key, often it's more of an art than it is a science. It's good to have champions, but not everybody has it in themselves to be a champion. From my experience, that is a personality type that needs to be worked on quite a bit. Having a good understanding of what would really motivate people within the organization. A lot of it is lack of communication. Communication in general has a strong influence on people, especially in organizations where there are a number of different layers. Some of these organizations you're talking about, they vary in the structure that they have, but there's organizations out there that specifically train this in terms, it's a skill that's not project management, it's people management. HR is not always there just yet, so I think the value of sometimes bringing in people like yourselves who are outside advisors, who've seen it happen on a number of different scales and have experiences to try and draw back on and alleviate concerns as you move through different organizations.
John Stevens: [00:51:36] One of the things you need to do is tap into that informal channel of communication within organizations and find a champion within that, because there's lots of informal channels of communication that go on within an organization. That's almost as important, sometimes, as the formal channels of communication within the organization when you're trying to change cultures.
Munir Haque: [00:51:59] I've seen in some instances where, you'd have a sponsor, which might be an owner or vice president or something like that, who's sponsoring this communication, but then you have somebody who's on the floor who is managing that communication. They've got the ear of the people, but it also needs that higher level input from the sponsor to show that, this is a legitimate communication that's going out and the owners have a vested interest in moving plans like this forward. Thanks a lot for the discussion today. I've learned more about employee trusts than I ever thought I would. That being said, I only know what I know, you guys are the experts. I'm out of questions here, but I want to leave it to you. Is there anything else that you'd like to talk about with regard to the ownership trusts or the ownership plans?
Munir Haque: [00:52:59] Maybe not at this moment, but there might be some opportunities to work together with you as you set up some of these ownership trusts. To have an organization like us come in and help with that governance aspect. Especially as they mature, whether they're having more issues with their protocols, or their ability to make decisions. When you're working with the ownership trust, a lot of the people on it may have never served on a board before. Some of the protocols around being on a board are different than if you're just in a work meeting. It takes a little bit of getting used to, and it takes a lot more planning to make sure that the decisions are all made. Culturally, everybody's probably on the same page, but you also need to be able to remind them that they're on the same page all the time, too, and help them make the decisions. Making sure that they're making the decisions based on the, not the right criteria, but these situations, you get a bit of information overload when you're making decisions. You need to understand what kind of decisions the board needs to make and which ones they don't.
John Stevens: [00:53:39] We didn't touch on it, but it's one of the things that I say a lot with employee share plans is, that there's a difference between your role as an employee and your role as an owner of the corporation. Obviously, you can say that as well for the employees that are going to be trustees on the employee ownership trust. There's your role as a trustee for the employee ownership trust, and your role as whatever you do for the organization, whether you're a supervisor or manager or whatever that may be. I think we did a good job of covering aspects of the regular employee share plan as well as employee ownership trusts and how it can affect and change a business from a culture perspective. We've seen that example of that time and time again, both in the US and in Canada, that it creates a great culture for the right business. I think we did a good job of touching on a lot of those things, so thank you.
Munir Haque: [00:54:16] Where can our listeners find out more about you? If you want to give us your website, and I mentioned earlier that this presentation is on your website, so if you provide us the links, we'll put those into the show notes.
John Stevens: [00:54:28] Our website is camillagroup.com, and there's a section on employee ownership trusts where the presentation we referred to a couple of times today, you can download that presentation, take a look at it. Our contact information is on there if you have any questions on it, feel free to reach out to us. Camilla Advisory Group on LinkedIn, go give us a follow on LinkedIn as well. Those are the two main places that you can find us. We're pretty passionate about this stuff and happy to answer any follow up questions your listeners may have. We're grateful that you gave us the opportunity to come on here today and talk about employee ownership trusts.
Munir Haque: [00:54:56] Thanks, John and Jason, for joining us today.
John Stevens: [00:54:59] Thank you.
Jason Vandenberg: [00:54:59] Thank you very much.
Munir Haque: [00:54:59] Thanks everyone for listening to The Boardroom 180 Podcast. You can learn more about me and Action Edge Executive Development on our website at aeednow.com. Fill out the form if you want me to reach out to you, or if you have any thoughts for future subjects or guests on the podcast. We also have a free board self-evaluation that will be linked on our website. You and your board can fill this out either individually or together, and it gives you a bit of a quick temperature check on how your board health is. As always, don't forget to hit like and subscribe to The Boardroom 180 Podcast. It helps us grow and bring more governance insights. We're recording from the Pushysix Studios in Calgary, Alberta, with production assistance from Astronomic Audio. You can find their info and the links to the AEX forums in the show notes. We've come full circle to conclude this episode of The Boardroom 180 Podcast. Goodbye, and good governance.