Steward Ownership

Steward ownership serves as the gold standard for imbedding purpose into a company’s DNA, preserving its mission over the long term.

With steward ownership, economic and voting rights are decoupled, leaving control over the firm in the hands of stewards of its mission.

Doing so turns the dominant model of ownership on its head.  Investors are no longer owners — companies own themselves and are controlled by stewards of its mission — investors simply have economic rights.

Steward Ownership Essentials:

"Steward ownership" is a brand for a corporate governance structure that has been arrived at many times independently. It is particularly prominent in Denmark where many firms are owned by foundations.

Many ways to structure, all defined by two principles:

  • (1) Self governance: control stays within the company
  • (2) Profits serve a purpose: profits serve the mission of the company, wealth generated can’t be privatized, profits used to invest in co, repay investors, shared with stakeholders, or donated.
  • Model decouples voting rights and economic rights completely
  • Less radical than it sounds. Dual class shares don't decouple economic and voting rights, but they give differential voting rights to company founders vs. other shareholders
  • Snapchat class A shares had no voting rights, essentially equivalent to steward ownership in so far as it stripped investors of control

Addresses two key questions, both related to incentives:

  • How can you ensure that the people in control have the right incentives, aligned with the company's purpose?
  • How can you ensure outcomes fairly benefit all stakeholders while appropriately rewarding risk taking for entrepreneurs and investors?

Avoids issues with other governance structures:

  • Co-ops: economic incentive issue, still see company as a commodity that can be sold to benefit its members
  • Public Benefit Corps: entrenches a commitment to purpose in legal documents and shifts fiduciary responsibility of the directors from shareholders to stakeholders, but doesn’t change the fundamental power structure of the company
  • Dilution of company’s mission at liquidity event: if a steward owned company is a position where it needs to sell, proceeds from the sale are locked into the structure and would go to furthering the purpose of the company

Structures to accomplish steward ownership:

  • Golden share: among three types of shares, steward-shares, non-voting preferred shares, and the golden share, the golden share has right to veto all decisions that would undermine a commitment to steward ownership, held by a veto-service foundation
  • Trust-foundation: separates voting rights and dividend rights completely by placing them into two separate legal entities: dividend rights in a charitable entity and voting rights in another legal structure (Patagonia's model)
  • Single foundation: business owned by self-governing nonprofit, run by two boards -- corporate council w controlling rights and charitable board with rights to distribute dividends to charitable causes.
  • Trust-Partnership: trust owns 100% of the company for the benefit of the partners (usually employees)
  • Perpetual Purpose Trust: Non charitable trust established for the benefit of a purpose rather than a person; may operate indefinitely.  Lots of flexibility in how to structure it; can include multiple stakeholder groups. Dominant structure in the US.

Current financing landscape:

Early stage traditional ventures are not well equipped for mission driven companies

  • Based on injecting large amounts of capital that can be recouped at a liquidity event (IPO, acquisition)
  • High failure rates necessitate returning 10x of successful investments to make up for failures (power law distribution)

Mature companies lack access to long term and patient capital

  • Private equity firms: make money by cutting cost, maximizing profits, and reselling companies to other firms -- in deep conflict with values and mission
  • Public markets: bring quarterly earnings pressure, speculative investors, and activist shareholders that all prioritize short term earnings over long term mission and strategy

Innovative financing models that work with steward ownership structures:

  • Non-voting redeemable preferred equity: Redeemable shares can (sometimes must) be repurchased by the company at a predetermined valuation, either gradually or at a fixed maturity date
  • Equity-like debt: Unsecured loans subordinate to other debt, therefore can act like equity on a company’s balance sheet.  Lots of flexibility for how terms are structured
  • Demand dividend: preferred equity share that requires a company to make periodic payments to investors based on a percentage of its available cash flow, usually until the investors have achieved some predetermined return – i.e., the “total obligation”  
  • Revenue/royalty share: operating revenue shared with investors to repay them, typically set a predetermined return on investment
  • Equity investments with structured exits: path to liquidity explicitly structured into the deal terms, vs reliant on an unidentified acquisition or IPO, e.g. annually using % profits, at end of a defined term through refinancing

Outcomes / Evidence:

  • Returns: outperforms traditional for profits in profit margins, less volatile returns
  • Resilience / longevity: more resilient during economic downturns; 6x more likely to survive over 40yr vs. conventional companies
  • Better for workers: higher wages, better benefits, lower attrition, increased productivity and social cohesion, less likely to downsize during a downturn
  • Denmark study: The Governance of Foundation-Owned Firms study of 110 steward owned Danish firms, best evidence on this model.  In Denmark the combined market capitalization of steward-owned corporations represents 60% of the entire value of the Danish stock market index.
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