Why employee-owned businesses must review governance roles now
Employee-owned businesses (EOBs) rely on clear governance to balance the interests of employees, trustees and company directors. Following the 2026 Privy Council court decision in Re the X Trusts, EOBs should review whether their governance documents clearly define the role and powers of any employee council.
Employee-owned business governance explained
EOB governance commonly involves: the company board, the trustees of the employee ownership trust (EOT) and the employee council or committee.
Each has a distinct role. Problems arise when those roles overlap or when one body is given approval or veto rights without guidance on how those rights should be exercised.
The trustee board
Trustees’ duties derive from the EOT trust deed and trust law. They own the shares in the company for the benefit of eligible employees and must act in beneficiaries’ best interests.
Their fiduciary duties require good faith, loyalty, openness and honesty.
Trustees oversee the company but are not responsible for day-to-day management. They rely on briefings from the directors and, where relevant, input from the employee council.
The company board
Directors’ duties are largely governed by company law. They must act in the company’s best interests and manage the business day to day, including commercial and personnel matters.
The employee council
The employee council may also be called an employee advisory board, colleague council or partners’ board. It provides employee representation and connects the trustees and directors with the wider workforce.
Directors can use it to share information; employees can use it to raise ideas, concerns and sentiment.
There are no statutory rules for employee councils, so their constitution or terms of reference are critical.
They may, for example, have rights to:
- Appoint or remove employee trustees.
- Input before significant corporate transactions.
- Approve amendments to governance arrangements.
- Veto the sale of the company's shares.
The impact of Re the X Trusts
Re the X Trusts was not an EOT case, but it is relevant where an employee council has approval or veto rights similar to those of a trust protector.
The issue was whether a protector, who needed to consent to certain transactions proposed by a trustee, had a narrow, supervisory role or a wider, fiduciary role. A narrow role would be limited to checking that trustee decisions are lawful and reasonable. A wider role would require independent judgment on whether consent should be given.
The Court supported the wider role: a fiduciary protector is not merely a ’watchdog’. Where documentation is silent, a consent power may require the protector to form its own properly informed view.
Does this matter for employee ownership trusts?
Re the X Trusts concerned different trusts and is persuasive, rather than binding, in the UK. However, the reasoning may matter where an EOT employee council has powers to approve, block or influence trustee decisions.
For example, if trustees receive an offer to sell the trading company and the employee council has a veto, must the council simply check that the trustees’ decision is reasonable, or must it reach its own view on whether the sale should proceed?
If the documents do not answer that question, the council and its members may face uncertainty about their duties, decision-making standards and potential liability.
What should employee ownership trusts do?
EOTs can reduce the risk of dispute by making the employee council’s role explicit. Here are five suggestions:
- State whether the council is advisory, supervisory or a decision-maker with its own discretion.
- Review the trust deed, council constitution and any terms of reference for clarity.
- Where documents are silent, consider clarifying the intended relationship between the council, trustees and directors.
- Train council members so they understand their role, responsibilities and decision-making process.
- Consider whether indemnity arrangements are appropriate for council members.
Careful drafting should reduce future disputes and provide greater certainty, particularly during major corporate events.
The broader lesson from Re the X Trusts is that governance documents should evolve as the EOB grows and the people involved change.
EOTs should review their arrangements now, before uncertainty becomes a dispute. For help in evaluating your documentation, contact Fiona Bell in our share plans and reward team.