Establishing a legal structure for your business is more complex than many people understand. Formation documents such as the corporate bylaws set up methods by which decisions are made, agreements entered into, profits reinvested or distributed and other key elements of operation. The questions to be answered in creating these documents range from basic, concrete questions like “how many members will sit on the board?” to more complex choices regarding the level of autonomy granted to various parties.
Complex Questions in Establishing Corporate Governance and Compliance Structures for Businesses
Although it may not be immediately obvious to those without significant experience in the corporate governance arena, even those most basic of these questions has a significant impact on the operation of the organization.
For example, the question as to how many voting members will sit on the Board may seem like a purely technical question. Often, those forming new corporations lean toward basing the answer to this question on the number of existing stakeholders they envision sitting on the board. However, the number of voting members of the board will impact:
- The complexity of meetings and ease of or difficulty in reaching a consensus
- The ease or difficulty of achieving a quorum at meetings
- The flexibility to form committees versus the need to present issues to the full board
- The need for a proxy voting system
- The board’s ability to continue effective operations if one or more board members unexpectedly resign or are removed
Those are just the key considerations associated with answering one question with regard to corporate formation–perhaps the most basic question involved.
Balancing Goals in Corporate Governance and Compliance
As the issues to be decided become increasingly complex, it is important to balance the organization’s ability to operate efficiently with checks and measures to protect the corporation and its shareholders. Without sufficient delegation, the operation could grind to a halt as key decisions awaited full board approval. On the other hand, without sufficient oversight, a delegee such as the corporation’s CEO could take significant steps in the wrong direction, endangering the corporation’s solvency or even creating significant liability.
The right balance between flexibility and oversight will vary depending on a number of factors, including the size of the organization, the industry in which the corporation is operating, the number of stakeholders and applicable government regulations.
Core Elements in Corporate Governance Documents
Although specifics may vary based on the factors above and others, there are core documents that must be created, questions that must be answered and responsibilities that must be defined for every corporation. While the corporation is actually formed with Articles of Incorporation and Operating Agreements, Shareholder Agreements and other documents that may play a significant role, the corporate Bylaws provide the foundation and basic structure for the organization’s operations.
Key questions to be answered in the bylaws include:
- How many Directors will be appointed, and what roles will they play?
- How many Officers will be appointed, and how is the position of Officer defined?
- For how long will Directors and Officers serve, and may they serve consecutive terms?
- What will the qualifications be for Directors and Officers?
- How will new Officers and Directors be installed?
- Under what circumstances may an Officer or Director be removed, and by what process?
- What will constitute a quorum for making decisions, and what percentage of the vote will be required to carry?
- Will different quora or percentages be required for certain types of actions?
- Which types of actions must be approved by the board, versus delegated to an executive?
- Will the board make use of committees, and if so will those committees be delegated decision-making power within their own arenas?
- How will shares be issued?
Of course, each of these questions carries with it the same type of detailed analysis set forth with regard to selecting the number of board members above. Without the right guidance, it is easy to make mistakes that may impact the operation of your business in ways unanticipated.
Experienced Corporate Attorneys Can Be Your Best Resource
One element of operating a successful business is knowing when to delegate or to seek outside expertise. When you are taking the all-important step of creating the structure that will govern your corporate operations and ensure that those acting with corporate authority understand and follow the rules, it is more important than ever that you get the help you need.
Our corporate lawyers have the experience to guide you through the process of creating governance and compliance structures, ensuring that you do not overlook key issues and that the resulting structure is designed to maximize the effectiveness and compliance of your particular organization.
