Here are some boardroom basics for entrepreneurs who want to set up a corporation but have no experience with corporate governance:
Most major decisions relating to the operations of a corporation are taken by its board of directors, which bears the primary responsibility for protecting the corporation’s assets and carrying out its mission. Sometimes particular decisions are delegated to officers of the corporation, but in such cases the delegation should be specific and board should be apprised of the results of such decisions.
Unless so provided in the articles of incorporation or bylaws, the board may form committees, such as finance or audit committees, and may authorize them to carry out certain functions of the board. Delegation to a committee does not, however, relieve the board members of their responsibility to the corporation. The board acts by voting at its regular or special meetings. Typically, the bylaws will describe the percentage of directors’ votes needed to approve an action and the requirements for a quorum. In most corporations a majority of the directors is needed for a quorum and, if a quorum is present, a majority of those present can approve an action. If the bylaws do not cover these voting requirements, the laws of the state of incorporation will govern. Generally, state corporation laws require a majority of the directors for a quorum and majority of those present to approve an action.
The articles of incorporation or bylaws may permit meetings to be held via telephone conference or other electronic means. Each director has one vote, and voting by proxy is generally not permitted. The articles of incorporation or bylaws will specify how muchadvance notice of meetings must be given to board members and the means by which notice must be given. Again, if the articles of incorporation or bylaws do not provide this notice requirement, it can be found in the applicable state law. A vote cannot be taken on a proposed action unless it was included in the agenda, absent a waiver of all directors of the advance notice requirement.
The minutes of board and committee meetings document the actions taken and provide an official record that the formal requirements for action (notice, quorum, etc.) were satisfied. In general, the minutes will include:
- the name of the corporation;
- the date, time and place of the meeting;
- members present and absent (including which ones qualify as independent directors);
- who called the meeting to order and who kept the minutes;
- all motions made and the results of all voting; and
- when the meeting ended.
Minutes will be prepared by the secretary, who is appointed by the directors but need not be an employee of the coporation, or by other authorized person and presented for approval at the next meeting.
Matters To Be Covered in Minutes
Aside from the factual matters specified above, the actual substantive content of the minutes require judgment, because meetings may be lengthy and include discussions of many issues. In general, it is usually not desirable to create a detailed record of all discussions, but rather to include only information sufficient to show that the members acted reasonably in coming to decisions. The minutes of board meetings also should provide evidence of compliance with other good governance practices, which include:
- Discussion of any possible conflict between the personal or professional interests of a director and the interests of the shareholders, and, if appropriate, a notation of the abstention of a director with a conflict of interest on the voting for any relevant actions;
- Approval of related party transactions between the corporation and its officers and directors;
- Approval or ratification of all major contracts and transactions;
- Status of and issues involving the corporation’s regulatory and tax compliance and risk management policies; and
- Board review of the corporation’s financial condition, compliance with debt covenants, and cash flow projections, with special attention to any threats of insolvency.
The board of directors should have an appropriate number of members to conduct effective oversight. A board with too few members may not have sufficient resources for proper oversight. With an overly large board, individual directors may have less sense of responsibility for overseeing financial affairs of the corporation.
Not only the size of the board, but also the existence and the number of independent directors, has become more important. Inspired by SOX related reforms for public companies, having a majority of independent directors on a board is considered sound practice because it is viewed as evidence that the board has the ability to make independent decisions that are in the best interests of the shareholders.
A director’s independence generally means that the director does not receive compensation from the corporation other than as a director, is not affiliated with management and has no personal interest in a specific transaction.
The existence of a personal interest may influence a transaction directly. For example, there is a risk that a director who supplies goods or services to the corporation may be awarded a contract on terms more favorable to the contractor (and accordingly, less favorable to the corporation) than the terms that would be obtained from an unaffiliated third party. There is also a risk that the director’s judgment may be influenced, consciously or otherwise. For example, that director may not voice his or her dissent to improper board actions for fear of losing a customer.
To guard against these risks and the appearance of improper decision making, it is deemed good governance practice to have independent directors on the board and also to institute a conflict of interest policy so that directors with personal interests in specific transactions are excluded from decision making on those matters and there is documented objective evidence of the fairness of the decision making process. The underlying rational for this principle is that independent and non-management board members are better situated to exercise objective and unbiased judgment in board decision-making and therefore can enhance the board’s ability to oversee the operation and management of the corporation and to make ethical decisions in the best interests of the corporation. In any case, each member of the board of directors of a corporation, whether or not he or she is independent, should understand and fulfill the board’s obligations by objectively evaluating the materials and information provided to him or her, overseeing financial matters of the corporation, and making decisions in the best interest of the corporation’s shareholders.
Complete and accurate financial statements are essential for a corporation to fulfill its legal responsibilities and for its board of directors to exercise appropriate oversight of the corporation’s financial affairs. Thus, a board that does not have members with financial expertise should retain a qualified accounting professional to review the corporation’s financial statements. Most small corporations do not have their financial statements fully audited by an independent accountant. Instead, they use an independent accountant only to review or compile the financial statements. This independent accountant can be a valuable source of information for board because he or she can discuss new developments, underlying trends, and any amounts appearing in the financial statements that are outside industry norms.
Policies and Procedures to Ensure Sound Financial Management
Assuring sound financial management is among the most important responsibilities of the board of directors. The board should establish clear policies and procedures to protect the corporation’s financial integrity.
While day-to-day accounting and financial management should be delegated to management of the corporation, the board should receive regular financial reports, either monthly or quarterly. The reports should show budgeted and actual expenditures as well as budgeted and actual revenues. By carefully reviewing the regular financial reports, the board will be able to determine whether adjustments must be made in spending to accommodate changes in revenues. The board of directors should also review and approve the corporation’s annual budget and should monitor actual expenses and performance of the corporation’s financial assets against the budget to determine whether the corporation is allocating its funds appropriately. Prudent financial oversight requires that the board look beyond periodic financial reports to consider how the corporation’s current financial performance compares with that of previous years and how its financial future appears. If the corporation’s net assets have been declining over a period of years, or if future revenue seems likely to decrease significantly, the board may need to take proper steps to achieve or maintain the financial solvency of the corporation.
The Corporation Secretary