Hello, and welcome to my new web site. I will be using this space to discuss and present my take on various issues relevant to the North bay business community from a legal perspective. I hope to invite guest contributions over time as well, as I have gotten to know so many skilled professionals over my years in the region. Let’s hope a bit of collective wisdom can be of use to those visiting these pages, particularly since we all know how difficult it is for businesses in these times to afford the panoply of professional services they should ideally have access to.
For my first topic, I want to take a closer look at the basic structures of corporate governance. I give you:
Corporate Governance 101
As a fictional “person,” a corporation cannot do anything for itself, but must act through its duly authorized agents – human beings, in other words. For the rest of the world, it is important to know who these authorized agents are, because (in general) only such an agent can commit the corporation to legally enforceable responsibilities, such as contracts. So, how do we know who is a duly authorized agent? Corporate law gives us a template to figure out what we are dealing with.
We know that every corporation will have a board of directors. The board is a group of individuals who share the ultimate authority and responsibility for management of the corporation – as a group. The board has a legal duty to manage the corporation in the best interests of what may loosely be termed the beneficial stakeholders of the corporation. In typical for-profit stock corporations, these are the shareholders; in non-profits, this may be a membership group (for example, a chamber of commerce), or the general public.
Because the board is only empowered to act as a group (usually by majority vote), it is poorly suited to the task of carrying out real-world actions on behalf of the corporation. It is intended as a deliberative, policy-making body, not an executive one. Therefore, as a practical matter, the board must specifically authorize individuals, whether members of the board or not, to act for the corporation. This can be done on a piecemeal basis for specific actions, but in general corporations find it efficient to delegate broad authority to one or more individuals so that they may carry out the daily management of the business. This is the role foreseen in the corporate law by officers.
The officers, then, are the duly authorized agents through which the corporation acts. Since the designation of an individual as an officer can generally be relied upon as empowering that individual to take action within his/her particular sphere of responsibility, this makes it a little easier for the rest of us to know what is going on. Usually, officers have a great deal more involvement with the management of the corporation than the directors do.
The officers are not, however, agents of the board, but agents of the corporation. It is the board’s duty to select the officers, to set goals for them, and perhaps to set limits to the scope of their authority, but the board is itself doing so on behalf of the corporation. The relationship between board and officers is perhaps analogous to the relationship between a manager and an employee – that employee is not there to be a personal servant to the manager (unless such a role is in fact what the corporation’s business requires), but to serve the corporation.
A simplified view of these relationships is depicted here:
It is largely irrelevant to this basic structure whether or not any given individual may be a director and an officer concurrently (or even a shareholder/member). They are separate functions, and one person may carry out both if doing so would not endanger the ability of the corporation to function efficiently and ethically. Certainly there will be instances where the two must be separated, as for example in a discussion of the employment status of an officer-director, but this should not be hard to do with a straightforward conflict of interest policy.
It is of course critical to be clear about whether an individual is or is not an employee of the corporation, a topic for a future post. However, although the employment status of an individual who also happens to be an officer and/or director will have an important effect on how these roles play out, it is also an independent status. Thus, in logical terms, director, officer and employee of a given corporate entity are three independent binary variables, with any combination both theoretically and practically possible.
Since the law permits any combination of roles to be held by an individual, it falls upon the board to consider carefully whether there should be any particular limitations on such combinations, and define them in the corporation’s bylaws.