Corporate Governance Best Practices

In three previous posts (links below), I reviewed the standard of conduct of corporate officers and directors, as well as the duties owed by shareholders in a closely-held corporation. I want to conclude this series with some best practices that owners, directors, and officers can follow to help in meeting these obligations.

In general:

• Leave a paper trail of corporate governance. I have written before about the risks in avoiding what many disclaim as mere “corporate formalities.” Even if you are a single member LLC, document the actions you take as a governor of your company.
• Obtain Directors & Officers (D&O) insurance coverage, to cover damages arising out of a lawsuit brought against a director or officer in connection with the performance of his or her duties.
• Establish a Code of Conduct and Conflicts of Interest Policy, and require each director and officer to sign an acknowledgment that he or she read and understands the document.

The Board should be actively engaged in guiding the company and making decisions:

• Meet regularly.
• Approve major corporate actions (such as entering into a new office lease).
• Present a meeting agenda and the documentation necessary for directors to make an informed decision.
• Provide an opportunity for directors to ask questions and provide input.
• Do not rush decisions or use the Board to merely rubber stamp corporate actions.

Owners of a closely-held corporation face the challenge of wearing several hats – shareholder, officer, and director. It is still critical to document major corporate actions, even if the documentation is a combined written action by “John Smith, Sole Shareholder and Sole Director of XYZ, Inc.”

This is only a partial list of best practices, and many comprehensive materials are available online for companies and their directors and officers to review. The main take-away here is to remember that even in the smallest companies, the directors, officers, and shareholders are bound by certain statutory and common law duties that cannot be ignored, and each person in these roles should be familiar with the applicable duties.

Related posts:

• Standard of Conduct of Corporate Directors
• Standard of Conduct of Corporate Officers
• Shareholder Duties in a Closely-Held Corporation