Corporate governance broadly refers to the mechanisms, processes and relations by which companies are controlled and directed. For a corporation, corporate governance typically refers to the decision-making processes by officers and a board of directors, and, to a more limited extent, shareholders. For LLC’s, members, non-member managers, a board of directors, or a combination of these roles may be involved in corporate governance as designated in the company’s operating agreement. To simplify our discussion about corporate governance, our San Diego business lawyers refer to all such individuals as “managers” or “management”. Common methods for addressing corporate governance issues include:
1) Meetings of board of directors or managing members to address relevant legal issues facing the business;
2) Drafting and implementing policies and procedures to ensure compliance with applicable laws and regulations (including employee policies);
3) Devising methods for communicating with shareholders or non-manager members; and
4) Designating individuals to address corporate governance and risk assessment issues;
5) Implementing a succession plan for the business in the event of death or disability of one or more member of management.
Despite their best intentions, our San Diego business lawyers find that many small business managers neglect corporate governance issues, believing that such activities are not cost-effective since they don’t generate revenue for the company. Unfortunately, neglecting to properly address these critical legal matters can lead to a myriad of costly problems for a business. Some of the consequences our attorneys have witnessed involve:
1) Penalties and personal liability of owners/managers. Failure to abide by sound corporate governance practices, some of which are mandated by the state corporation’s code and business and professions code, can lead to a myriad of monetary penalties. It can also expose the company to the risk of lawsuits and expose managers to personal liability for company debts, essentially making management guarantors of any company debts;
2) Limited access to new capital. Without documentation of regular meetings by management, the company lacks important evidence that it has been well-managed, with a clear direction for sustainability, causing investors to avoid investing in the company because they believe it is too risky;
3) Potential for dissolution of the company if a key manager dies or is incapacitated;
4) Lack of shareholder confidence. Sound corporate governance practices typically lead to significantly higher shareholder confidence in the company and its management, which makes the company more marketable, reduces exposure to shareholder lawsuits, and generally thwarts the potential for disputes;
5) Negative company image in the community. This speaks to the intangible “good will” element that is important to many companies. Without good corporate governance, companies often develop a reputation for being poorly managed or unreliable;
6) Employee/customer criminal activity/corruption. Without sound governance, which typically results in sound policy-making and better oversight of the company’s operations, even one corrupt employee can potentially take down a small business;
7) Lawsuits initiated by employees. Employment-related lawsuits are a huge drain on any company and which are commonly seen by our San Diego business litigation attorneys. They are much more likely to occur where management has not implemented appropriate employee policies, ensured compliance with wage and hour laws, and trained their staff.
If your business needs a corporate governance tune-up, it is recommended that you contact an experienced San Diego business law attorney sooner rather than later. While spending time on such issues may not seem as important as generating revenue, failing to address these matters can and does contribute to the demise of small businesses every day.
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