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Corporate Governance

Corporate governance in Virginia

Corporate governance is the system of rules, practices, and processes by which a company is directed and controlled.

It balances numerous interested stakeholders, such as shareholders, executives, customers, suppliers, financiers, governments, and the community.  It includes areas like the environment, ethics, and compensation.

A strong corporate governance puts your company in the best light before potential investors, who seek responsible and serious investment opportunities.  Strict adherence to corporate governance leads to more confidence in the company, which strengthens its financial sustainability.

Many owners of newly formed small companies are overworked and understaffed. They start taking little shortcuts in order to save time.  They don't follow their own rules.  These harmless shortcuts start adding up.  In time, this might come back to hurt them with stakeholders, especially with future investors. 

Attorneys can act like internal auditors for legal and ethical issues. 

Which company would investors likely choose:  a company that has an attorney watching it like a hawk or a company with no such internal legal regulator?  

A large part of corporate governance involves the “fiduciary duties” of directors and officers.  A fiduciary duty is a commitment to act in the best interests of another person or entity.  It is a duty of loyalty and a duty of care.  A fiduciary must act only in the best interests of that entity (company) and must act diligently in those interests.  This seems straight-forward but it is not.  In fact, it is highly contentious, and there are well over 100 years' worth of caselaw that attempt to define what these terms mean. 

The three primary responsibilities of directors are as follows:

  1. Fiduciary duty
  2. Duty of loyalty and of fair dealing
  3. Duty of care

Fiduciary duty

Shareholders place their trust in directors to act in their best interest. Directors do this by acting ethically and within the law, and through exercising integrity and competence in attempting to enhance corporate profit and shareholder gain. Shareholder gain implies everything that contributes to building a strong and valuable company, even to the short-term financial detriment of its shareholders. For example, directors may expend funds in philanthropic ventures.

If a corporation is not performing well, its directors must implement some change. Directors who do nothing or who oppose new directors, when a corporation suffers losses year-after-year of, may not be acting in the best interest of the corporation.   

Duty of loyalty and of fair dealing

Directors must put the interests of the corporation before their own. All transactions must be transparent. Although it may seem obvious, directors cannot compete with the company. However, they may be allowed to do so if the corporation believes that the predicted benefits of the director serving outweighs foreseeable harm.

Directors should not use their position to make a personal profit or to gain personal advantages at the expense of the company. They may take advantage of corporate opportunities only after they first offer the opportunity to the corporation, reveal their interest in the opportunity, and the corporation rejects the opportunity.

Duty of care

Directors are legally required to act with the care reasonably expected of an ordinary prudent person. That means that directors have the duty to be informed. While directors have the power to delegate their functions, they are ultimately responsible for oversight and supervision.

In order to properly supervise, directors must set standards by establishing policies of ethics and disclosures. These internal controls must be reviewed by the audit committee. Directors must also decide in advance which policies will require board approval and what information the board must receive.

Directors must ask management meaningful questions. Directors who remain ignorant are abiding by their duty of care.

Directors must follow these three responsibilities while maintaining the four basic pillars of corporate governance: accountability, transparency, fairness, and responsibility. But having a solid corporate governance is not enough.  Your company must communicate it to all stakeholders.  

How exactly can I help?
1. Explain corporate governance to your board.
2. Ensure that your company strictly complies with its bylaws and all other legal and ethical requirements.
3. Assist with your internal legal and ethics auditing.
4. Review and amend internal documents to promote compliance while keeping in mind the needs and expectations of stakeholders.
5. Perform a legal analysis on whether an act of the board or individual director violates any ethical duties.
6. Recommend changes.
7. Assist with the search, selection, and recruitment of directors.
8. Communicate your success to some or all stakeholders.

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