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The Importance of Corporate Governance

Posted by Patrick Ivy | Feb 08, 2021 | 0 Comments

For small businesses, corporate governance is critical. Not only is it important to ensure smooth business operations, but it is also necessary to ensure fairness to shareholders and integrity among management. Establishing processes and procedures for directors and officers of a business helps ensure that they make decisions fairly and consistently. This allows the business to operate ethically and transparently, and it also helps minimize legal risks, which can be particularly important for small businesses.

At Newburn Law, P.C., we work to understand our clients' specific needs and help them draft corporate governance charters that make sense for their business. A solid governance plan can help minimize risk and ensure your business is set up for success. Contact us today at 303-847-4987 to set up a meeting to discuss your business needs.

What Is Corporate Governance?

Corporate governance refers to how a corporation is organized, including the rules and procedures for decision-making. Generally, the board of directors is the group primarily involved in governance-related issues. An organization's governance documents may include:

Governance plans should address issues such as:

  • The corporation's mission
  • How the board of directors is structured
  • How decisions are made
  • Subcommittees
  • How to communicate with shareholders
  • When and how the board or shareholders will meet

Even for small businesses, corporate governance documents are important. Small businesses, like start-ups or family-owned businesses, should still set forth standardized procedures for decision-making and determine the roles and responsibilities of each board member.

Why Are Corporate Governance Documents Important?

Corporate governance documents are a corporation's Bible. They are essentially a set of rules to guide the business's management on how to operate the business on a day-to-day basis. This is of course important for large public companies to ensure they manage the business consistently, but it is almost more critical for smaller businesses.

Independent Board of Directors

Small businesses are often closely held, where the managers and shareholders are generally the same people. In these cases, the decision-making process may become convoluted as roles and responsibilities blur together. Good corporate governance helps establish an independent board of directors that can focus on the strategy of the company and make important decisions about the company's future. Corporate governance allows small businesses, where ownership and management are often commingled, to share authority and responsibility, hold management accountable, and have meaningful discussions about what is best for the company.

Minimizing Risk

Corporations are in the business of managing risk. While taking business risks is a natural part of running a company, poor governance can harm business operations and open a corporation to legal liability. For example, a good governance plan should include provisions for internal audits to gauge how the company is performing and correct course if necessary. If the company repeatedly fails to identify and correct mismanagement and poor performance, not only will profits suffer, but shareholders may be able to sue the corporation. A poor governance structure may also fail to detect - or even intentionally perpetuate - illegal conduct, such as fraud, subjecting the corporation to civil fines or even criminal penalties.

Building Trust with Investors

A corporation's investors are its lifeblood. Well-drafted and executed corporate governance documents show investors that a company is organized, transparent, and trustworthy. At the end of the day, the board of directors owes a primary duty to shareholders to make decisions in their best interests. Investors want to know that their money is being spent wisely and in a way that will grow the business and increase profits. When considering where to put their money, an investor is more likely to choose a corporation that clearly outlines its mission, vision, roles, responsibilities, and procedures, rather than one with a less robust corporate governance charter, or none at all.

Importance of Corporate Governance for Small Businesses

For many small businesses, keeping the business running is a challenge in and of itself. You may be more concerned with the daily operations of your business rather than long-term strategy or conflicts of interest. Nonetheless, corporate governance is extremely important, even for small businesses. 

Small Business Stakeholders

Even if a small business does not have to deal with shareholders in the traditional sense, they still likely have numerous stakeholders to communicate with, such as partners and investors. A corporate governance charter should lay out how and how often stakeholders will receive communications about the company's performance and major decisions.

Growth of Small Businesses

As a company grows, it begins to face more and more challenges. The sooner a company lays out its internal governance plan, the more smoothly it will be able to grow and expand. As companies hire more employees, they become subject to countless laws and regulations that require internal auditing and financial reporting. A solid corporate governance plan may help identify procedures for complying with these regulations to avoid costly penalties. 

Merger or Sale of Small Businesses

Finally, small businesses may want to merge or sell at some point, at which point a potential buyer would want to inspect the corporate governance structure to ensure that they are inheriting a well-oiled machine. When there are multiple owners of a company, there needs to be a procedure set forth in the governance plan about how to decide on a merger or acquisition, or else default rules will apply.

Discuss Your Company's Governance with an Experienced Business Lawyer

At Newburn Law, P.C., we believe in the importance of corporate governance documents, especially for small businesses. We have helped many clients develop a governance plan that is unique to their business. Contact us at 303-847-4987 to set up a meeting to discuss your company's distinct needs, and allow us to help you establish a governance plan that will encourage independence, integrity, and transparency.

About the Author

Patrick Ivy

Patrick is a native of the Texas Hill Country. He attended The University of Texas at Austin, earning his undergraduate degree in finance in 2003 and his law degree in 2007. In the winter of 2010, he relocated to Denver, Colorado. He enjoys spending time with his family and alpine skiing.

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