GOVERNANCE
The Three Words
of Corporate Governance

BY MATT DONOVAN

Quick—think of three words relating to corporate governance. How about shareholder, director and officer? Good choices. Virtually everyone can give some sort of definition for each of these words. Fewer, however, can explain the differences between them, or how they relate to one another.

Because many family businesses are corporations, the distinctions are important. Under state law, most corporations must have shareholders, a board of directors, and officers. In practice, these roles are often blurred together.

This is especially true when the same people dominate all three roles. However, in addition to the legal reasons, there are practical reasons for family businesses to understand the differences and the interrelationships between each role.

Here's a Brief Primer:

Shareholders
Shareholders own the company. They act through shareholder meetings and are responsible for making extraordinary decisions, such as whether to sell the company. Shareholders elect members to the hoard of directors, but do not necessarily have the right to appoint themselves as a director or officer of the company.

Director
Directors represent the shareholders in the management of the company. They are primarily responsible for the strategic vision of the company, and act through board meetings. Directors have duties of loyalty and due care to the company and all shareholders. They hire and oversee the officers of the company.

Officers
Officers run the day-to-day operations. They report to the board of directors, and receive their authority from the board. Officers have duties of loyalty and due care to both the company and all shareholders.

As ownership of the family business becomes more disbursed, conflict can easily arise when these lines are blurred. Therefore, adherence to the roles and responsibilities of the shareholder, director and officer can be useful by:

• Reinforcing that the business is separate from the family. By framing people's actions through their roles and responsibilities to the company and shareholders, decisions can be approached and explained, based on the interests of the company and shareholders.
• Depersonalizing the decision-making process. Focus each person on the roles they and others must play when making decisions on behalf of the company, rather than on individual differences of opinion.
• Helping family members employed as officers understand that they are accountable to the board of directors, which is in turn accountable to all shareholders.
• Helping inactive family members (who are shareholders) understand the proper forum for receiving information about the company. Annual shareholders meetings can and should be considered an important means of communicating with inactive shareholders.
• Helping inactive family members understand the contributions of family members employed as officers and to recognize that these officers must be reasonably compensated for their service.
• Focusing directors on providing strategic guidance to the company. Understanding that the directors have a duty to provide strategic guidance to the company can open the door to the sometimes difficult topics of change and innovation in the family business.

For these reasons and more, shareholder, director, and officer are three words of corporate governance you should know.