Basics of Corporate Governance

Corporate governance encompasses the formal rules and procedures companies must follow in their day-to-day operations, including the rules governing how companies make decisions. Many of these rules are imposed by the law of the state where the company is organized, and therefore the specifics may vary by state, but the general governance rules are fairly consistent across jurisdictions. Most governance requirements are easy to follow but failing to do so can lead to questions about the validity of corporate actions and, in extreme cases, may expose owners of a company to personal liability.

Most states require that actions fundamental to the corporation’s existence – such as amending the corporation’s charter or selling the company – be approved by a vote of the shareholders. Actions outside the ordinary course of day-to-day business but not as fundamental to the company’ existence – such as entering into a material contract, electing officers or granting stock options to employees – typically only require approval of the corporation’s board of directors. As a general rule, actions requiring approval of the corporation’s board of directors or shareholders must be approved by a majority of those voting on the matter at a meeting where at least a majority of all directors (by number) or shareholders (by voting power).

In most states, the board of directors also has the ability to approve actions without a meeting if all of the directors consent to the action in writing. Many states also allow the shareholders to approve actions by written consent; in some states the consent must be unanimous and in others the threshold is as low as those shareholders holding a majority of the voting power. A corporation’s shareholders have the ability to specify that certain actions require approval of the board or shareholders, even if approval isn’t otherwise required by state law, and increase the threshold for approving certain actions.

For corporations, most of the corporate governance procedures are detailed in the company’s bylaws, which typically describe, among other things: how directors are elected, and officers are appointed; how authority is divided among the corporation’s shareholders, directors and officers; and what procedures must be followed for actions requiring approval of the shareholders or board of directors.

Bylaws often also describe procedures for issuing stock and the form and content of required corporate recordkeeping. However, deviations from the default corporate governance procedures prescribed by state law – such as specifying certain actions that must be approved by the corporation’s shareholders or increasing the default threshold for approving certain actions – typically must be set out in the corporation’s charter.