Best Corporate Governance Practices for Rookies
If you recently took over a business, became an officer or director, or started a company, I can say with confidence that you are already doing a great job because you are attempting to learn how to fulfill your corporate duties to the best of your abilities. This article aims to suggest some of the easiest, best practices I have found that can prepare you to avoid future headaches and heartburn.
Read Your Governance Documents
Your governance documents – bylaws and articles of incorporation for corporations or operating agreement and articles of formation for limited liability companies – contain a roadmap for how your entity is to be run. Good, up-to-date governance documents provide clear instructions that are easy for all stakeholders to understand and follow. Bad, outdated governance documents make operating your business challenging. If ambiguous, your governance documents can lead to fights between parties. To best operate your business, you’ll need to know what is required of you and how you can fulfill your responsibilities. Take the time to carefully read through these documents and consider highlighting what is mandated.
Understand Your Fiduciary Duties
Under Indiana law, if you are an officer or director, or similarly acting on behalf of the business, you owe certain fiduciary duties to the business and its owners. The two primary duties are the duty of loyalty and the duty of care.
The duty of loyalty mandates that when acting in your corporate capacity, you put the interests of the business before your own.
For example, if you are awarding a contract, you would likely breach your duty of loyalty to the company by awarding the contract to your cousin, solely because he was your cousin, if he charged five times more than any other contractor and did not add five times the value. You likely wouldn’t hire that cousin to perform services for yourself at your home that were substantially over the market rate. Similarly, when acting as a fiduciary for a company, you must be mindful of what is best for the company.
Indiana courts presume officers and directors act in good faith and in the best interests of the company they represent, but that presumption can be disproven by evidence showing disloyalty, willful misconduct, or recklessness. Ask yourself who primarily benefits from this action before making decisions. When acting in the scope of your position, your answer should be “the company”. If you think there could be a conflict of interest, disclose or discuss it within the business and then consult counsel if necessary.
The duty of care requires that you act with the care that a normal person in a like position would reasonably believe appropriate under the circumstances. For instance, an ordinary person would likely review a handful of choices before making a large purchase. Therefore, you would want to obtain multiple quotes or review several available options before signing an important agreement. Make sure to:
- Fully read through and understand any contract or document that you sign
- Stay informed
- Take notes
- Pay attention
In fulfilling your duties, do not aim to merely stay out of trouble – your goal should be to exceed industry standards. Failure to act with reasonable care could result in your minority owners bringing a lawsuit against the management and/or the company, a risk which can be reduced by taking these basic steps.
Keep Accurate Corporate Records
I encourage all my clients to maintain excellent corporate records – minutes from shareholder meetings, director meetings, and actions taken by written consent. Corporate records can protect you and your company from a claim related to breaches of fiduciary duties, mentioned above. Years later, they can also help shed light on decisions that were made and discussions relating to those decisions, when details could be foggy regarding what the business did or did not do and discussions about those actions.
For instance, notes from a board of directors meeting might include references to 3 possible vendors, a discussion had about the choices, and then a vote selecting one. Even if it later turns out that the vendor was perhaps not the best choice, the notes could be evidence that the board fulfilled its duties to the corporation by carefully considering options and making a rational business decision based on the information available at the time.
In keeping notes, you do not need to go into all the details, but jotting down topics of conversations in meeting notes illustrates engagement and preserves a record for your company should anyone ever try to bring a claim against the board.
Furthermore, it is important to keep copies of all company agreements in a centralized location. These documents spell out rights and responsibilities. When companies do not have a system for tracking and maintaining copies of all agreements, a personnel change can be calamitous. Contracts are vital in mergers, acquisitions, restructurings, and generally operating a business – you do not know when you will need to go back to review the terms, so it is best to keep meticulous records that can be easily accessed.
Adhere to your Compliance Plan
Every business should have a written plan of compliance with state and federal laws, including regulations, permits, and licenses. You should familiarize yourself with the plan. If your company does not have a written plan, you should consider having one drafted.
The laws for each industry can be complex and change over time, so you should list these requirements specific to your business in the plan. Keep in mind that if you operate in different states, there could be different rules.
Failure to follow the requirements could lead to fines and regulatory actions. In your compliance plan, I recommend identifying a person responsible for knowing these requirements and reviewing developments to comply with any changes in the law. The plan may include a periodic check-in with your corporate or regulatory counsel to discuss changes or potential changes in the law.
Set a Reminder to Annually Review Your Governance Documents
I have seen companies still using bylaws drafted in the 1940s, which say that notice can be provided by telegraph. It’s 2025 – if your governance documents allow for facsimile, but not email, it is likely time for an update.
Moreover, the law is constantly evolving. Your governance documents might not reflect current corporate law or technological developments. If you are reviewing and revising older agreements, it is important to check for and potentially add some more modern provisions such as dispute resolution procedures, stock/unit transfer restrictions, non-competes, and drag-along or tag-along rights.
Bylaws and operating agreements are especially important to help your business function smoothly. They should be written in plain English, not “legalese”. If you do not understand what an article means, that may be your sign that it is time for an amendment.
Your governance documents are meant to help your business operate effectively, not work against it. I recommend setting an annual reminder in your phone or on your calendar to read through your governance documents and, if needed, consult your corporate counsel to discuss and make amendments.
For questions regarding your governance documents, contact a member of Barrett McNagny's business law team listed below.
About the Author:
Holly M. Weber is a member of Barrett McNagny's business law team. She is licensed in Indiana and Delaware and focuses on working with mid-sized and family-owned businesses with contract review, governance issues and succession planning.