Columnists

Define roles of board and shareholders

board

An empty boardroom. FILE PHOTO | NMG

Should a board of directors be a driving force for a company? It’s surely a question on which there seem to be a thousand opinions. Yet this week, as I listened to one of my own directors on the matter, it struck me that the total fuzziness around the responsibilities of corporate ownership and corporate direction continue to fuel disputes akin to divorce every single day across our corporate world.

Even in my own tiny company, I have seen a tremendous spread, proving that not all owners, shareholders or directors are equal.

Perhaps the most extreme idea of what ownership means - in the imbalance of taking out and putting into corporate success - is represented by our first non-family investor, which, years ago, bought an initially five per cent stake in the business I founded: on condition of a directorship.

Two days after buying, the new director instructed us to have an article we had authored in our contract publishing department ‘removed’ from this very newspaper, Business Daily, post-publication, because it included quotes from a real estate industry analyst he had had a dispute with, and didn’t want to see professionally recognised.

It wasn’t a viable demand, but a fight anyway ensued over whether five per cent ownership entitled him to editorial control. We resolved the issue eventually, concluding it did not.

But his company did consider its investment entitled it to up to 80 per cent discounts for work from us for years on end, effectively accumulating ‘dividends’ that no other owner or director was getting and cheating the other 95 per cent owners out of both profits and returns.

The free services are now over following that shareholder’s coup de grace, in the form of a press conference it had the company deliver, receiving the invoice and never paying for it since and never intending to, in a new extension to the privilege it granted itself to free services without agreement.

No-one needs owners or investors like that: they can destroy a business, and, at the very least, take up valuable shareholder, board and management time dealing with their infractions.

By comparison, another shareholder has been positively honourable in only holding up the signing of the accounts every year as leverage to be granted dividends that weren’t possible, while never contributing to the wellbeing of the company.

In the US, many companies insist that to be a director, an individual must be invested in an organisation’s shares – be an owner – and must also generate a certain level of business. The principle is that owners must further the interests of the businesses they own and direct.

Yet, according to our non-contributing director, it was the role of other directors and shareholders, unpaid, to generate business, while his organisation was there solely to get the same dividends as the revenue generators.

Not fair either.

However, the cause, in the end, for the extraordinary shareholder journey we have lived was there from the start.

Firstly, we set no time limitation on the directorships, so when directors started holding the company hostage - no signed accounts unless we give an individual x, y and z, etc - there was no way to get rid of them, without a court case.

In fact, we give people tremendous power on asking them to join our boards, and that shouldn’t be taken lightly – they can literally take us out of business if they refuse to sign key returns.

Thus, a second essential is a clear shareholders or directors’ agreements, something that lays out no editorial control, no discounted services, an obligation to generate business.

It will save countless disputes ahead and put in place some balance around the wellbeing of the business itself. For these agreements can also define dismissal grounds for directors that include refusing to sign the accounts, unless the accounts are a false representation of the business. No other grounds should be permissible.

So get it right at the start. Owners are responsible for inputting to achieve success. Moreover, the law gives you virtually nothing to stop errant minority shareholders and directors from tipping you over, so set the requirements, responsibilities, and the boundaries from the get-go.