Michael J. Sheppeard
Partner
212-784-6939 msheppeard@sh-law.comAuthor: Michael J. Sheppeard|March 11, 2024
With corporations subject to increased scrutiny from investors, consumers, and regulators, the importance of corporate governance law has never been greater. Among its many benefits, strong corporate governance helps businesses operate more efficiently, manage risk, and safeguard against legal and reputational harm.
The term “corporate governance” broadly refers to the system of rules, practices, and processes by which a company is directed and controlled. It also covers the relationships among a company’s board of directors, management, and shareholders, along with the company’s relationships with various stakeholders, including employees, customers, suppliers, and the community at large.
The four basic principles of corporate governance are accountability, transparency, fairness, and responsibility. Below is a summary of each principle:
Adhering to these principles is particularly important for the board of directors, which plays an essential role in corporate governance. A board’s responsibilities include overseeing the company’s operations, establishing strategic objectives, managing risk, hiring and supervising senior corporate officers, and protecting shareholder interests. A well-functioning board is comprised of diverse members who work together, communicate effectively with other stakeholders, and prioritize transparency and accountability.
Given the many challenges that today’s businesses face, it can be easy to let corporate governance fall to the back burner. Its importance, however, cannot be overstated. Below are several benefits of proper corporate governance:
If the principles and laws of corporate governance are not observed, corporations can and do experience significant strife. Recently, Tesla, Inc.’s corporate governance, or as the Court found, lack thereof, was recently spotlighted in Tornetta v Musk, 2018-0408-KSJM, 2024 WL 343699 (Del Ch Jan. 30, 2024), which addressed the approval by the board and Tesla’s shareholders of Elon Musk’s compensation plan in 2018. In her ruling on this case, Chancellor Kathaleen S. McCormick found that Elon Musk had an outsized influence on the board (Id. at *48-50), the board lacked independence from Musk (Id. *51-53), the shareholder vote was insufficiently informed (Id. at *63-68), approval of the compensation plan resulted from unfair dealing (Id. at *68-72), and the amount of the compensation was unfair (Id. at *72-81). After making these findings, Chancellor McCormick found that rescission of Elon Musk’s compensation plan was reasonable, appropriate, and practicable Id. at *84).
Corporate governance isn’t just important for large public companies. No matter the entity size, strong corporate governance signals to the market that a company is a better-run, positive-performing, and sustainable business by signaling that the interests of directors, management, and shareholders are aligned. These improved efficiencies can unlock new opportunities, reduce risk, and propel faster and safer growth. The same disputes that engulfed Tesla and Elon Musk can be used by shareholders against management and other shareholders in closely held businesses as well.
By prioritizing strong governance practices at the outset, companies can often prevent larger and more expensive legal problems from developing down the road. Challenges that can arise as a business matures and scales include ill-defined profit-sharing and decision-making processes, the lack of an independent board, and inadequate financial disclosures.
A strong corporate governance framework can position your company for success. Scarinci Hollenbeck’s Corporate Governance and Regulatory Compliance Group has extensive experience advising public companies regarding corporate governance matters ranging from codes of conduct to board training to internal investigations. Our attorneys rely on best practices and practical strategies that are proven to help corporations establish effective corporate governance practices and maintain compliance in response to regulatory changes.
Partner
212-784-6939 msheppeard@sh-law.comWith corporations subject to increased scrutiny from investors, consumers, and regulators, the importance of corporate governance law has never been greater. Among its many benefits, strong corporate governance helps businesses operate more efficiently, manage risk, and safeguard against legal and reputational harm.
The term “corporate governance” broadly refers to the system of rules, practices, and processes by which a company is directed and controlled. It also covers the relationships among a company’s board of directors, management, and shareholders, along with the company’s relationships with various stakeholders, including employees, customers, suppliers, and the community at large.
The four basic principles of corporate governance are accountability, transparency, fairness, and responsibility. Below is a summary of each principle:
Adhering to these principles is particularly important for the board of directors, which plays an essential role in corporate governance. A board’s responsibilities include overseeing the company’s operations, establishing strategic objectives, managing risk, hiring and supervising senior corporate officers, and protecting shareholder interests. A well-functioning board is comprised of diverse members who work together, communicate effectively with other stakeholders, and prioritize transparency and accountability.
Given the many challenges that today’s businesses face, it can be easy to let corporate governance fall to the back burner. Its importance, however, cannot be overstated. Below are several benefits of proper corporate governance:
If the principles and laws of corporate governance are not observed, corporations can and do experience significant strife. Recently, Tesla, Inc.’s corporate governance, or as the Court found, lack thereof, was recently spotlighted in Tornetta v Musk, 2018-0408-KSJM, 2024 WL 343699 (Del Ch Jan. 30, 2024), which addressed the approval by the board and Tesla’s shareholders of Elon Musk’s compensation plan in 2018. In her ruling on this case, Chancellor Kathaleen S. McCormick found that Elon Musk had an outsized influence on the board (Id. at *48-50), the board lacked independence from Musk (Id. *51-53), the shareholder vote was insufficiently informed (Id. at *63-68), approval of the compensation plan resulted from unfair dealing (Id. at *68-72), and the amount of the compensation was unfair (Id. at *72-81). After making these findings, Chancellor McCormick found that rescission of Elon Musk’s compensation plan was reasonable, appropriate, and practicable Id. at *84).
Corporate governance isn’t just important for large public companies. No matter the entity size, strong corporate governance signals to the market that a company is a better-run, positive-performing, and sustainable business by signaling that the interests of directors, management, and shareholders are aligned. These improved efficiencies can unlock new opportunities, reduce risk, and propel faster and safer growth. The same disputes that engulfed Tesla and Elon Musk can be used by shareholders against management and other shareholders in closely held businesses as well.
By prioritizing strong governance practices at the outset, companies can often prevent larger and more expensive legal problems from developing down the road. Challenges that can arise as a business matures and scales include ill-defined profit-sharing and decision-making processes, the lack of an independent board, and inadequate financial disclosures.
A strong corporate governance framework can position your company for success. Scarinci Hollenbeck’s Corporate Governance and Regulatory Compliance Group has extensive experience advising public companies regarding corporate governance matters ranging from codes of conduct to board training to internal investigations. Our attorneys rely on best practices and practical strategies that are proven to help corporations establish effective corporate governance practices and maintain compliance in response to regulatory changes.
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.