Publications: Articles Authored by Julius J. Brecht

Fuzzy Governance - Bad Habits
By Julius J. Brecht [1]
For The Alaska Journal of Commerce

It’s easy to get into the habit of doing things in a particular way because that’s the way it has been done in the past. In the corporate arena, at best, this practice can lead to blunders that are embarrassing and costly to fix. It can also lead to violations of law and jeopardize the effectiveness of years of hard work.

As an example, an Alaska domestic corporation, whether formed as a for-profit or a nonprofit entity, must with limited exceptions, annually elect a board of directors.

The limited exceptions include, in the case of a for-profit corporation, when the entity’s articles of incorporation provide for a classified board. That is, the board has member positions divided into two or three classes. Each class is subsequently elected for a two or three year term, as the case may be, each with a different staggered starting date so that only one class is elected each year. The result is that the full board is elected over a period of two or three years, as the case may be.

Another limited exception occurs for a nonprofit corporation where the entity’s articles provide that it has no members or its members have no right to vote. In this instance, the appointment of the board is done in accordance with the articles.

While interesting in their own right, let’s put aside these exceptions and look to some examples of bad corporate habits.

A director election is accomplished through a vote at a shareholder meeting, in the case of a for-profit corporation. It's accomplished through a similar vote of the members, in the case of a nonprofit corporation. If there are no members as provided in the nonprofit’s articles, then the vote or appointment of directors is accomplished by other means as provided in those articles.

Some corporate articles provide expressly that a particular officer position or chair of a committee of the board is a member of the board. However, the individual in that position or who is slated to step into that position must first stand for, and be elected to, the board in order to serve in that capacity for that term. One possible exception to this rule under the Alaska nonprofit statutes may be when the articles expressly limit, enlarge or deny to the members the right to vote on that position.

Some corporations fall into a practice of allowing the shareholders or members to elect officers and corporate committee members. However, both the Alaska for-profit and nonprofit statutes require the entity’s board to elect or appoint the officers. This act is typically done at the annual board meeting.

Some corporations have gone for several years without holding a shareholder or member meeting, as the case may be. Others follow the dubious procedure of holding simultaneous combined meetings with the board, either with or without separate sets of minutes documenting the meetings. Still others further confuse the situation by preparing only one set of minutes for the two meetings.

As another variation on this theme of morphed procedure, some corporations ignore entirely one or the other annual meeting requirements. For example, they may hold a shareholder meeting to elect a board and use the meeting to also elect the officers of the corporation with no indication that the board met to assume these duties as required by statute.

The structure and purpose of an annual shareholder or member meeting is, if nothing else, to elect a board. This duty is one that cannot be delegated to other persons.

In contrast, the structure and purpose of an annual board meeting is, if nothing else, to elect officers, and to establish or reestablish committees and committee chairs. In addition, the board may take the opportunity to adopt by resolution other policies for the new fiscal year, e.g., a budget or a new or revised corporate business plan.

Combining these two important meetings as one simultaneous meeting can, at best, cause confusion. At worst, it can lead to inadvertent omission of important duties of either body of persons. It can also lead to the wrong body taking action on a matter. Furthermore, holding a single combined meeting presents a challenge to the corporate officer responsible for preparing the minutes for the meeting.

An Alaska nonprofit corporation may be lulled into thinking that, in following guidelines established by the national organization with which it is affiliated, it is operating in a legal fashion. The rude awakening comes when it is discovered that those guidelines are at odds with Alaska corporate law. For example, a national guideline for the affiliated organization may envision the nonprofit corporation following a quorum requirement for board meetings which is less than a simple majority of the directors.

A lower quorum requirement may seem enticing to a nonprofit having a large board to enable the entity to reach out into, and to get a broad representation from, the community. In this instance, it is often times difficult to get those representatives to attend a meeting in that they lead busy lives aside from their volunteer work on that board.

Management of the nonprofit may, only after months or years of operating under this quorum misconception, realize that Alaska law requires the presence of at least a majority of the number of directors fixed by the corporation’s bylaws. Alaska corporate law specifies the same quorum requirement as applying to for-profit corporations. In both cases, this requirement applies regardless of vacancies on the board.

For example, should the corporation’s articles or bylaws provide for a seven member board and there are two vacancies, the quorum requirement continues as four, not three. Attempting to take action when a quorum is not present creates great confusion as to just what corporate action, if any, has been taken.

The conscientious board member reads the corporation’s articles and bylaws to ensure understanding of the provisions on holding corporate meetings and director meetings. He or she also ensures that the required business of the corporation is addressed at the proper meeting.

To further engage in fuzzy governance can, at best, lead to embarrassment of officers and directors and costly repairs to the corporate organization. At worst, such governance may place the corporation and its board and officers in the position of having to defend themselves as to actions taken by them outside the legal guidelines set forth in Alaska corporate law.

If you are on a board of a for-profit or nonprofit corporation and have not recently reviewed the corporation’s articles and bylaws, ask the president for current copies of them. If they cannot immediately be provided to you, ask yourself why the delay?

It could be an indication that the corporation is not being operated in accordance with those basic organizational documents. Make sure this predicament is resolved timely.

To allow it to linger, only engenders further fuzzy governance not in you best interest. That practice is certainly not in the best interest of the corporation and its shareholders or members.

[1] Mr. Brecht is an attorney in private practice and shareholder with the law firm of Wohlforth, Johnson, Brecht, Cartledge & Brooking, A Professional Corporation, with offices in Anchorage, Alaska. Mr. Brecht's concentration of practice is in state and federal securities law and corporate and finance law. The content of this article was not prepared as, and must not be construed as, legal or investment advice to anyone. He may be reached at .

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