In privately-owned and closely held companies the duties and functions of a Board of Directors is and should be very different.

Directors represent the owners of a business and therefore should make company controlling decisions both benefiting and reflecting wishes of the owners.

Privately-owned companies are more realistically served by having a Board of Advisors, the members of which have expertise and experience of use to the owners of the business.

Once there is even a very small percentage of the company owned by investors the role of Directors changes dramatically. Directors are required to represent the owners of the business without consideration as to the percentage of ownership held. Therefore, the Directors are collectively and personally responsible that all company actions are in the best interests of all of the company owners. This burden requires a critical awareness of executive compensation, retirement and expense reimbursement policies and practices, personnel management policies and practices, financing, acquisition and selling of the company terms, assuring that all shareholders have the same proportionate benefits.

The Directors set the mission of the company and have an approval role in the retention of key individuals. The Directors have the responsibility of closely monitoring the performance of senior executives regarding attainment of the company’s mission. The monitoring can result in determinations’ of if or when senior executive change is required.

I personally, do not believe officers of the company should serve on the Board of Directors of the company, but be available to the Board and provide Board required data on a scheduled basis. In the case of officers who are also large shareholders of the company, I believe it to be in their best interest to appoint Directors, rather than serving as Directors themselves.

Business owners must recognize that Directors of investor financed companies are fiduciaries who represent the owners and as such can find themselves in conflict with the wishes of the controlling shareholders.

Of course, if the sale of a royalty rather than stock is used in the financing of the company the fiduciary issue does not occur.

 

 

Arthur Lipper, Chairman
British Far East Holdings Ltd
chairman@REXRoyalties.com
858 793 7100

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