Links from this article: shareholder concerns will be brought forward by such independent member of the board
Many early stage companies are directed by a Unanimous Shareholder Agreement, under which the shareholders take control away from the board and make all decisions by requiring a unanimous vote of the shareholders. This is sensible when there are a small number of shareholders who have self-financed a business.
Reasonably, as a company starts to grow and take on silent or passive investors who are far removed from the business, decision making will start to occur not by shareholder decision but instead, more formally, at a meeting of the board of directors.
The value of a board is its review of company performance against business plan, standards of governance, and forum for debate. The board is elected by the shareholders at the annual meeting, or at other times when vacancies occur. Often a shareholders’ agreement will set rules as to which of the shareholders or groups of shareholders have the right to nominate board members. For example, a company’s founders may require that one or more board seats are filled by company founders or their nominees (by reserving the right to nominate a replacement director should there ever be a vacancy in those seats). Major investors will often reserve one or more seats, and “minority” investors may also require a seat.
A company will sometimes also leave room for “independent directors” who are not shareholders or stakeholders. Recently and famously, eBay has appointed an independent director to its board in response to a claim from investors that the company is poorly governed. Claims from eBay’s billionaire and activist investor Carl Icahn were leading to a potential proxy battle to spin PayPal out of eBay, for reasons of lack of confidence in the governance of eBay.
This matter was resolved last week when eBay announced the appointment of David Dorman, formerly of (among other appointments) Motorola Solutions, an “independent member” of the board, with the anticipation that shareholder concerns will be brought forward by such independent member of the board. As business decisions can be complicated and multi-faceted, debate and discussion is a cornerstone feature of a board of directors, along with diversity of experience and context, amongst the members of a board.
It is clear that, whether a company is growing with a handful of investors, or a public company with thousands of investors, once a company’s investors increase in numbers and are far-removed from the day-to-day operations of the business, they will rely on the voice of the board at regularly scheduled meetings to protect their investment.