Leadership Authority Through Corporate Governance Documents

Employment agreements, bylaws, and articles of organization.

By Paul J. Welk, PT, JD

Many qualities of a good leader are intrinsic to the individual, however some are learned through leadership training or a variety of other mechanisms. While the ability of any individual to lead an organization is certainly not derived from paper documentation, the actions that can be taken by a leader are in part controlled by an organization’s governing documents and the rights and obligations of the individual thereunder. This article will review some of the key corporate governance documents that serve to provide the legal authority for a leader to lead within an organization. It will also delineate how specific leadership roles, such as that of a corporate officer, board member, or management-level employee, derive the legal authority to lead.

In general, a legal entity such as a corporation is formed by filing a certificate of incorporation or another similar document in the applicable jurisdiction. This document, sometimes referred to as the “articles,” serves as an early source of authority for the leaders of an organization to serve in such a capacity. By way of example, the Delaware Code governing corporations provides in part that “every corporation, its officers, directors, and stockholders shall possess and may exercise all the powers and privileges granted by this chapter or any other law or by its Certificate of Incorporation.”¹ Delaware law further provides that the business and affairs of the corporation will be managed by or under the direction of the Board of Directors, but that the Certificate of Incorporation can provide for specific powers and duties to be conferred or imposed upon the Board.² Delaware law also provides that the Certificate of Incorporation may fix the number of directors and may prescribe other qualifications for directors.³ While many individuals may not give significant consideration to the filing of a Certificate of Incorporation, hopefully it is clear by these examples how this document can serve as a basis for creating or limiting an individual’s rights and obligations as to the governance of an organization. If an amendment to a Certificate of Incorporation is desired so as to be consistent with the future leadership structure of the organization, this amendment must generally be filed with the state.

Much of the oversight of a corporation occurs through its board of directors, which is defined in the context of a corporation simply as a group of individuals who are elected to represent the shareholders.⁴ As has been noted, the role of the board of directors can in part be defined in the Certificate of Incorporation, but more commonly, the parameters of an individual’s ability to lead in a board capacity are set forth in detail in a corporation’s bylaws. In general, the board of directors has broad responsibility for determining the direction of the corporation and making decisions on long-term objectives for the business. Based on the general responsibilities of the board, it is obvious to see how an individual’s ability to participate as a board member may affect their ability to serve in a leadership capacity within an organization. Therefore, within a corporation’s governing documents, in particular the bylaws, consideration shall be given to the number of board members, the qualifications that may be necessary for a board position, and other similar issues in determining how best to position the organization to allow its leaders to lead.

Individuals are also able to exercise their leadership skills as officers in a corporation. In Delaware, every corporation shall have such officers with such titles and duties as are stated in the bylaws.⁵ Typically, the officers of the corporation include at a minimum a president, secretary, and treasurer. Oftentimes the specific roles and duties of each of these individuals are set forth in detail in the corporation’s bylaws. For example, the bylaws may describe the specific roles of the treasurer to include responsibility for all funds of the corporation and the ability to select the corporation’s bank, but may also place limitations on the treasurer such as limiting his or her ability to write checks in excess of a certain dollar amount threshold without the approval of another officer of the organization.

In addition to addressing officers and directors, the bylaws or other governing documents may also set parameters on the ability of the shareholders to provide input into the direction of the organization. For example, it is not uncommon for corporate governance documents to provide that certain fundamental corporate actions require a supermajority of the shareholders to vote in favor of a specific action. By way of example, a practice’s governing documents may require that a vote of 75 percent of a corporation’s shares is required to borrow funds in excess of $50,000. This provision could potentially limit the ability of a dynamic leader of an organization to take an action that he or she believes will be in the organization’s best interest; however, such a limitation may be very appropriate for the organization as determined on a case-by-case basis by the leadership team. As to a shareholder’s ability to lead, in certain corporations, particularly those that are larger and more complex, it is not uncommon to have nonvoting ownership interests.

In addition to the traditional governing documents of a corporation, leadership authority can be derived through an employment agreement or job description. For example, the employment agreement of a practice’s chief operating officer may delineate that he or she reports directly to the chief executive officer while otherwise providing for broad discretion for the employee to lead the operations team consistent with the current job description.

In summary, while likely not the first thing that comes to mind when considering leadership in private practice physical therapy, it is important for any aspiring leader to be aware of the leadership responsibilities, obligations, and limitations that may be present in the organization’s governing documents and how the same may affect the ability to lead. Of course, an exceptional leader may well be able to navigate through the practice’s corporate documents and achieve consensus among the leadership team so as to maximize the potential of the organization.

References

¹ 8 Del. C. §121 (2017).

² 8 Del. C. §141 (2017).

³ 8 Del. C. §141 (2017).

⁴ See www.investopedia.com/terms/b/boardofdirectors.asp. Accessed January 9, 2018.

⁵ 8 Del. C. §142 (2017).

Paul J. Welk, PT, JD, is a Private Practice Section member and an attorney with Tucker Arensberg where he frequently advises physical therapy private practices in the areas of corporate and health care law. He can be reached at pwelk@tuckerlaw.com.

*Please note that this article is not intended to, and does not, serve as legal advice to the reader but is for general information purposes only.