What is corporate governance and why is it important
- Nov 08, 2022
- 10 min read
We can see you. Your eyes are glazing over and you’ve got a frown on your face just at the very thought of corporate governance.
We know you just want to get your business incorporated. But like so many of our clients, you’re a little stumped at this step about choosing how your company will be governed.
What is corporate governance?
Corporate governance is the framework through which your company will make business decisions.
It will include rules about who will be responsible for making decisions, how shareholders will vote, or how it will issue new shares.
Does corporate governance really matter?
Yes. It is a legal requirement of ASIC for all companies.
Unfortunately, you can’t skip this bit.
Putting the legalities aside for a minute, having a strong, detailed corporate governance ensures that the correct person/s are making the important and right decisions.
It can help your company comply with all company laws.
Corporate governance also injects values and practices that will contribute to the longevity and prosperity of your business. Aspects such as transparent decision-making and reducing conflicts of interest create accountability, protect decision-makers, and give trust to those that deal and invest with your company.
What choice in corporate governance do you have?
We know this can be a bit hard to grasp, so we’ll go through this slowly.
You have a choice between:
Replaceable rules
This is where your company follows the rules set out in the Corporations Act 2001. This Act details how your company will be formed and how it will operate. It covers such things as the duties of officers, what to do in takeovers and raising funds.
ASIC has tabled a simplified outline of the replaceable rules here to make it a whole lot easier to understand.
If you’re feeling brave, have a look at the whole Corporations Act 2001 here.
The benefit of adopting the replaceable rules is that your company does not need its own written constitution nor the expense of keeping it up to date as the law changes.
The benefit of adopting the replaceable rules is that your company does not need its own written constitution nor the expense of keeping it up to date as the law changes.
Its own company constitution
This is where your company can write its own constitution and have these filed with your company records.
A charity for example, may want to write its own constitution so it can outline its charitable purpose or your company wants to create rules around issuing shares.
Your company constitution must be made available publicly for anyone to read.
Services like Sleek can provide you with a robust Constitution drafted by external lawyers.
A combination of the above two
Your company can also create a company constitution made up of a combination of the replaceable rules and its own constitution.
Shareholder Agreement
Your shareholders’ agreement is a contract between the shareholders. It controls the relationship between the shareholders and the company. It will form part of how your company is run.
Your shareholders’ agreement should outline rules such as who controls the company, how the company will be owned and managed, the rights of shareholders and how shareholders can exit the company.
Do I really need a shareholder agreement?
While it is not legal nor necessary to have a shareholder agreement, it is strongly advised to have one if you have more than one shareholder.
Having this agreement can help address and resolve potential issues in a fair way before they become bigger problems.
What if you’re the sole director or member of a Pty Ltd company?
It’s easy if it’s just you (or one person) as the sole director or member of your proprietary company. Your company does not need to follow either of these rules of operation.
If more directors or members come on board down the track, then the replaceable rules automatically apply, until such time, you create your own constitution.
Who is responsible for corporate governance?
Make sure your directors, shareholders and the company secretary (if you have appointed one) understand they are responsible for corporate governance.
Once your company is registered you must follow the rules for meetings, including recording the decisions made, ensuring decisions are made by the right people and keeping your company registers and ASIC details up to date.
What do you do now?
See, it wasn’t too hard. You’re all set to go!
- You understand your company type
- You’ve decided on the constitution for your company and the rules that govern it.
- You’ve decided if you need a shareholder agreement.
You’re ready for the next step to business incorporation – What address should you use for a business?
