For many businesses, the risk that the owner or a board member is absent for a sustained period raises serious continuity questions.
If the senior decision-maker is unavailable, who is in charge and how are decisions made – decisions that could be critical to the survival of the business?
The best solution will vary for different businesses depending on the legal structure, type of ownership, articles of association, and a number of other factors. Larger businesses managed by a board of directors, or with an advisory or supervisory board to turn to, may be able to bridge the gap relatively smoothly. But for smaller businesses where the owner is the only board member, the path is less clear.
Fortunately, there are some key steps these businesses can take to minimise business continuity risks if due to absence:
Appoint another board member
If a business has only one board member, it is relatively easy to minimise this risk simply by appointing more board members. So if one is absent, the other(s) can manage affairs.
Having more than one board member to help run the business can also be beneficial generally, in terms of more collaborative decision-making and bringing different perspectives and ideas to the table.
However, appointing another board member is not particularly flexible, as once a board member is appointed, they can – depending on the articles of association – only be removed via applicable procedures. It therefore tends to be more suitable as a longer term strategic solution rather than to cover a temporary absence, and those being appointed must understand and accept the responsibilities and liabilities that come with being a managing director.
Nominate a successor
If an owner is concerned about diluting their control by bringing in another board member, they could choose to retain the sole board member structure, but formally nominate a successor who would take over as a board member in certain circumstances.
It is possible to define conditions around the power and responsibilities of the successor and the circumstances in which they would be appointed, as well as when they will step down from the temporary position, so the owner does not need to entirely let go of control of the business while absent.
Set up power of attorney
A power of attorney (also called a ‘living will’) is a legal document that lets a ‘donor’ appoint one or more people to make decisions on their behalf if they cannot make their own decisions; for example through illness, incapacity, or injury.
The benefit of a power of attorney is flexibility. They are tailor-made, so can be tightly drafted to cover exactly what is required, with as many stipulations and safeguards as necessary. It could be very far-reaching, as if the person holding the power of attorney is a direct replacement for the business owner. Or it could grant more limited powers solely to safeguard the continuity of the business. For example, the power of attorney might specify that they cannot sell the business or dispose of any assets.
For business use, powers of attorney are usually limited in time to around two to three months. Specific legislation may apply to power of attorneys in certain countries; for example, trust office legislation.
Setting a safety button
All these strategies enable a business owner to ensure continuity if they are absent from the business. It shouldn’t be forgotten, however, that at some point it’s likely they will return, so there needs to be some form of legal process that enables them to do that.
The ‘safety button’ might be time limits on the power of attorney, for example, or a clause that means the owner retains the power to let go of the board even if he is not a board member, which prevents a situation where the new board member refuses to let them return.
The power of proxies
As well as formal legal structures for managing the business, there are a number of other steps businesses can take to ensure continuity in day-to-day operational matters.
One of the most common is proxies that delegate a power from the board to an individual. For example, a proxy for the head of finance to approve payments up to a certain amount, or for the head of sales to close sales up to a certain level.
Proxies are more limited than a power of attorney, but they are a relatively simple way of ensuring continuity in certain elements of the business, such as payments, sales, purchasing and signing contracts. Safeguards can also be built in to prevent misuse, such as requiring two specific people (for example, head of finance and head of purchasing) to sign and approve payments together.
Put it in writing
The final step in ensuring business continuity is perhaps the most important: make sure the chosen solution is formalised with the appropriate documentation. Even the most failsafe, carefully considered and structured business continuity strategy is worthless if it is not legally binding. And, of course, it goes without saying that the documents should be kept updated.
As a result of the Covid-19 crisis, these questions have come into focus for many business owners and managers. During a global health pandemic it seems more plausible to be absent from the business, however, it’s always important to be prepared at any time so that you don’t get caught off guard and you have peace of mind for the future. To discuss business continuity issues or put a plan in place, please contact us.