Corporate Governance Fundamentals

Michael Ioane

Article III

PRACTICAL ARTICLE

Governance Failures

Governance failures are among the most common and most costly problems Michael Ioane encounters when reviewing existing business structures and trust arrangements. They are also among the most preventable. Most governance failures do not result from complicated legal errors or unusual circumstances. They result from routine inattention to the basic administrative requirements that keep a legal structure functioning as designed.

Understanding where governance failures occur and why they matter is the starting point for building arrangements that avoid these vulnerabilities.

Failure to Maintain Governance Records

The most widespread governance failure Michael Ioane observes is the absence of proper records. Entities that were formed years ago and have never held a documented meeting, have no written resolutions on file, and have operating agreements that have not been updated since formation present a serious problem in any litigation or creditor challenge. The records, or their absence, become the evidence that determines whether the entity’s protections are real or illusory.

Governance records do not need to be elaborate. A written resolution documenting a significant decision, annual meeting minutes that record attendance and actions taken, and a current operating agreement that accurately reflects ownership and authority are the foundation. The failure is not usually that the required records are too complex to maintain; it is that no one made maintaining them a consistent priority.

Outdated Governing Documents

Operating agreements, trust documents, corporate bylaws, and partnership agreements that were drafted at formation and never updated are another consistent governance failure. A business that began with two equal owners and now has five, that has added new lines of business, that has changed its management structure, or that has had significant changes in the value and composition of its assets should have governing documents that reflect those changes. Documents that no longer accurately reflect the current arrangement are not just administratively untidy; they are legally problematic when a dispute arises over rights, authority, or obligations.

Governance Authority Without Governance Discipline

Some governance failures involve individuals with formal governance authority who exercise it without appropriate documentation or process. A managing member who makes all entity decisions informally, communicates via text messages, and never creates a written record of decisions is not just operating carelessly; they are eliminating the evidentiary foundation that would support the entity’s legitimacy in a legal challenge. Governance authority needs to be exercised through governance processes, not around them.

Succession Gaps

Governance documents that do not address succession are a particularly serious failure for long-term arrangements. What happens to governance authority when the managing member of an LLC dies or becomes incapacitated? What happens to a trust when the trustee can no longer serve? What happens to a family business when the founder retires? If the governing documents do not address these questions clearly, the answer may be provided by a court rather than by the parties, and courts resolving governance disputes produce outcomes that satisfy no one well.

Michael Ioane treats succession planning as a governance requirement rather than an optional addition. Every significant arrangement should have clear, documented provisions for what happens to governance authority when key individuals are no longer available to exercise it.

Informal Control Overriding Formal Structure

Perhaps the most legally consequential governance failure is the pattern where formal structure exists but informal control overrides it. An entity may have a documented management structure, but if a single individual directs all decisions without reference to those documents, courts will evaluate the entity based on how it was actually operated. Informal control that contradicts formal governance documents is evidence that the formal structure is not genuine, and courts reaching that conclusion will not honor the protections the structure was supposed to provide.

The information in this article reflects general structural principles and practical observations from consulting experience and is provided for educational purposes only. It should not be interpreted as individualized legal or tax advice.

Michael Ioane  |  MichaelIoane.com