April 19, 2012
Having additional experts help you make major decisions can help your dealership.
By Denise L. Rondini, Executive Editor
Corporations are required to have a board of directors, but a business that is set up as Limited Liability Company has no such requirement. Still some dealers have established boards of directors and others are thinking about doing so.
Successful Dealer recently spoke with Jeffrey Henderson, partner in the law firm of Duane Morris, to get his insights on the role of a board of directors. Here are excerpts from that interview.
SD: What is the purpose of a board a directors?
Henderson: This is going to sound like a non-answer, but they are there to make extraordinary decisions ─ those that are outside the ordinary course of business. It includes things like, “Should we get a bank loan, should we build a new building for our dealership, should we buy some later to build on in the future, should we take on a new line of vehicles, should we terminate an existing product line?”
Those kinds of things are extraordinary decisions that don’t come up every day.
If somebody asks, “Should we order 10 green trucks or 10 blues ones [for stock]? That is not for a board to decide. That is more of a day-to-day, routine decision that can be made at the officer or operational level.
SD: Does a board of directors have any other responsibilities?
Henderson: The board has a fiduciary duty and that is to act in the best interest of the business. Does that mean creating lots of dividends every year? Or does it mean creating growth in the business without cash distributions? Some of both often is the answer.
Does this mean they have to be right every time they make a decision or that they only can make good, correct decisions?
No, but they do have to make informed decisions. They have to make reasonable inquiry. They have to make themselves informed. They can rely upon legal counsel, accountants and other professionals for their opinions and then armed with those opinions and their own judgment, make a decision.
That is called the Business Judgment Rule. If they act within some reasonable standard of making proper business decisions and exercising proper business judgments then they have met that standard of care.
SD: If a dealer is considering setting up a board of directors, what kind of expertise should he look for?
Henderson: I would answer that by saying it depends on what kinds of decisions the board will be facing. Is it fair to say that since I have a truck dealership I would never want someone who has run a very successful carpeting company?
The answer is no because it is conceivable that that person could add some value. They may not know about trucks, but they know about running a successful business, and if they had a sales force they are used to the way a sales force should be managed and supervised. Therefore, they can add value. I am not saying that is the only person you want, but if that person is smart and successful they certainly can be an asset.
You also may want to find someone who is experienced in vehicle sales or someone who has strong negotiating skills so help negotiate better deals with suppliers.
When you assemble a pool of brain power, you certainly want to include people with expertise in cars or trucks, with operating a sales force and those who have been successful at business.
SD: How many people should be included on a board of directors?
Henderson: There is no right or wrong answer, but as you get more and more people you want to consider the issue of losing control.
Here is a typical example: John Smith owns 70 percent of his dealership. The other 30 percent is owned by a cousin with whom he has a bad relationship. The cousin is threatening legal action and thinks the dealer is self-dealing and not representing the interest of the whole company.
The dealer decides he does not want to be the sole director but rather wants more people who will stand with him when the cousin starts throwing mud. He decides to have five people on the board. He will allow the cousin to select two people and he will select the others. One is always going to be himself and the other two will be people the dealer can trust. This means the dealer will always have three out of five votes on the board so he will always be in control. But his cousin will have a say and this may lessen the likelihood of a lawsuit.
SD: Are there alternatives to a board of directors?
Henderson: A corporation would have a shareholder’s agreement and an LLC could have an operating agreement ─ an agreement made among the shareholders on the governance of the company. It would focus on how decisions are made. What kind of decisions can be made with 10 percent of the vote of the equity owners, what needs a super-majority of 75 or 80 percent, what can be decided with 50 percent of the vote?
The veto and consent rights of the shareholders are a very important set of issues to have documented. To me, this is more important than a board of directors because it is the disputes among equity owners that I see so commonly blow up small businesses.