The Value of Charters and Bylaws

I have often heard – and used to think – that corporate documentation only matters when something goes wrong.  It is true that it really matters then, but it is a wasted opportunity to think of Charters, Bylaws, and other corporate documentation as only relevant in worst-case scenarios.  Quite to the contrary, if done well, they can help head-off potential problems within the organization and keep things running smoothly as the organization grows and as people come and go within various roles.

Charters, or Articles of Incorporation, are the official documents that create the company. They specify basic traits of the organization: the name of the its name, its place of business (and its registered address if it is, say, a Delaware company operating in Massachusetts), its “nature of business”, its ownership and/or capitalization structure, the structure and approval mechanism of the Board of Directors, and how decisions are made that effect the company (e.g., shareholder voting rights). Typically, a financing event will trigger a revision of the Charter to include the new class of stock. A good Charter will clearly specify how it is to be amended (typically by shareholder vote).  Corporate charters will also clearly lay out what happens in various end-state scenarios for the company for different stakeholders.  As I’m not a lawyer, I won’t go into detail on Charters here, other than to say that you need to have one that has sufficient detail and that has been properly vetted for a stable organization.

Bylaws go hand-in-glove with Charters in that they are the day-to-day rule book for how the organization is to be run. They often contain some of the same definition material as Charters: name, location, and the purpose of the organization.  From there, they vary depending on the specific needs of the organization in question but should cover the following if applicable and if not addressed in the Charter: membership considerations, meetings of shareholders and/or other members, the details of the makeup of the Board of Directors (how many, key roles, any committees, term limits, how often they meet, etc.), Officers of the organization (e.g., President, Secretary, Treasurer) and how those roles are filled, the organization’s fiscal year, how the Bylaws are to be revised, and any information relevant to the dissolution of the organization that is not covered in the Charter. A good set of Bylaws will serve as a touchstone as the organization grows and changes to ensure that it is staying true to its original purpose and that all of the stakeholders have been involved appropriately in any changes.

One of the first things that I do when coming into an early stage organization is ask for a copy of the bylaws.  When starting my own company I worked with our legal team to make sure I understood the issues at play and read every word of the boilerplate document they based these documents on.  It’s disheartening how many early stage organizations either don’t have bylaws, or, if they do, have never looked at them.  And I understand: it’s easy to let your bylaws be a bunch of legal boilerplate that doesn’t seem particularly relevant to the daily functioning of your organization.  But they can also form the underpinnings of either dysfunction or of the authority and process that can mature and streamline the organization.  

There are a few organizations I have been involved with for which bylaws became especially important: 

When I joined the newly formed MIT Rocket Team as an undergraduate, they were a loosely organized group of really smart people that were having a blast (literally) building and testing rockets engines. There was no hope of the organization outlasting the original founding team however, a critical flaw when you're looking at a student group for which you have built in turn-over rates. By working with the existing leadership to craft bylaws that encapsulated the key pieces of organizational structure and knowledge and made explicit annual recruiting activities, I was able to help turn the group into a self-sustaining organization. They are still going strong twenty years later with all new people and ever more exciting rocket launches.

A non-profit organization that I have been heavily involved was struggling with growth, as well as with staying current and fresh for new membership. Part of the problem was that the original founding team had become the board of directors, and then just stayed there, some for the entire 20+ year history of the organization. They were fantastic people, but there was no room or mechanism to recruit the mix of skills that were necessary to help the organization get to the next level. By implementing term limits and recruiting tactics, among other changes, into the bylaws, we were able to bring in fresh perspectives and accelerate the organization's growth.

An industry committee tasked with being a major part of revolutionizing the general aviation industry is in the process of maturing. The success and credibility of the group depends on the balance of participants from across all facets of the industry. As membership changes and the initial founding members of the group move on in some cases, it has become necessary to have crisp definitions for new membership types and clear processes for granting or transferring voting member status. Having clear guidelines and mechanisms in place is essential to maintaining the sense of fairness and camaraderie that is essential for the group to function effectively and efficiently.

So take the time to think through the bylaws whenever you are creating or joining a new organization. For new organizations, make sure there is a clear mechanism to change the bylaws. For existing organizations, it is rare that both the reality of the group and its bylaws will be in alignment. If the bylaws are no longer serving the needs of the organization, the bylaws need to change. If the reality of the group doesn't match the bylaws, but the bylaws are still relevant, then the behavior needs to change. Often it's a mix of the two and the right solution depends on the good faith efforts of at least one or two dedicated members of the organization to fix. No matter the situation the one thing that shouldn't happen is ignoring the bylaws: they are the organization's playbook by which its future will be directed.