Many answers could be given, but this article is about the business administration. In El Salvador, the Courts have recognized that there is a very diffuse and scattered regulation on the principles of corporate governance that should be applied by the companies’ Directors. Of course, it would be quite convenient to have specific guidelines on the relationships between Shareholders, Board of Directors and steak holders, at the time of making relevant decisions, such as the case of Chile with Law No. 20,382. Fortunately, the Courts have stablished some basic rules considering the actual law, as well as the principles of diligence and good faith. The purpose of this article is to explain how they have been applied in some of the most well-known cases and compare them with the solutions applied by Salvadoran Courts.
What do the most important precedents teach about the management of a business?
1.Render to Caesar the things that are Caesar's.
You can probably identify the Model T, one of the most iconic automobiles of the Ford Motor Company and the history. Given its affordable price, it represented a growing volume of sales for the company, at the beginning of the 20th century. This product got such a degree of popularity and acceptance that, by the year 1916, the company had accumulated $ 60 million in profits. The Dodge brothers, Minority Shareholders, expressed surprise when Henry Ford, Administrator and Majority Shareholder, decided to capitalize all this surplus. His strategy was a huge investment in production facilities and hire more employees, to obtain even lower costs in the manufacture of automobiles. His public defense over the decision stated that there was a long-term benefit for Shareholders but his main objective was to spread the benefits of industrialization to as many people as possible through new jobs.
The Supreme Court of Michigan resolved the dispute denying Henry Ford the possibility of materializing such investment. According to its resolution, the companies are originated with a clear lucrative purpose. In accordance with the precedent established by said Court, the main purpose of the Directors is to develop their functions in such a way that the Shareholders could obtain profitability. Considering the above, it declared that the efforts of the person at the head of every mercantile society must be oriented to pursue it.
The mandate for the search for profitability has been included in the Salvadoran law, by presuming expressly that commercial acts are always onerous. Beyond the above, the Courts have analyzed the case in which a Director performs acts that go beyond the purpose of the company or its functions. In the clearest example, an Administrator of a company sold a company’s property to their daughters, without attending to the authorization of the Board of Directors. The Civil Chamber of the Supreme Court of Justice denied the cancellation of such business arguing that the regime applicable is that of liability for damages that could be caused.
2.What happens if what could wrong, go wrong?
It seems that this case represents the opposite idea of the previous one, but it one lesson further about the administration of a company. During the year 1935, 19 of the 20 teams participating in the baseball league scheduled their games at night, accommodating the events to the public spare time. The purpose was clearly a greater volume ticket sale, because, if the games matched with the free hours of the working day, more people would attend the matches. However, the CUBS, founded since 1870, had accumulated significant operational losses between 1961 and 1965, because the administration refused to schedule night games. This resulted in low attendance of the spectators and little tickets sale. The case reached the courts attributing to the administration arbitrariness and waste of the assets.
In this case, despite the loss of income, the court of appeal attended the administration's reasons for maintaining the matches during the day. According to the defendant, baseball was a "daytime" sport and the quality of the neighborhood was an important long-term asset for the company. The location of the stadium was important when deciding to attend a game. The court established that it was only possible to intervene in the decisions of the administration, in case of fraud, illegality or conflict of interests, which did not happen in this case.
The Tribunals of El Salvador have established a similar criterion, without establishing such a separation so concretely. However, they have come to describe as disloyal some actions, such as the case in which a natural person linked to a company asked for the sanitary registration of certain medicines, knowing that the company had already identified them under certain brands. On that occasion, the proceedings filed transcended a claim of unfair competition, but the Court's analysis of the facts focused on the dishonesty of the defendant.
3.One of the most serious risks of operating a business is ignorance.
One of the most important elements to consider in the operation of a business is the management of risk through the diligent search of information about contingencies. An emblematic example of the above was the acquisition of TransUnion, by Marmon Group. This operation began when the board of directors was thinking about a solution to a very specific problem: the business operation involved a permanent mismatch between credit and tax debit, for which taxation never became efficient. The solution designed to resolve such circumstance consisted of a "cash out merger", a merger that excluded Minority Shareholders at the same time as their shares were paid, while the Majority received shares on the new entity. What was the problem with the departure of Shareholders? That the negotiations about merger and the valuation of the actions were carried out personally by the CEO of the company, at a dizzying speed and without having discussed it with the rest of the administration.
Of course, the respective approvals were obtained to materialize the function, but they were taken without diligently compiling about information about the convenience of the operation. In this context, a claim was filed for the damages caused by the merger. The Supreme Court of Delaware ruled that the Board of Directors, seen as a single body, was subject to a fiduciary duty with respect to the Shareholders. In other words, the other members had to take a more methodical process to make the best-informed decision possible and communicate the situation on time to the Shareholders. Therefore, the court proceeded to convict the defendants.
The Courts of Appeal of El Salvador have specified that, if there is no other provision in the company statues, the duty to inform Shareholders about corporate matters is limited to the General Shareholders' Meetings held each year, where directors expose the work memory. The drawback of the above is that, the Shareholders lack a clear faculty to request reports in a dynamic way, at the precise moment that a concern arises. Of course, in that context, there would be a risk that knowledge about relevant issues of business development would occur too late.
How to take these practical teachings?
A constant in the cases mentioned above is the seriousness and the implicit risk in the business development. One of the most important functions of the Administration is precisely to mitigate the risks involved in the operation. Given the above, there are some ideas to take into account, to evaluate the management of the business, by a Board of Directors:
- In the first place, when rendering accounts, the attention must be focused over the damages or losses suffered during the year. However, the foregoing is insufficient to claim damages to the Directors.
- The foregoing implies that you should probably find out if the losses occurred due to fraud or illegality in the day-to-day management of the business. At the same time, it is healthy for strategic decisions to be taken after deliberation.
- In addition to the above, one of the most effective ways to evaluate diligence in management is to review the way in which the information was collected, to make reasonably informed decisions. One way to achieve this is to establish clear rules so that Shareholders have access to relevant business information in an opportunely way.