Bylaws is a legal document that is basically a set of rules and procedures that govern how the company is run and how the board of directors functions. In other words, this is a kind of practical manual for the board. An organization’s bylaws look different depending on the organization’s type. Naturally, they differ in the for-profit and nonprofit organization.
However, no matter the type of organization, board bylaws get outdated with time and require timely amendments. No matter the procedure, organizations always need to assess their overall relevance, productivity, and efficiency. This way, businesses remain prepared for socio-economic and technological changes that could impact their industry.
This article focuses on the why, when, and how it is time to update your bylaws. Keep reading!
How often should bylaws be updated?
There’s no single one-size-fits-all solution and approach to the question of when do bylaws need to be updated. This greatly depends on the type of organization, the current organization’s mission statement, and the changes an organization is going through.
The most obvious factor that a company and board of directors need to consider bylaw amendment and review is when there has been a change in the organization’s structure or local, state, and federal law. Additionally, reviewing bylaws is required when there’s a situation that was not previously anticipated that might conflict with the existing bylaws.
Typically, for-profit and nonprofit bylaws need to be reviewed at least every two years, but no less than every five years. To do this in time, most boards of directors have specific board committees tasked with overseeing the board’s adherence to policies and bylaws.
6 reasons that it’s time to update your bylaws
Here are the main reasons why you need to consider reviewing your corporate bylaws for legal and internal compliance.
1. Ensure legal compliance with federal and state laws
Regular review of your current bylaws ensures that your organization and board of directors are acting in compliance with current federal and state laws and timely adapt to any changes.
For example, directors who approve or observe bylaws that are not compliant with the latest federal and state laws might be breaching their legal duties and threatening an organization. The most common areas of noncompliance include:
- Voting on the board’s actions by email
- Committees that include non-directors individuals being authorized with powers of the board
- Directors’ terms of excess
- Actions by written consent that fail to meet state requirements
2. Ensure legal compliance with internal governance practices
Since bylaws specify board procedures and board of directors responsibilities, ignoring these rules may result in a breach of the directors’ duties and put the whole organization at risk.
For example, it implies that board meetings should be held as required and a board chair should follow the specified procedure. Failure to do so may result in dissenting directors invalidating the board action if a certain procedure deviation takes place.
3. Ensure having effective governance practices in place
Bylaws help companies to routinize certain governance procedures, and thus, ensure that the board performs effectively and is assessed regularly.
For example, by reviewing your corporate bylaws, you can change the election approach, so that board elections take place at an annual meeting instead of the anniversary date of each particular director. Or, you can specify the requirements for the board meeting to be held quarterly instead of every half of the year, which can significantly improve board’s performance and effectiveness.
4. Get rid of ineffective governance practices
Some provisions in bylaws may be in compliance with the law but still be burdensome for the company.
For example, this is relevant to Robert’s Rules of Order many companies follow. Some requirements given there are getting outdated and may be not applicable to certain for-profit or nonprofit organizations. The same corresponds to the quorum requirement: if a current quorum for a board meeting is established with less than a majority of the board, it might be considered discouraging for some directors to be present at a board meeting.
5. Instruct the board about its responsibilities
As simple as that, board directors should be aware of their responsibilities. As federal and state laws change, the board directors’ responsibilities should be adapted to that as well.
For example, reviewing bylaws should include updating the information on how an executive committee, governance committee, and other standing committees should operate.
6. Guide the board in fulfilling its responsibilities
This reason follows from the previous one — directors should not only be aware of their responsibilities, but also know how to fulfill them.
For example, bylaws should describe the procedure of holding the board meetings and what actions can be taken by each committee or board member. Additionally, bylaws should emphasize the importance of all board members’ presence during the meeting. Logically, with the organization’s development, certain procedures will require amendments.
Challenges organizations may face because of outdated bylaws
Outdated bylaws that were not revised for a long time can most likely be violated, because they are not timely adopted to current law requirements. This can result in various consequences, most of which can lead to litigation.
Among the main consequences of outdated bylaws are the following:
- Director’s removal from the organization. Board directors who were unable to follow the latest governmental requirements because of outdated bylaws can be removed from the board.
- Internal liability. In some cases, board members can face disciplinary actions or be required to pay fines for their inability to follow the bylaws.
- External liability. In cases when a third party is impacted because of the board’s inability to comply with the state requirements due to the outdated bylaws, board members can then be liable for that harmful impact.
- Company’s dissolution. In the most serious cases, when the dispute can not be resolved, a company may be dissolved by the decision of the court.
- Criminal liability. In some situations, a board member who was unable to follow state law requirements due to the outdated bylaws may face criminal charges.
To prevent potential consequences, a for-profit or nonprofit organization should review the bylaws regularly.
5-step process to updated bylaws
The basics of the bylaws reviewing process are described in Robert’s Rules of Order. However, it may look a bit different in certain organizations depending on their nature and jurisdiction.
Below, we provide five general steps of bylaws review process:
- Identify the timing. The process of bylaws review should be either regular (for example every 2 years) or on-demand. On-demand bylaws review should usually follow from the latest changes that took place on the board, such as virtual meeting rules, director terms, or the minimum and maximum number required for the motion to be voted.
- Adapt to the latest changes. The next step is to reflect all the latest changes of the board procedures in the bylaws, so that they’re compliant with internal policies.
- Review the state’s laws. For the corporate bylaws to stay compliant with the state laws, dedicated committees should monitor all the changes that take place in the state laws and initiate the bylaws review when such a need comes. This can include changes in the requirements for conducting virtual meetings in a particular state
- Draft the amendment. When all the required changes are identified, it’s time to draft the amendment. Usually, dedicated bylaw amendment templates are used, and legal specialists are involved.
- Submit amendments to the government agencies. Bylaws amendments should be submitted to the government agencies. It’s especially important to submit all the amendments to the Internal Revenue Service (IRS), when it’s required.
Key questions to ask when reviewing your organization’s bylaws
- How many consenting board members does it require for a motion to be passed? Or in other words, any given member must know the board’s quorum number. It doesn’t necessarily have to be the standard half-plus-one voter ratio. In fact, it might suit the needs of the business for the numbers to be more skewed. Perhaps some boards would benefit from a 100% “yes” vote, for instance. Boards must continually assess if their quorum suits the unique inclinations of their organization.
- Do the bylaws implement term limits? A board that requires consistency and long-term stability won’t be overly interested in term limits. They’d rely on the same members for as long as possible. Conversely, other boards who are eager to change with the times will implement term limits. A board in need of some fresh blood but with no term limit, may need to contemplate a change in its bylaws. If it’s been a long time since your last bylaw review, don’t waste any more time! Schedule a bylaw review today.
- Are all committees still relevant? When a business is young, it’s going to require specific structures that don’t necessarily fit the mold as it grows and matures. For instance, during an organization’s infancy, a board of directors will require a committee strictly focused on nominations. Whereas when the company finds itself a little longer in the tooth and the board is more established, a committee centered only around nominations makes less sense. As such, a broader governance-based committee will be utilized instead and charged with a more diverse array of responsibilities, (including the review of company bylaws).
- Do the listed officers align with the organization’s current status and identity? The basic officer list in a company’s bylaws generally involves a president, chairperson, treasurer, and secretary. Though, other organizations (specifically those with leadership development in mind) will put vice presidents on that list. Alternatively, many companies don’t think it’s necessary to add any extra officers to their bylaws, sticking with the bare bones. Like the other factors discussed on this list, reviewing this facet of a board of directors’ bylaws depends on what ground the company currently stands.
Main areas of the bylaws review process
Here’s a short checklist of areas you should pay attention to during the bylaws revision process:
- General information about the organization, including its name and location
- Organization’s mission statement
- Structure of the board
- Board members, their responsibilities, and term limits
- Information about committees and rules for their performance
- Voting rules and procedures
- Election procedure
- Membership rules
- Rules for the director’s removal process
- Compensation and indemnification policies
- Board meeting guidelines
- Virtual meeting requirements
- Policies corresponding to the conflict of interest
- Bylaws amendment policies
- Cases of organization’s dissolution
Key takeaways
The company’s bylaws is a legal document that comprises all the rules and regulations that govern how the company and its board operate.
The process of bylaws revision should be regular, perfectly — not less frequent than every two or five years. By initiating the bylaws’ revision process, an organization ensures that it acts in compliance with local, state, and federal laws.
The typical bylaws review process includes revision of such areas as board structure, voting and election rules, board meeting guidelines, committee information, and more.
The process of bylaws review can be significantly simplified when using dedicated board portals, such as iDeals Board. A variety of dedicated features, collaboration tools, and enhanced secure storage capabilities ensure a smooth and effective process of bylaws revision.