After incorporation, a startup’s founders are the only directors, officers and stockholders of a company, and determining responsibility for the decisions is straightforward. However, as a company matures and its structure changes, many early-stage companies face the challenge of determining who should make the decisions. Founders should understand the general decision-making rules and guidelines described in this article; they are applicable to newly formed companies, to publicly traded companies and to all companies in between.
A company generally makes three types of decisions:
- Strategic Decisions and Plans
A board of directors, whose members are elected by a company’s shareholders, makes strategic decisions for a company. Strategic decisions are decisions and plans that have long-term or material impact on a company. These often include, but are not limited to, decisions regarding:
- The election of officers and executives
- Equity grants or transfers (including compensation packages for officers and executives)
- Annual budgets and audits
- Amendments to the certificate of incorporation or bylaws
- Shareholder distributions
- Sale of substantially all a company’s assets
- Dissolution or sale of a company
- Adoption of employee benefit plans
- Other materially important agreements or long-term strategies
The guidance directors provide to company management regarding strategy and operations is vital to a company’s long-term success. A board of directors has fiduciary duties, so it generally must act and make decisions in the best interests of a company and its shareholders.
2. Tactical Decisions and Plans
Officers and executives make tactical decisions for a company. Officers and executives include the CEO, COO, CFO and other top-level management in a company. Tactical decisions are decisions and plans that concern the more detailed implementation of the directors’ general strategy, usually with a medium-term impact on a company. Tactical points requiring decisions include, but are not limited to:
- Size and structure of a work force
- Sales and marketing strategy
- Signing non-disclosure agreements
- Work assignments allocated to particular groups and people
- Large purchases within a previously approved budget
Most tactical decisions and plans are more detailed and certain than strategic decisions and plans. Additionally, officers and executives must answer for these decisions to a board of directors, which in turn has responsibility to a company’s shareholders.
3. Operational Decisions
Operational managers and other employees make operational decisions for the company. Operational managers include mid-level, supervisory and lower-level management. Operational decisions are the day-to-day decisions that have only a short-term impact on a company. These include, but are not limited to, decisions regarding:
- Scheduling employees
- Training on specific tasks in a company (e.g., sales techniques, computer training, etc.)
- Purchasing office supplies
- Assigning work to specific employees
Operational decisions generally are very specific and have a high degree of certainty. Although operational decisions alone do not have long-term or material impacts on the company, these decisions guide the implementation of strategic and tactical plans. Operational managers must answer to a company’s officers regarding the operational decisions that operational managers make.
A board of directors makes strategic decisions at all stages of a company’s growth; however, what a strategic decision is can change depending on the nature of an organization. For example, a startup likely would view a decision with six-month implications as “long-term,” but a company that has existed for 50 years likely would perceive the same decision as medium- or short-term. Similarly, a company that recently secured its first round of financing likely would consider a $US1 million contract material, but a company with multi-billion dollar annual profits likely would perceive the contract as non-material.
Furthermore, as a company matures, so too does its structure. At incorporation, a group of founders as the only directors, officers and stockholders, essentially makes all decisions for the company. However, over time, a company generally builds a larger board of directors (typically including representatives of investors), more officers and executives, more complex layers of management and a larger stockholder base (as a result of equity financings and employee equity grants). As a result, the interests of the directors, officers and stockholders may change and may not align as closely as they did at incorporation. However, despite the increasing complexity in the structure of a company and the divergent interests that might arise as it matures, the model for decision making discussed above still applies.