Governance in one-person corporations

The Revised Corporation Code of 2019 provided for the formation of One Person Corporations or OPCs, which makes it easier for entrepreneurs to limit their personal liability when running a business. India, in 2013, already allowed OPCs. Singapore also allows sole proprietorships with limited liability. The US, I believe, has something like the Singapore model.

Why bother to put up an OPC rather than a sole proprietorship? Well, an OPC can have a single incorporator, instead of the usual five, and a single stockholder — which can be a person, a trust, or an estate. More important, the single stockholder enjoys limited liability — his or her personal assets are protected, and he or she is liable only up to the capital investment in the company.

In single or sole proprietorships, when the business goes bust, unpaid creditors and suppliers can go after the assets of the business, the personal assets of the owner, and possibly even the assets of the owner’s spouse. With OPCs, however, creditors and suppliers can go after only the assets of the business and not that of the owner.

OPCs also do not have minimum capital requirements, making them easier to set up. Decision-making is also centralized, since the owner, director, and president are all the same. No Board of Directors required. However, the sole stockholder is required to name an alternate nominee in the Articles of Incorporation, in case of his or her death or incapacity.

Offhand, the structure of an OPC does not appear to promote good corporate governance. After all, it does not seem to provide for a system of check and balance, with the stockholder, director, and president rolled into one. Much like in any sole proprietorship, the top guy can do whatever he wants, until he gets flagged down.

In considering corporate governance best practices for OPCs that lack boards of directors, board committees like audit, risk, and corporate governance cannot be formed. OPCs do not appoint independent directors either. Although they still need to appoint external auditors, are subject to audits, and must comply with reporting and regulatory requirements.

In this line, in the absence of a formal board of directors, OPCs can establish a Board of Advisors that can provide strategic advice and oversight. These advisors can also be a sounding board for major decisions, especially if they are subject-matter experts, former executives, or industry leaders who bring valuable perspectives.

The thing though, it will entail some expense on the part of the OPC to maintain such a board. Advisors will not agree to come on board for nothing. And, quality comes with a price. But the OPC can make the most of the board in adding not only credibility to the OPC but also expertise. In fact, highly competent advisors can vastly improve management’s decision-making.

In a way, having such a board can also make it easier for an OPC to seek private investments or secure a credit line. It can even count when securing a bank loan. The same board can also take on functions like Audit, Risk, and Governance, especially as the business grows. Advisors can also assist in establishing internal policies on ethical behavior, compliance, and social responsibility.

As far as practicable, such external advisors should have no vested interest in the company. They need to be able to offer objective views on financial and strategic matters, if only to ensure transparency and accountability. Admittedly, an owner can easily dismiss advisors who do not agree with him. But in turn the owner loses access to diverse expertise and views.

Maintaining an independent Board of Advisors provides the primary benefit of enhancing an OPC’s public image as being transparent, accountable, and well-governed. To some extent, this can help build market. The younger generation seems to give more premium to patronizing businesses that maintain a positive image as a responsible steward.

At the same time, regular consultation with a Board of Advisors provides the OPC owner a structured approach to governance, even via informal mechanisms, and helps the OPC owner make more informed decisions for the business. An entrepreneur can be one-track minded, and can greatly benefit from outside expertise and diverse viewpoints.

And, as mentioned earlier, should the OPC seek to grow or attract investors, the presence of a governance structure — starting with a Board of Advisors — can help boost confidence in the company’s sustainability and ethical practices. Having an internal governance structure can also make it easier to comply with future legal requirements as the business grows or as regulations evolve. In a way, it can be seen as form of future-proofing.

Obviously, adopting clear accounting practices and having external audits are minimum requirements for enhanced transparency. The OPC must also build a reputation of ensuring compliance with all laws and regulations.  But engaging external experts, like a Board of Advisors, for periodic reviews of financials and strategic advice can help ensure better governance.

Obviously, it will not be easy for an OPC, especially one with limited resources as a start-up, to adopt corporate governance best practices like those observed in bigger corporations. Moreover, it is not a legal requirement for OPCs. Not yet, anyway. But adopting even just a few practices at the onset can still offer substantial benefits.

A Board of Advisors must be structured in a way that it can provide strategic oversight, credibility, and help the business owner make informed decisions. Beyond public perception, having external advisors and implementing internal governance frameworks can help promote sustainability, reduces risks, and ensures transparency and accountability.

Marvin Tort is a former managing editor of BusinessWorld, and a former chairman of the Philippine Press Council

matort@yahoo.com