Required Certification Documents – Governance

Why does a SDMWVLGBTBE (Small, Disadvantaged, Disabled, Minority, Women, Veteran, Lesbian, Gay, Bisexual or Transgendered Business Enterprise) get denied certification over Governance? Governance is certifier short hand that refers to the documents governing a diverse SDMWVLGBT business and its operations. Certifiers (the SBA, VA, state agencies or third party organizations) review these documents to make sure a diverse owner’s ability to control the business hasn’t been restricted. Each type of business structure has its own type of governing documents. These can include shareholder, voting, management, or partnership agreements, franchise or operating agreements; by-laws; or articles of incorporation. And, denial can happen because one of these documents has effectively restricted the owner’s ability to govern their business.

How can a governing document restrict, or limit, a diverse owner’s ability to control the business? In many ways …

When we sought certification in Connecticut, we ended up having to update our Corporate By-Laws — which, we must admit hadn’t been reviewed let alone updated since the mid-1980s. Connecticut was concerned that because there had been two deaths in this family-owned WBE, that that President/CEO could be outvoted by the other two owners. What wasn’t in the By-Laws? The fact that each owner could only cast votes based on the number of share s/he owned. Since the President/CEO owns 71%, she can’t be outvoted. So, we changed the language in the agreement to “A director shall have the power to vote his/her shares and/or those for which s/he holds proxy/trustee/ or power of attorney.”

Our Women Business Enterprise (WBE) is a Corporation organized in the Commonwealth of Pennsylvania. In our original By-Laws, there is a clause that states “The President shall be the chief executive officer of the Corporation, and subject to the control of the Board, shall have management and supervision over and exercise general executive powers concerning all the property, business and affairs of the Corporation.” This clause actually addresses two issues.

• First, this document clearly identifies the company’s President as the Chief Executive Officer. So, in one sentence our By-Laws declares this as the highest position (President/CEO). If our By-Laws separated the position of President from that of CEO, then the CEO would hold the highest position. If this were the case, to maintain our WBE status, the CEO should be a woman.
• The second is “subject to the control of the Board”. Our Board is elected by the company’s shareholders. If the shareholders chose to elect three men and two women to the Board, our ability to govern our WBE business might be compromised by the heavily male populated Board. Fortunately that’s not the case since we happen to have two female and one male Board members, headed by a Chairwoman.

We recently reviewed a partnership agreement with a management clause that might raise questions: “Each of the Partners shall have an equal voice in the management and conduct of the partnership business. All decisions shall be by a majority vote and each partner shall be entitled to one vote. In the event of a tie vote, arbitration clause shall be invoked.” In this instance, everyone has an equal voice – no one partner controls this organization – and, it is less likely that this partnership could become certified, unless all partners meet the certifying agency’s diverse criteria. (In other words, all women for WBE or all minorities for MBE, etc.) If we were part of this partnership, we might recommend renegotiating the agreement to clearly establish a managing partner consistent with the diverse ownership.

A Limited Partnership Agreement establishes the rights and liabilities of both a general partner who actively manages the business and limited partners who do not. An LLP agreement that states “The General Partner shall have the sole and exclusive control of the limited partnership” clearly establishes who governs this business. An American Bar Association’s special edition for Managing Partners says: “Ideally, a managing partner’s job description is set forth in the firm’s partnership agreement, the constitution of the firm. Alternatively, there should be a partnership vote—reflected in the minutes of the firm—defining job responsibilities.” If a General Partner defined this way meets a certifying agency’s diverse criteria, it is likely this LLP can become certified.

If a franchise agreement says something like this: “ … distinguishing characteristics of the System include, without limitation, distinctive exterior and interior design, décor, color scheme, and furnishings; uniform standards, specifications, and procedures for operations; quality and uniformity of products and services offered; advertising and promotional programs; copyrighted information and materials; and adherence to the principles of Franchiser’s charter and missions mission statement …” then the franchiser appears to be in complete control and it is quite possible that a franchise of this type won’t receive certification.

DuPage County, Illinois says it best “Individuals who are not WBE/MBE may be involved in a WBE/MBE firm as owners, managers, employees, stockholders, officers and/or directors. Such individuals must not, however, possess or exercise the power to control the firm, or be disproportionately responsible for the operation of the firm.”

Reviewing your governing documents before you apply for a diversity certification is highly recommended.  And, if you think there is some question about your ability to govern your business based on these documents, it would be a good time to consult your attorney.