1. Why Corporate Governance Matters
Every corporation — whether a nonprofit alumni association or a for-profit startup — depends on clear governance to function lawfully. Corporate governance defines how decisions are made, who holds authority, and how accountability is maintained.
When structure breaks down, even well-intentioned organizations risk internal disputes, loss of control over finances, and potential exposure to legal liability.
2. The Role of the Board of Directors
Under the California Corporations Code (§§ 5210 – 5231 for nonprofits; §§ 300 – 312 for for-profit corporations), the board of directors holds ultimate authority over the corporation’s affairs. Officers such as the CEO, CFO, and Secretary carry out day-to-day operations only under the board’s direction and supervision.
A functioning board:
- Sets policy and approves budgets,
- Appoints and removes officers,
- Oversees compliance and fiduciary duties, and
- Ensures that assets are used for the corporation’s lawful purposes.
When a board ceases to meet, lacks quorum, or fails to maintain records, the corporation’s legal foundation begins to erode.
3. What Is a De Facto Board?
When a corporation lacks formal bylaws or has not properly elected its directors, California law may still recognize a “de facto board.”
A de facto board exists when a group of individuals has continuously acted as the governing body — making decisions, approving expenditures, or representing the corporation in good faith — even if their appointments were never formally ratified.
Courts have long upheld the acts of such boards under the doctrine of de facto corporate governance, reasoning that public or member reliance on the group’s apparent authority should not invalidate otherwise legitimate corporate actions.
However, the protection of de facto status is not unlimited. When internal disputes arise, or when one faction claims control over finances or leadership, the absence of bylaws leaves the corporation vulnerable to costly and avoidable conflict.
4. The Risks of Operating Without Bylaws
Without bylaws:
- There is no clear definition of officer duties or voting procedures.
- Meetings may be challenged as invalid for lack of proper notice or quorum.
- Removal or appointment of officers (such as the CFO or Treasurer) can be disputed.
- Banks, grantors, and regulators may hesitate to recognize corporate actions.
In short, bylaws are not mere formality — they are the internal constitution of a corporation. When they do not exist, default statutory rules and the conduct of the de facto board fill the gap, but only temporarily and often imperfectly.
5. Practical Solutions: Interim Governance Policies
For organizations unwilling or unable to adopt full bylaws, a short-form Interim Governance Policy can provide essential structure.
Such a policy can establish:
- Who has authority to call meetings and vote;
- How officer roles and fiscal responsibilities are defined;
- Procedures for conflict resolution and record-keeping; and
- Rules for appointing or removing officers.
Even a two-page interim policy adopted by majority vote can dramatically reduce internal confusion and restore operational legitimacy.
6. Takeaway: Restore Order Before Conflict Escalates
When leadership disagreements emerge — for example, between a CEO and CFO — the board (including any de facto board) retains ultimate authority to supervise, discipline, or remove officers by majority vote.
Documented board actions, formal resolutions, and transparent meeting minutes are the key to demonstrating good-faith governance and protecting all participants from future disputes or regulatory intervention.
7. How We Can Help
At The Law Office of Andy Yang, we assist California nonprofits and small businesses in:
- Restoring governance where bylaws are missing or outdated,
- Drafting compliant bylaws and interim policies,
- Advising on officer and director duties under the Corporations Code, and
- Resolving internal control disputes before they lead to litigation.
Whether your organization is a small alumni association or a growing startup, a clear governance framework is the foundation for trust, transparency, and legal protection.
At The Law Office of Andy Yang, we advise California nonprofits and small corporations on board governance, officer duties, and internal control disputes.