Why is Shareholder Protection Crucial for Business Owners?

Posted on 7th August 2023

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Board of directors, who enjoy the perks of authority, have tons of responsibilities towards the company and the shareholders. For example, directors are responsible for, promoting the company’s success, avoiding conflict of interest, providing accurate information to the shareholders, protecting shareholders’ interests, and more.

The protection of shareholders in every aspect is one of the most important fiduciary duties of the board of directors. Here is a detailed guide on:

• What is shareholders’ protection?
• Why is it important for your company?
• How can the board of directors use technologies like virtual boardroom software to perform their duties efficiently?

What is shareholder protection?

Shareholder protection is a policy that helps other shareholders to get money if one shareholder is unable to work due to:

• A serious accident
• Physical or mental illness
• Death

It gives a lump sum based on the money needed for the remaining shareholders to buy the shares from the leaving shareholder.

The cost of this policy depends on factors like the amount of funds needed and the shareholder’s health.

Importance of shareholder protection

Businesses usually rely on their owners/shareholders for direction and stability in the long run. If a shareholder is unable to carry out their responsibilities, it will affect the company in negative ways, such as delayed or unmade decisions, which ultimately affect factors like profit, growth, etc.

In case a shareholder dies, his/her shares can be passed on to others as per the deceased’s will. However, it can lead to various undesirable situations.

For example, the person receiving the shares doesn’t care about the company’s future or may sell them to an outsider with maleficent intentions. These scenarios will put businesses in a challenging position.

Companies can set a shareholder agreement in order for what happens if a shareholder dies. It can provide the necessary funds to ensure everything runs smoothly. This helps the business operate with minimum disruptions and ensures that the shareholder or their family are fairly compensated.

Benefits of shareholder protection

Shareholder protection is key, and a protection plan or policy must be among the top priorities of the board of directors. It not only win’s investors’ trust but makes sure the wheels keep moving, says Jesus Rivas – Marketing Strategist at board-room.org. Read more aboutdirectors’ fiduciary duties in the UK.

Here are the key benefits of a shareholder protection policy.

1. Financial stability for the company

Shareholders need to buy back outgoing shares to run the company smoothly if a shareholder dies. However, it can be challenging due to several factors, like financial limitations and increased share value.

Shareholder protection insurance provides financial resources to buy back shares easily and minimize the disruptions in business operations that the sudden incident may cause.

2. Clarity over the value of shares

A shareholder protection policy is not only helpful for the business, but it also makes things easier for the family of a deceased shareholder. For example, if the shareholder’s family wants to sell the shares in the open market or doesn’t know the actual value of their shares, they might incur heavy financial losses.

Shareholder protection plans help create a clear and transparent calculation of the share’s value to ensure the family knows exactly what they will receive.

3. Minimum-to-no disruptions in operations

In case the family of a deceased shareholder decides to sell the shares back to the remaining shareholders without an insurance policy, it is most likely to create a disruption during

• The negotiation of the sale
• The valuation of the shares to be repurchased

However, with the help of a shareholder protection plan in order, this process becomes fast and seamless. It allows the remaining shareholders to get control of the outgoing shares with minimum-to-no disturbances that could affect the smooth operation of the business.

How can reliable board software help directors perform duties efficiently?

Board portal software is an online board management tool that ensures the safe and fast sharing of data between board members and external parties. Here are some key benefits of board software for directors.

1. Provision of fast information

Providing accurate information to the shareholders is one of the fiduciary duties of directors. Virtual boardrooms ensure that shareholders, investors, and directors can communicate in a single platform and safely share documents.

2. Protection of corporate data

Protecting the company’s secrets and valuable data is the responsibility of BOD. Board portals, certified by renowned regulatory bodies like ISO, FINRA, SOC, and GDPR, ensure maximum data protection by employing the latest cybersecurity tools.

3. Reduction in administrative costs

Board portals are way more cost-efficient than traditional board management methods. Directors can conduct paperless meetings and eliminate traveling or venue costs for board meetings.

Final words

Shareholder protection is vital for companies because it ensures the smooth functioning of the company and protects shareholders’ interests. The board of directors has a fiduciary duty to promote company success, avoid conflicts of interest, and provide accurate and latest information to shareholders.

Virtual boardroom software can help directors efficiently perform their duties by providing fast and secure information sharing. Some of the most secure board portals include iDeals boards, Azeus Convene, and BoardPro.