Q. How do by-laws fit into the hierarchy of a corporation's legal documents?
A. By-Laws fit into a hierarchy of governing legal documents in a corporation:
- Statute (incorporating Act) and incorporation documents (charter or letters patent and subsequent amendments) – these are put in place when a corporation is first incorporated, and only rarely amended, for example if there is a substantive change in control, name or mandate.
- By-Laws – these are generally the “hard and fast” rules of the corporation, and typically require member approval to change; for example how members and the board are constituted and can exercise their powers (meetings, voting, etc.)
- Policies – these deal with the more important aspects of a corporation's strategic issues, and typically require board approval to change; for example capital expenditure approvals and disclosure, or HR compensation policies and disclosure.
- Procedures – these deal with the day-to-day running of the corporation's operations, and typically require management approval to change; for example cheque signing, bank reconciliations, hiring, grievance procedures, advertising guidelines, etc. etc.
Two governance principles help us to decide what belongs in which of these:
• The Principle of Empowerment : means that we push decision-making as far down into an organization as we can. As much as possible, we put things in procedures, unless the board MUST be involved, then we'd put these in policies, unless the members MUST be involved, then we'd put these in by-laws. Often our tendency is to enshrine things in by-laws and policies, but we need to resist this urge, since it restricts flexibility and therefore the ability of management to manage the organization in a climate of continuous change.
• The Principle of Alignment : each set of documents must be consistent with, and flow from (cascade) the documents above it in the hierarchy. By-Laws must follow, and give effect to, Statute and incorporation documents. Policies must follow, and give effect to, By-Laws. Procedures must follow, and give effect to, Policies. From time to time, for the sake of clarity, we may have some duplication/overlap between documents, but we should avoid this as much as possible, since it creates the potential for conflicts if we later change one and not the other. For example, the By-Laws may cite the powers and duties of directors, even though these are in Statute, simply to be clear as many directors don't know the law. And Policies might restate the names and composition of core Board Committees and Officers, that are already in By-Laws, for the sake of completeness in explaining committee mandates and functioning.
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