Pros‌ ‌of‌ ‌Having‌ ‌a‌ ‌Company‌ ‌ Constitution‌

The word Constitution is defined in the Merriam-Webster dictionary as: “the fundamental political principles on which a nation-state is governed, especially when considered as embodying the rights of the subjects of that nation-state and the statute embodying such principles”. This means that a constitution is set in place to make sure that every citizen has the same rights and freedoms.

A company’s constitution does not follow this definition precisely, but it has many aspects very similar to this definition. The main idea of a corporation having a state is because corporations are legally created entities (this will be explained later). 

Model Constitutions of Singapore Companies - Rikvin Pte Ltd

A company’s constitution can also be known as articles of incorporation or bylaws. These terms all refer to the specific rules and guidelines that a company has to follow. They are the basis for how a business runs and what powers it can or can’t exercise.

The rules of articles of incorporation/bylaws include: who is allowed to become an officer, how officers are elected, how the board of directors is formed, etc. They also include information such as if shareholders have voting rights and if so, how many votes they hold per share.

These articles play a large role in daily operations. If a director makes decisions that violate these articles then their actions would be considered void because it goes against the foundation of the company itself. A perfect example of this is if two shareholders both own 50% of shares but one wants to sell and one does not want to sell.

In this case, the selling shareholder would need the agreement of the other shareholder as stated in the articles. If they cannot agree then a third party can step in and help negotiate or buy out the shares from one party.

The high cost of maintaining a business makes it important to find ways for saving money. A Company Constitution is an effective tool for cutting costs by providing guidelines on how the business should be run. Although it may not be mandatory, having a company constitution can benefit any organization.

Pros

Saves Money

One way writing a company constitution saves money is by mitigating the risk of lawsuits against the business. Many lawsuits are avoidable if companies have documents that specify what staff members are responsible for which tasks and what will happen to them if they are unable or unwilling to do their jobs accordingly.

If these responsibilities are not written down then legal teams must spend lots of time determining who was supposed to do what when to help defend their client when they’re sued.

Reduced Time

Another way having a company constitution saves money is by reducing time spent on hiring and firing. When businesses do not have clearly defined chains of command, people often feel as though they cannot speak to their superiors about problems without fear of being punished.

Employees sometimes leave jobs because they cannot discuss work-related issues with those who would be best positioned to solve them. Having job descriptions and well-defined reporting relationships can therefore reduce turnover and avoid the additional cost of finding replacements for those who left.

Efficient Business Practices

A third benefit is that writing a company constitution leads to more efficient business practices which usually leads to an increase in overall production. Once staff members know what tasks are expected of them it becomes much easier for managers to distribute jobs appropriately and keep everyone working towards the same goals.

With clearer expectations employees will be more likely to follow through with their responsibilities because they know why they are doing them and what benefits they will bring, which means there will be fewer mistakes and bottlenecks in production.

Educational Tool

Another advantage of having a written constitution is that it can act as an educational tool for starting up new branches of the business. A company constitution outlines the ideals that govern the business so it can easily be referenced when trying to determine how best to expand into different fields.

Although having a company constitution may not always be mandatory, any organization would benefit from adopting one. It saves money by making lawsuits less likely, reduces turnover rates, allows managers to do tasks more efficiently, provides clear expectations to staff members, and helps with education when new branches of the business are opened.

If you still don’t have a constitution in your company, you might check the company constitution template in order to be guided.