Streamlining corporate governance through clear contracts

Insights|June 19, 2024

Executive agreements play a crucial role in defining the roles and responsibilities of managers within a company. Over time, these contracts have evolved to become more detailed, aiming to prevent confusion and potential disputes, which are typically resolved privately.

Key elements in management contracts include specifics about salary, benefits, vacation time, healthcare, and training. They also address terms related to the end of employment, such as non-compete agreements, severance pay, confidentiality, and intellectual property rights. A particularly important aspect of these contracts is the clear specification of rules regarding the use of company resources, such as email access, to prevent potential issues. Including a dispute resolution clause is also beneficial, allowing for quick and private resolution of disagreements through arbitration, thus avoiding lengthy court processes.

Modern contracts emphasize professional development, encouraging managers to continue learning and adapting, which is beneficial in today’s fast-changing business environments. This focus on growth helps align expectations and performance evaluations, reducing conflicts.

In some cases, the parties to a contract must be more aware of the agreement’s details. One example is startup companies, where management contracts frequently account for potential changes in ownership. Managers are expected to commit to the company after an exit, as part of long-term remuneration plans, ensuring continuity and stability during transitions.

Another point to know is that there is a notable difference between management contracts and CEO contracts. CEO contracts are not governed by standard employment laws, meaning a CEO can be dismissed without specific reasons. However, management contracts offer some security by specifying severance conditions if a manager is terminated. These days, severance payments in such contracts tend to be shorter than before.

Confidentiality and non-compete clauses are critical when a manager leaves voluntarily, often including penalties for breaking the agreement. Additionally, the contracts clarify that any creations or innovations developed during employment belong to the company, not the individual.

Overall, keeping management contracts up-to-date and specific to the role is vital. This ensures they function effectively for both the manager and the company, minimizing misunderstandings and legal disputes. The clarity and currency of these contracts are paramount in defining the roles and expectations of managerial positions, ensuring smooth transitions, and fostering a productive corporate governance environment.

The original interview is published in Kauppalehti.