Corporate governance: who decides in the company, and who answers when the decision is wrong
Corporate governance is not decoration for public companies. It is the set of rules that determines who has authority to decide, how a decision is made, and what happens when the decider had a conflict of interest. In a private company those rules are usually examined only once a dispute erupts, and then they determine the outcome.
“Corporate governance is tested for the first time on the day there is a dispute. Until then nobody asks who is authorised to decide.”
Adv. Erez Sapir
What corporate governance is, and why it applies to private companies
Corporate governance is the relationship between shareholders, the board and management. It answers three questions: who has authority to decide, through what process, and to whom they account. These sound procedural, but they determine substantive outcomes the moment there is a disagreement.
The common mistake is to treat governance as a public company matter. A private company with three shareholders needs no audit committee and no external directors, but it certainly needs an answer to who signs, which decision requires everyone consent, and how a decision is recorded. Without answers, every past step becomes open to interpretation.
The starting point in law is section 4 of the Companies Law: a company has a legal personality separate from its shareholders and from the members of its board. That separation is the asset. Governance is what protects it, and careless management is what invites an application to pierce it. See the piercing the corporate veil page.
Source: Companies Law, 5759-1999. Checked September 2026.
The organs of the company and who decides what
The general meeting. The shareholders. It appoints and removes directors, amends the articles, approves a merger, increases registered capital and appoints the auditor. These are the structural decisions.
The board of directors. Sets policy and supervises management. It is responsible for the work plan, approval of the financial statements, appointment of the general manager and the credit framework. The board does not run the day to day, and is not meant to.
The general manager and management. Ongoing management, subject to board policy and instructions.
In many private companies one person fills all three roles. That is entirely lawful, but it does not erase the distinction. When a person makes a decision they do so wearing a particular hat, and after the fact it will be asked whether they acted as a director, as a manager or as a shareholder. That distinction determines which duty applied to them.
Source: Companies Law, 5759-1999. Checked September 2026.
The duty of care and the duty of loyalty
The Companies Law imposes two separate duties on an office holder, and they should not be confused.
Duty of care, section 252. The standard is a reasonable office holder in the same position and circumstances. It concerns the quality of the process: were the facts gathered, were alternatives weighed, was an opinion obtained where one was needed. The duty of care does not guarantee an outcome. A business decision that failed is not necessarily a breach if it was taken through a proper process.
Duty of loyalty, section 254. This is an entirely different duty, and the harder one. An office holder must act in good faith for the benefit of the company, avoid conflicts of interest, refrain from competing with the company, and not appropriate a business opportunity of the company. Here process is no defence. There is no such thing as a reasonable conflict of interest.
The gap between the two is the gap between I got it wrong and I took it. Courts allow room for business judgement, and allow no comparable room for loyalty.
Source: Companies Law, 5759-1999. Checked September 2026.
Conflicts of interest and related party transactions
The problematic transaction in a private company is rarely fraud. It is a transaction entered in good faith with a connected party, without disclosure and without approval: the company leases premises from a shareholder, buys a service from a company owned by the manager brother, lends money to the controlling shareholder, employs a family member at a salary nobody examined.
Each of these can be a good transaction for the company. The problem is not necessarily the substance but the process: who disclosed, who approved, and what was recorded. A transaction that skipped disclosure and approval stays open to challenge years later, even where its terms were fair.
The practical rule is simple: full disclosure in advance, approval by someone who is not tainted, and a record in the minutes. Those three steps cost half an hour and save years of litigation.
Alongside office holders, the law also imposes duties on shareholders themselves. Section 192 requires a shareholder to act in good faith and in a customary manner towards the company and the other shareholders, and to refrain from abusing their power. Section 193 imposes on a controlling shareholder, and on a holder of a decisive vote, a duty to act fairly towards the company. Fairness is a higher standard than good faith, and that is precisely the point.
Source: Companies Law, 5759-1999. Checked September 2026.
Governance in a company of two or three
The smaller the company, the greater the temptation to skip process. No meetings, no minutes, decisions taken in the corridor. That works perfectly until the day it stops working.
The minimum worth keeping even in a company of two: a short minute for every material decision, a written list of decisions requiring full consent, complete separation between the company account and personal accounts, documentation of every payment to a connected party, and an orderly decision on remuneration for shareholders who work in the company.
These are not bureaucratic burdens. They are the evidence you will have on the day someone claims you acted against the interest of the company.
Where weak governance costs money
In due diligence. A buyer or investor examines board minutes and transaction approvals. Their absence is not merely a technical defect. It lowers the price or produces an indemnity demand.
In a shareholder dispute. A minority shareholder alleging oppression will point first to the absence of process. See the minority shareholder oppression page.
Facing creditors. Mixing company assets with personal assets is the first argument in any application to pierce the veil.
Facing banks and financiers. An institution that asks to see a board resolution and receives a document signed after the fact will draw a conclusion about how the whole company is run.
Building governance that works
Start with the articles. A standard set downloaded from the internet does not know who the shareholders are or what they agreed. The articles should set the majority required for each type of decision, how directors are appointed and removed, and the protective mechanisms, including a poison pill provision where relevant.
Continue with a shareholders agreement. The articles face outward; the shareholders agreement governs what happens inside: minority rights, exit mechanisms, the right to appoint a director, veto over defined matters and deadlock resolution.
And finish with routine: a regular board meeting, a short minute, a procedure for approving related party transactions, and an annual review of authorised signatories.
Legal support
We build governance frameworks for private companies at a scale that fits them: articles and a shareholders agreement that speak to each other, a procedure for approving related party transactions, and minute templates people will actually use. Where a dispute already exists, we start by establishing what was documented and what was not, because that sets the starting position.
To reach us: 02-5953322 in Jerusalem, 03-3030430 in Tel Aviv, WhatsApp 050-4411343.
Frequently asked questions about corporate governance
Does a small private company need corporate governance?
What is the difference between the duty of care and the duty of loyalty?
Is a director personally liable for a wrong decision?
What is required to approve a related party transaction?
Do we need both articles and a shareholders agreement?
What happens when the same person is shareholder, director and manager?
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