When a company incorporates, there are two main parts of the incorporation paperwork: the articles of incorporation and the bylaws. When a board of directors or top management of a company or organization meets to make decisions, they set policy.

Function of Bylaws

Bylaws define the governing and operational rules of the corporation under which the board of directors and management must operate on behalf of the shareholders. They specify when the board meets, when the shareholder meeting takes place annually, the term of office for board members, who appoints management and other governance matters.

Function of Policies

Policies are set by the board and management to define the operations of the company, such as hiring and firing of employees, sales procedures, customer relations, product return policies, charitable giving policies, employee conduct and other operational matters.

Significance

Bylaws only can be changed, in most cases, by a vote of the shareholders. Policies can be changed by board or management decisions.

Misconceptions

Boards or management sometimes ignore provisions of the bylaws thinking they don't matter. This is a serious legal mistake, and shareholders can force a recall of the board and sue for mismanagement in such cases.

Considerations

The board of directors may adopt board policies that stipulate certain board procedures, but those policies are voted on by the board and can be changed by the board without a vote of the shareholders.