Corporations are legal entities that have stockholders and require a rather specific corporate management structure to be compliant. The corporate management structure can be thought of as a pyramid.
The evolution of public ownership of a business has led to the need to create a separation between ownership and management.
In the old days, companies were small, family-owned, and family-run. Today, many businesses have investors that are not directly involved in the operations of the business. Some corporations are large multinational conglomerates that trade publicly on one or many global exchanges, but most corporations are not publicly traded but want to take advantage of a corporate management structure to attract investors.
In an effort to create a corporation in which stockholder interests are looked after, many firms have implemented a multi-tier corporate hierarchy made of stockholders, a board of directors, and officers.
Stockholders
At the base of the pyramid are the stockholders, which are the owners of the business. Ownership interests are represented by “shares” of stock. Stockholders, sometimes also called shareholders, participate in the corporation by voting on major corporate decisions, such as adding or removing board members, dissolving the corporation, or changing the bylaws. Stockholders do not take part in other business decisions or the management of the corporation. Stockholders vote their shares. For example, 1 share = 1 vote and 10 shares = 10 votes. Stockholders exercise their voting rights at annual and special stockholders’ meetings.
Annual meetings are required and must be held at a fixed time based on the bylaws of the corporation.
Special meetings may be called by the board of directors, stockholders that control at least 10% of the corporation’s shares, and by any other person authorized by the Articles of Incorporation.
Stockholders agree in advance to vote in a specific manner that is set forth in the corporation’s shareholders’ agreement. Stockholders also have the right to inspect the books and records of the corporation.
As a general rule, the liability of a stockholder is limited to their investment. However, where justice is required, the courts can choose to “Pierce the corporate veil” and impose liability upon stockholders. Moreover, stockholders who hold a sufficient number of shares to control the corporation (i.e., greater than 51%) are deemed to be “Controlling Shareholders”. In some cases, controlling shareholders are not provided the same limited liability as other shareholders based on their greater ability to influence the activities of the business.
Board of Directors
In the middle of the pyramid is the Board of Directors (BOD). The BOD are the elected representatives of the stockholders and are delegated the powers to manage the business of the corporation. The BOD is often composed of a chairman as well as inside and outside directors.
Chairman
The chairman of the board leads the business and is responsible for the board’s actions. They preside over the BOD and committee meetings. A chairman often sets the agenda and has significant sway on the BOD’s vote. The chairman ensures that meetings run smoothly and remain orderly, and they work at achieving a consensus in board decisions. The chairman is elected by a majority vote of the BOD. Because the position has substantial interaction and influence with both the BOD and management, the chairman is arguably the most powerful position in the company. The chairman is often the BOD member with the greatest stake in the corporation. In some organizations, the chairman is the founder and CEO and holds a controlling interest in the business.
Inside Directors
Inside directors are chosen from within the company. An inside director can be a CEO, CFO, manager, or any other person who works for the company on a daily basis. Inside directors may also include major stockholders, institutional investors, and lenders. Inside directors are expected to always act in the best interests of the company. Because of their specialized knowledge about the inner workings of the company, inside directors can be a key element in a company’s success.
Outside Directors
Outside directors, as their name implies, are external to the business and are independent of the company. Outside directors are less likely to have any conflicts of interest, they see the big picture differently than inside directors, and are more likely to provide unbiased opinions. The downside of outside directors is that, since they are less involved in the companies they represent, they may have less information upon which to base decisions and fewer incentives to perform.
Inside directors and outside directors help balance each other on a company’s board.
The BOD’s responsibility is to determine questions of operating policy. Directors are not usually expected to devote all their time to the affairs of the corporation (except in smaller, closely help private corporations), they generally do not receive a salary for their services and have the authority to delegate powers to officers. The BOD has the power to select and remove officers, and determine the officers’ compensation.
The BOD can declare the amount and type of dividends and set the par value of newly issued shares. As a group, the BOD can also borrow money, issue notes, and bonds, and perform other obligations of the corporation. They can also sell, lease, exchange, or mortgage assets of the corporation in the normal course of business.
Directors are elected each year at the annual meeting. In large corporations, which generally, have more than nine directors, directors are divided into classes of approximately equal numbers and assigned to multi-year terms. This way, only a percentage of the total board is up for election in any given year. The staggering of directors provides a level of continuity in the makeup of the BOD. The terms of board members and the number of classes are defined by the corporation’s bylaws.
Brad Feld recommends that founders have a wide lens when recruiting a board of directors in the following video:
Brad Feld also has a great video on the makeup of a board of directors:
The board of directors report to the stockholders. The board’s tasks include:
Making sure managers are effective
Keeping the chief executive officer (CEO) on track
Reviewing the company’s plans, budgets, and goals
Ensuring the business follows the law
Writing bylaws
Creating committees
Protecting stockholders
Holding annual meetings
Officers
At the top of the pyramid are the officers of the corporation. Officers hold office at the will of the BOD. The officers hire and fire all necessary operating personnel and run the day-to-day affairs of the corporation.
Corporate officers usually include a Chief Executive Officer (CEO)/President, Vice-President(s), Secretary, and Treasurer. In some corporations, the CEO and President are separate roles; in these situations, the CEO is the highest-ranking officer of the corporation. When a corporation has a separate President and CEO, the CEO often has a Chief Operating Officer (COO) and Chief Financial Officer (CFO) that report to the CEO.
CEO/President
The CEO/President is the principal officer of the corporation and is subject to the control of the BOD. In general, the CEO/President supervises and controls all of the business and affairs of the corporation. They can sign for the corporation any deeds, mortgages, bonds, contracts, and other instruments which the BOD has authorized the CEO/President to execute.
In the absence of the CEO/President or the event of their death, inability, resignation, or refusal to act, the Vice President shall perform the duties of CEO/President. Vice Presidents control specific divisions of a corporation, such as sales, marketing, and engineering, and report to the President.
Secretary
The Secretary records and keeps the minutes of stockholder and BOD meetings. They see that all notices are duly given. The Secretary is the custodian of all corporate records and the corporate seal. The Secretary signs along with the CEO/President on certificates of shares of the corporation and is in charge of the stock transfer books of the corporation.
Treasurer
The Treasurer is responsible for all funds and securities of the corporation. They write budgets and reports and track spending. The Treasurer receives and gives receipts for deposits, money due, and payables to the corporation. When the Treasurer works for the CEO, they are called the Chief Financial Officer.
Corporate Management Structure Analogy
You could compare a corporation to our US House of Representatives. The stockholders are like the citizens that vote for their congresspersons. The directors are like the elected congressmen and congresswomen in the House of Representatives who act on the promises they have made to their constituents. Finally, the officers are like the governmentally appointed positions, such as the Secretaries of various divisions like agriculture, education, transportation, etc.
Do you have a proper corporate management structure?
