A corporation with many owners functions similarly to the American government in that it would be almost impossible for all the company's shareholders to meet on a daily basis and decide what is best for the company. Therefore, the shareholders elect a governing body, known as the board of directors, to act as their representatives. Understanding the difference between a corporation's shareholders and the its board of directors helps investors better understand their role in the company.
The shareholders are the owners of the corporation. Each corporation issues shares of ownership, the number of which varies from company to company. For example, a small, privately held company may have 10 shares all owned by one person, while a publicly held company might have millions of shares owned by thousands of people around the world. Each share represents a fraction of ownership. Shareholders can buy and sell shares, which transfers ownership in the company.
The Board of Directors
The board of directors of a company runs the day-to-day operations of the company. The board is elected by the shareholders to act as the shareholders' representatives in running the corporation. Board responsibilities include naming officers of the corporation, such as the Chief Executive Officer (CEO), managing corporate strategy, and setting the pay for the corporation's executives. Members of the board of directors also serve on several smaller committees, such as the nominating committee, which determines how board members are nominated, the compensation committee, which determines how much corporate officers are paid, and the audit committee, which reviews the corporation's financial statements.
Types of Directors
Directors are classified as either inside directors or independent directors. Inside directors are directors that also own stock or are employed by the corporation. Independent directors are those without ties to the company. Inside directors bring the expertise and specialized knowledge about the specific company. Independent directors are able to offer a different perspective and can help manage disputes between shareholders and the board because they do not have a financial stake in the company. Independent directors are also required by the Sarbanes-Oxley Act to serve on certain committees. For example, the board of directors audit committee must be made up of all independent directors.
Shareholders have several options if they believe the board is not running the company well: vote, sell or sue. Shareholders get to vote on the board of directors as they come up for election. However, this may be a limited remedy for shareholders in large corporations because most shareholders do not own enough shares for the shareholder's vote to make a difference. Shareholders can also sell their shares to new buyers. Finally, shareholders can bring a suit against the board of directors if the board breaches its duties to the company.