Shareholders and Directors

*Photo by reynermedia is licensed under CC 2.0. *

Often when we think of businesses, we think of the owners as being in charge of the business. This, however, is not always the case when dealing with corporations. Corporations are divided between shareholders—the company’s owners—and directors—the company’s leaders.

Understanding the differences between shareholders and directors is important because without such an understanding it is impossible to understand how corporations are run. While shareholders elect the board of directors, the nature of publicly traded companies, where often no one individual owns a significant portion of the company, allows directors to become entrenched and run the company with very little active oversight.

The Board of Directors

The board of directors runs the company. In closely held corporations, the company’s owners and leaders are often the same individuals with perhaps one or two shareholders both owning the entirety of the company and running its day-to-day operations.

In larger companies, however, particularly in publicly traded companies, there may be millions of shareholders. So, while the directors ultimately derive their power from the shareholders, where the power of shareholders is distributed among millions of persons and the power of directors is distributed among maybe a dozen individuals, the advantage clearly goes to the directors. Shareholders therefore often function as rubber stamps to the company’s leadership because it is too difficult to organize opposition.

Simply put, the directors run the company.  They appoint the officers and executives, such as the CEO, and they are ultimately responsible for all the business decisions of the company—though these tasks are often delegated to the officers they appoint.

The directors do not have to listen to the advice or direction of the shareholders. They are by statute authorized to run the business. Generally, the only recourse shareholders have is to remove them.

Consider, as way of analogy, the directors to be the President of the United States and the shareholders the voting public. The public elects the President, but once in office the President is under no obligation to listen to the voters. He has the power to run the government and is not required to take the suggestions or advice of voters. If the voters do not like the President, their only practical recourse is to elect someone else when he runs for reelection.

Shareholder Rights

As discussed above, the rights of shareholders are largely limited to the ability to control who sits on the board of directors, unless the Corporate Bylaws provides additional rights.

Consequently, their ability to influence the course of the business is severely limited in corporations where ownership is distributed among a large number of persons. Even where publicly traded companies have influential individuals holding significant equity interests in the company, the ability of shareholders to influence change is limited because those holding significant equity interests likely already hold influential positions. Walmart, where multiple members of the Walton family sit on the board of directors, is a good example of this situation.

Therefore, without obtaining a significant equity interest in a company, it is unlikely that an individual owner will be able to influence much change. Stock ownership typically functions as an investment rather than as a means to exercise influence over an organization.

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See Also:

The Corporation

The Shareholder Derivative Suit