Text 2 Governing Bodies of the Corporation

Shareholders. Theoretically, the shareholders, as the owners, are the ultimate governing body of the corporation, but in practice most individual shareholders in large corporations accept the recommendations of management. Indeed, the more shareholders there are, the less real influence each one has on the corporation. However, some shareholders have more influence than others. For one thing, some people own stock that carries no voting rights, while others own shares that are worth one vote each. Furthermore, some people (or organization) own more shares with voting rights than others do.

In the last 20 years institutional investors such as pension funds, insurance companies, and college endowment funds have accumulated an increasing share of the stock in the nations corporations. These large institutional investors want the value of their stock to increase, and they are beginning to play a more powerful role in governing the corporation in which they own shares. At least once a year, all the owners of voting shares are invited to a meeting to choose directors, select an independent accountant to audit the company’s financial statements, and attend to other businesses. Shareholders who can’t attend the annual meeting in person vote by proxy, signing and returning a slip of paper that authorizes management to vote on their behalf.

Board of directors. As a practical matter, the board of directors, which represents the shareholders, is responsible for guiding the corporate affairs and selecting officers. Depending on the size of the company, the board might have anywhere from 3 to 35 directors, although 15 to 25 is the typical range. The board has the power to vote on major management decisions. The board’s actual involvement in running a corporation varies from one company to another. Often, the board of directors acts as a “rubber stamp”, simply approving management’s recommendations. This role is common where a majority of the board members are also managers and where management ensures that only people who support management’s interests are elected to the board.

Officers. The real power in a corporation often lies with the chief executive officer (CEO), who is responsible for establishing the policies of the company at the direction of the board. He may also be the chairman of the board, the president of the corporation, or both. Officers just below top rank, including most vice presidents, are generally appointed by the chief executive officer and approved by the board. A top officer who fails to carry out the board’s wishes may be removed, although this happens relatively rarely.

Employees. To an increasing degree, employees are also becoming more involved in governing the corporation. They are doing this through a variety of vehicles, one of which is the employee stock ownership plan (ESOP), a program that encourages employees to buy shares of stock in the company for which they work.