Corparate Governance
Now, let’s start discussing corporate governance. There are three key roles here that we need to understand:
- Shareholders
- Board of directors
- Executive management (CEO, CFO)
Shareholders own the shares in the company and own the company itself. The board of directors represents shareholders, making strategic decisions, declaring dividends, and hiring or firing executive management. Meanwhile, executive management, like the CEO and CFO, handles the daily operations of the company.
The board of directors, a group of individuals elected to represent shareholders, holds significant power in an organization. Firstly, they have the authority to hire or fire executive management. Additionally, they set the compensation level for executive management, decide when to issue a dividend, and are responsible for overseeing internal controls.
Shareholders, being the actual owners of the organization, hold the company’s stock and strive to ensure their interests are protected. This is the reason the board of directors exists — to represent shareholders’ interests. Owning the company allows shareholders to vote on the company’s future. One example of what the shareholders vote on is whether to hire or fire members of the board of directors. This mechanism creates a check-and-balance since the board of directors, as representatives of the shareholders, can be replaced if shareholders are dissatisfied with their representation.
Next is the role of executive management, the third group of participants in an organization. This team comprises the CEO, CFO, etc. The executive management has the authority to hire or fire all the management that reports to them. Who has the power to hire or fire the executive management? The board of directors. In this interplay of parties, the board of directors represents shareholders’ interests, shareholders can vote to replace the board of directors, and the board of directors hires the company’s executives who then manage the rest of the organization.
Study Tip: Shareholders hire/fire members of the board of directors. The board of directors hire/fire executive management.