The Structure of a Corporation

The Board of Directors is elected by the shareholders of a company. It is composed usually

of both

• inside directors - senior officers of the company, and

• outside directors - individuals who do not work for the company but who can offer it

expert advice.
The board is responsible for protecting investors' interests, such as the company's profitability
and stability. The board establishes corporate management policies and decides on "big picture"
corporate issues. It usually meets several times a year to set long-term goals, review financial
results, evaluate the performance of high-level managers, and vote on important strategic
moves proposed by the CEO. Directors appoint--and can fire--upper-level managers such as
the CEO and president.

The Chairman of a company is the head of its board of directors, and has a key leadership
role. The chairman presides at Board meetings and at Executive Sessions (meetings that do not
include members of management). He or she is responsible for making sure that directors
receive all the information they need to understand the company make decisions. He should
ensure that all directors participate, that their expertise is listened to, and that directors
understand investor concerns. But he or she does not play an active role in everyday
management – that is the role of the CEO.

U.S. boards typically combine the roles of chairman and chief executive officer: a majority of
companies among the Standard & Poor's 1500 composite index do so. However, there is a
growing call for the two roles to be separated. In other English-speaking countries, and in
Continental Europe, the jobs of CEO and chairman are almost always separated.

Corporate Officers are the individuals appointed (hired) by the directors of a corporation who
are responsible for carrying out the board's policies and for making day-to-day decisions.
Senior officers can also hold the position of inside director. Typically, the authority and
responsibilities of each officer are described in the corporate bylaws and may be further defined
by an employment contract or job description.

The CEO (Chief Executive Officer) is a company's top decision-maker, and all other executives
answer to him or her. The CEO typically delegates many of the tactical responsibilities to other
managers, focusing instead on strategic issues, such as which markets to enter, how to take on
the competition, and which companies to form partnerships with. So, the CEO must be a
leader and a visionary, looking to the future for new opportunities. He or she is often the face
of the company to the outside world. The CEO is ultimately accountable to the board of
directors for the company's performance. The CEO can affect the composition of the board of
directors through his or her selection of senior executives, many of whom are guaranteed
board seats by company bylaws. He or she also assists in the selection and evaluation of board
members. The CEO often (but not always) fills the role of chairman of the board.

1
Presidents often hold the position of Chief Operating Officer (COO). The President/COO
has the overall executive responsibility for the management of the corporation and is
responsible for day-to-day operations. He/she is directly responsible for carrying out the
orders of the board of directors. The President/COO usually has vice-presidents for different
parts of the company reporting to him or her.

In a corporation with many different businesses (a conglomerate), there may be one CEO who
oversees a number of presidents, each running a different business of the conglomerate and
reporting to the one CEO. A company without subsidiaries may have one person execute the
roles of CEO and president (and perhaps even chairman).

The CFO (Chief Financial Officer) leads the financial structure of the company: how it raises
money to fund operations, how it accounts for the business and how it reports to owners
(shareholders).

It's important to remember two significant facts about actions taken by officers:
1. Executive officers have the authority to legally bind the corporation; and
2. Officers are not personally liable for their acts while acting (lawfully) on behalf of the
corporation.
Shareholders are the owners of the corporation. Each share of stock represents a financial
interest in the company. Shareholders can receive stock for cash or services to the company.
Shareholders are responsible for electing the Board of Directors. Unless the shareholders are
part of the management team (directors or officers), they have no authority to control the
operations of the company. If they are dissatisfied with the company, they may elect a new
board of directors or simply sell their shares. When the company has a profit, it may pay part
or all of it to its shareholders in the form of a dividend.

Who are other stakeholders?

A stakeholder is a person or group not owning shares in an enterprise but having an interest in
its operations. Examples are the employees, customers, creditors (e.g., banks, bond holders),
suppliers, regulators, and the community at large.

How is a Corporation formed?

A company must write several legal documents and file them with a state in order to “become
incorporated.” A Corporation's "Articles of Incorporation" is the main filing document, which
begins the corporation's existence under state law. Once filed, the corporation commences
existence.

A corporation's Articles of Incorporation can range from very simple to extremely complex.
Articles of Incorporation contain information that all states need in order to form the
corporation. Generally included in the articles are items such as: the name and purpose of the
corporation, the names of the initial directors, the name of the Registered Agent, and the
number and par value of authorized shares of stock. Requirements vary by state.

2
Bylaws serve as the internal operating document for the corporation. Bylaws are adopted by
every corporation, and contain rules about shareholder voting, required meetings, stock, the
makeup of the board of directors, and the corporation’s fiscal year. Generally, most states do
not require that Bylaws be filed.

Limited Liability Corporations (LLC’s) must also create similar documents; they are called
Articles of Organization and the Operating Agreement

Where does a Corporation Get Money to Begin Operations?

A business corporation must sell shares of stock in order to capitalize the corporation, that is,
provide the corporation with its own capital, separate from the money of its owners. This
separation provides part of the support for shielding the shareholders from personal liability for
the debts and obligations of the corporation.

Stocks and shares are certificates representing the amount of money a shareholder has
decided to invest in the corporation. Owning stock makes the holder a part-owner of the
corporation, and entitles the shareholder to certain rights, including voting rights and
dividends. At formation, a company decides how much stock will be issued, and how many
different classes of shares it will have (common, preferred, etc.). This information is contained
in the Articles of Incorporation.

Generally, common stock entitles the owner to vote for directors and receive dividends. Owning
common stock does not guarantee that dividends will be paid, however. The board of directors
must look at the corporation’s financial situation and decide whether it can legally authorize
dividends to be paid. Finally, dividend amounts are split equally among all common shares and
distributed to the shareholders.

Preferred stock usually entitles the owner to receive a certain amount of dividends each year,
provided the corporation can legally authorize that payment. Preferred shareholders are paid
before common shareholders. Most small corporations do not have preferred stock.

Questions:

1. List at least 6 functions of a Board of Directors.

2. List 3 responsibilities of the Chairman of a company.

3. List 5 job responsibilities of the CEO of a company.

4. What are the responsibilities of a company President?

3
5. What steps must a company follow to incorporate and become a public company?

6. Describe a shareholder/stockholder. What rights does he have?

7. List 3 differences between a public company and a private company.

8. List 4 reasons why a company would want to incorporate and become a public company.

4
 Vocabulary

Public Corporation

Privately-Held Corporation

Partnership

Stockholder

Stakeholder

Board of Directors

Liability - being legally obliged and responsible

Limited Liability - a firm's owners are liable (legally responsible) for no more capital than they
have invested in the business.

Disclosure Statements

Securities and Exchange Commission (SEC)

Incorporation (to incorporate)

Capital