In nearly all companies, the Chief Executive Officer (CEO), holds a seat on the board of directors. More often than not, the CEO is actually the chairman of the board.
In this article, we discuss the internal corporate structure and the reasons why the CEO generally holds a seat on the Board of Directors.
Corporate Governance Structure
Corporations have a very defined ownership structure. Corporates are owned by the stockholders or shareholders. These individuals acquire stock (a share of the company’s equity interest) by providing capital or other resources to the company. The shareholders do not generally take part in the active management of the company. Their role is vote for an elect the individuals charged with managing the company. Those individuals are known as directors. (Note: Some shareholders — primarily holders of some class of preferred shares — may forgo their rights to vote for directors. Others may have enhanced voting rights, such as the right to elect specific seats to the board.)
The number and role of the company directors will be outlined in the organizational and governance documents (the articles of incorporation and bylaws). These documents will control whether voting is straight or cumulative, when voting takes places (whether voting is all at once or staggered), etc. The directors will control the high-level affairs of the company. This means approving operational plans, approving budgets, approving funding or other major transactions, etc. The directors bear the primary responsibility for reporting of company information to the public and to shareholders.
Once elected, the board of directors then appoint or hire the company’s top officers. The single top officer is the CEO. She manages the daily affairs of the company. As such, she is often seen as the primary driver behind a company’s operational success.
Why is a CEO Often the Chairman of the Board?
In modern society, the role of the CEO has changed significantly from its historical role. The change is primarily the result of investor expectations. Today, managers of large capital funds hold approximately 80% of public company stock in their portfolio. This centralizes voting control of many companies with these powerful money fund managers. When these managers are activist in nature — meaning they seek to exercise extensive control over the company — they effect how the board of directors and CEO are selected. Generally, these investors will work backwards and choose their desired CEO as board chairman. Because public companies require 1/2 of all board members to be unrelated to the company (I.e., not officers or major shareholders) they CEO chooses loyalists to fill the ranks. The activist investor (as controlling shareholder) pushes to elect these individuals to the board. In effect, the CEO is given a blank check to run the company.
This modern trend in public companies explains many things about the role of the CEO. The CEO is pushed ever harder to make short-term returns for the activist investor. The compensation packages for directors and officers has soared in comparison to the average company employee — as the board of directors set these company salaries.
As discussed, the traditional roles associated with corporate figures has evolved significantly since the inception of the corporate model. If you have additional questions about corporate governance or the roles played by any of these corporate stakeholders, contact the legal professionals at LawTrades. They can provide answers to all of your corporate governance questions.