When and why does a company require a board of directors? How come it can sometimes overrule or even push out the owner?

189 views

[ad_1]

When and why does a company require a board of directors? How come it can sometimes overrule or even push out the owner?

In: Economics
[ad_2]

A board of directors comes into play when the company goes public usually. And at that point, there isn’t any 1 owner, there are many many owners. Because at the point where a company goes public then anybody who owns a share of the company is an owner.

They can push out the founder of a company because the founder no longer controls the company, it’s public, so the public controls the company. Well, the public that owns shares in the company. If they don’t like what the founder is doing any more, they can fire them.

When a corporation starts selling shares. The Board of Directors is who shareholders vote for as a part of their partial ownership of the company.

As far as pushing out the owner of a company, it doesn’t mean the person no longer owns the company. They will still get their share of the profits. The shareholders just don’t want them running the company. They think the company will be more profitable (and therefore the stock price will go up, making them more money) with someone else.

The owner can fight that measure if they own the majority of shares in the company, but if the shareholders don’t want the owner there, and the owner is fighting them, that may cause shares to be sold, lowering the value of the stock, which hurts everyone.

A board of directors is usually found at a public company. The board is elected by the shareholders (the owners) to run the company on their behalf and look out for their interests. Usually, the board then hires the executives who actually run the company per the board’s instructions.

The board works for the owners. However, in lots of cases, “the owner” is one of the original owners from before the company went public and they still own a lot of shares. But if they don’t own a majority (very common with large public companies) then the other owners (the rest of the shareholders) have enough votes to push a particular person *off the board* or *out of working at the company*.

And since the board represents the *majority* of the shareholders, minority owners may not always get their way. If the majority of shareholders decide to sell the company, then the minority can be “forced out”. They will still get whatever they’re due from the sale but they may not be able to stop the sale.

A corporation with a board of directors usually doesn’t have one owner, but many owners. Publicly traded companies, like Apple or Microsoft, has many owners, anyone who owns a share is a partial owner. So even if Bill Gates or Steve Jobs were the founders, they are no longer the sole or even primary owners of the company. The board exists to represent the shareholders, and thus owners of the company, to ensure that the company operates in the best interest of the shareholders.

You can imagine a publicly-traded company like a government: it has citizens (shareholders) a legislature/parliament/congress (board) and a head of government/president (CEO.)

The board exists for the same reason a legislature does: there are too many citizens to get in a room to learn about and decide everything, so they elect representatives who do it on their behalf.

The main difference is that, in government, each citizen’s vote is equal, but in a corporation, shareholders get one vote for each share of stock, so shareholders with more shares can outvote others.

A board can never fire the owner**s**, because the board works *for* the owners — the shareholders together are the owners. But they can fire the founder of the company if the founder no longer owns enough of the company’s stock to control the board.

These answers are right, but a bit inaccurate in that all companies have a board. What’s important are to understand the difference between a board vote and shareholder votes. Companies’ articles of incorporation and bylaws determine what requires a board vote and what requires a shareholder vote.

First, boards represent the shareholders. For private companies, this can just be one founder, or more often consist of major shareholders (think venture capitalists). Public companies boards usually are made up of the CEO, a few directors elected by shareholders and “independent” board members. The board votes on things like executive compensation, exec hiring, etc. So if there is enough board votes, they can vote to strip a CEO/founder of their job. It’s important to note that person still holds their shares.

This serves as a check and balance as if a founder owns 51%, they may only have 1 board seat and thus cannot “bully” the other investors.

Finally, all companies have different rules on what is determined by the board vs shareholders