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

Question

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

Answer 1

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.