What Are the Basics of Corporate Structure?
CEOs, CFOs, presidents and vice presidents—what's the difference? With the changing corporate horizon, it has become increasingly difficult to keep track of what people do and where they stand on the corporate ladder. Should we be paying more attention to news relating to the CFO or the vice president? What exactly do they do?
Corporate governance is one of the main reasons that these terms exist. The evolution of public ownership has created a separation between ownership and management. Before the late 19th century, many companies were small, family-owned and family-run. Since that time, many larger corporations began to form and establish themselves. Today, many are gigantic international conglomerates that trade publicly on one or many global exchanges.
In an attempt to create a corporation in which stockholders' interests are looked after, many firms have implemented a two-tier corporate hierarchy. On the first tier is the board of governors or directors: these individuals are elected by the shareholders of the corporation.
Key Takeaways
- The most common corporate structure in the United States consists of a board of directors and the management team.
- Boards of directors most often include inside directors, who work day-to-day at the company, and outside directors, who can make impartial judgments.
- The top of most management teams has at least a Chief Executive Officer (CEO), a Chief Financial Officer (CFO), and a Chief Operations Officer (COO).
On the second tier is the upper management: these individuals are hired by the board of directors. Let's begin by taking a closer look at the board of directors and what its members do. Please note that this corporate structure is what's common in the U.S.; in other countries, corporate structure might be slightly different.
Understanding the Basics of Corporate Structure
Board of Directors
Elected by the shareholders, the board of directors is made up of two types of representatives. The first type involves inside directors chosen from within the company. This can be a CEO, CFO, manager, or any other person who works for the company daily.
The other type of representative encompasses outside directors, chosen externally and considered independent of the company. The role of the board is to monitor a corporation's management team, acting as an advocate for stockholders. In essence, the board of directors tries to make sure that shareholders' interests are well served.
Board members can be divided into three categories:
Chair: Technically the leader of the corporation, the board chair is responsible for running the board smoothly and effectively. Their duties typically include maintaining strong communication with the chief executive officer and high-level executives, formulating the company's business strategy, representing management and the board to the general public and shareholders, and maintaining corporate integrity. The chair is elected from the board of directors.
Inside directors: These directors are responsible for approving high-level budgets prepared by upper management, implementing and monitoring business strategy, and approving core corporate initiatives and projects. Inside directors are either shareholders or high-level managers from within the company.
Inside directors help provide internal perspectives for other board members. These individuals are also referred to as executive directors if they are part of the company's management team.
Outside directors: While having the same responsibilities as the inside directors in determining strategic direction and corporate policy, outside directors are different in that they are not directly part of the management team. The purpose of having outside directors is to provide unbiased perspectives on issues brought to the board. By being unbiased and detached from management, outside directors provide independent representation of shareholders, broaden the company's thinking beyond management's perspective, and help to insure transparency, accountability, and ethical conduct.
Management Team
As the other tier of the company, the management team is directly responsible for the company's day-to-day operations and profitability. They often work with lower-level staff managers, who, in turn. convey company orders to supervisors. Supervisors then work directly with the junior staff members frequently located in the bullpen.
Chief Executive Officer (CEO): As the top manager, the CEO is typically responsible for the corporation's entire operations and reports directly to the chair and the board of directors. It is the CEO's responsibility to implement board decisions and initiatives, as well as to maintain the smooth operation of the firm with senior management's assistance.
Often, the CEO will also be designated as the company's president and, therefore, be one of the inside directors on the board (if not the chair). However, it is highly suggested that a company's CEO should not also be the company's chair to ensure the chair's independence and clear lines of authority.
Chief Operations Officer (COO): Responsible for the corporation's operations, the COO looks after issues related to marketing, sales, production, and personnel. Often more hands-on than the CEO, the COO looks after day-to-day activities while providing feedback to the CEO. The COO is often referred to as a senior vice president.
Chief Financial Officer (CFO): Also reporting directly to the CEO, the CFO is responsible for analyzing and reviewing financial data, reporting financial performance, preparing budgets, and monitoring expenditures and costs.
The CFO is required to present this information to the board of directors at regular intervals and provide it to shareholders and regulatory bodies such as the Securities and Exchange Commission (SEC). Also usually referred to as a senior vice president, the CFO routinely checks the corporation's financial health and integrity.
Special Considerations
Together, management and the board of directors have the ultimate goal of maximizing shareholder value. In theory, management looks after the day-to-day operations, and the board ensures that shareholders are adequately represented. But the reality is that many boards include members of the management team.
When you are researching a company, it's always a good idea to see if there is a good balance between internal and external board members. Other good signs are the separation of CEO and chair roles and a variety of professional expertise on the board from accountants, lawyers and executives.
It's not uncommon to see boards that consist of the current CEO (who is chair), the CFO, and the COO, along with the retired CEO, family members, etc. This does not necessarily signal that a company is a bad investment, but as a shareholder, you should question whether such a corporate structure is in your best interests.
