Every organization, be it a corporation, a not-for-profit agency or even a large partnership, needs a hierarchy for decisions to ultimately be made and carried out.

It is said that a successful business is either growing or dying - there is no in between.

In that context, a leadership hierarchy is essential.

For corporations, the traditional triumvirate between shareholders, directors and officers has withstood the test of time.

SHAREHOLDERS

Shareholders are, well, holders of shares!

They are the owners of the company.

If the company were ever wound up, the shareholders would distribute the proceeds prorated between them based on the number of shares each held.1

There are many different kinds of shares but for the purpose of this article, the only shareholders that count are those with voting rights.

Typically, and annually, the owners of the corporation (the shareholders) get together in a formal meeting usually called the Shareholders Annual Meeting or even Annual General Meeting (AGM).

Corporate hierarchyUsually a shareholder does not have expertise in the business of the company or if he or she does, there is a lack of appreciation for the entire business of the corporation such that any specific proposal made by a shareholder in terms of the operation of the company may not make financial sense in the whole context of the corporation at that time.

While any number of weird or unusual proposals may be put by shareholders to their colleagues at these meetings, the point of a shareholder AGM is usually threefold: to approve ongoing or novel business plan proposals; to receive, consider and approve the financial documents for both the past fiscal year and the budget for the upcoming fiscal year; and to re-elect or fill vacancies or replace membership on the board of directors.

Except for very small corporations, shareholders do not manage the company on a day-to-day basis. Their primary objective is a return on their investment. They do not buy shares to produce the world's greatest coffee or best running shoes. They leave that to management and business administration experts. All the shareholder usually wants is profit: a dividend.

For the shareholder, the best way to make sure the corporation makes money is to higher experts in management and administration and go away and let them do their job. This, they do by electing directors.

At the corporation's AGM, a slate of directors will be presented to the shareholders for approval by majority vote.

There is no pecking order between voting shareholders with the exception of the chairman, chairperson or chair and secretary of the AGM, both having considerable authority on matters of process and procedure subject, of course, to any corporate procedure statute or internal bylaws that might apply.

Once elected, directors are given considerable freedom to run the business. Where a director performs poorly, they would not likely be reappointed. Alternatively, successful directors are often kept in their positions for years.

Shareholders do retain a pair of eyes amidst the directors in the office of a Corporate Secretary (often combined with the office of General Counsel) who will also serve as a formal liaison person for the shareholders and the separate legal entity of the corporation.

DIRECTORS

The Canada Business Corporations Act, at §102, asserts a typical rule of law as regards the jurisdiction and authority of the directors:

“Subject to any unanimous shareholder agreement, the directors shall manage, or supervise the management of, the business and affairs of a corporation.”

The committee of directors is usually known as the Board of Directors. It is the most powerful decision-making body of any corporation.

To reflect this reality, note the law as stated in the Corporations Code of California:

“The business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors.”

More specifically, the duties and responsibilities of directors, as is the case with officers, where applicable, are set out in the corporation's bylaws, also sometimes known as the company’s articles or regulations.

Another legal document might impact upon the legal authority of a directors, the shareholder agreement. Typically, a shareholder agreement will enable a small corporation to select one of the shareholders to act as director, to be the company manager.

It is not a requirement that directors hold shares; i.e., be shareholders. They are frequently employees of the corporation.2

But for large, multinational corporation, the preferred model is to populate the board of directors with non-employee individuals.

For example, circa 2009, the board of directors of Microsoft Corporation included, as chairman, Bill Gates. No employees of Microsoft sat on the board of directors except for Steve Ballmer, the chief executive officer.See no evil

The same situation prevailed at Nike where the founder, Phil Knight, was chairman of the board of directors. Nike has a president, who is also chief executive officer.

While most corporations do not preclude shareholders from becoming directors, or directors from buying shares,  you will find statutes which prohibit a minor or a bankrupt from being a director of a corporation.

Some jurisdictions also try to control for content of corporations by restricting the number of non-resident directors.

The job of a director is to organize the business in an efficient fashion and which maximizes the profit of the business in the short and long term. Directors are almost always appointed based on merit and not on wealth.

Typically, the most senior director will be called chief executive officer (CEO), executive director or president.3

Under the general authority of, and reporting to a CEO, at least as regards a large corporation, one would find a chief financial officer (often also the Treasurer), a corporate secretary, a general counsel and a number of other offices which may or may not go by the title of vice-president(s).

For corporations which operate over a large territory, vice-presidents may be assigned to specific components of that territory such as, for example, Vice President, Western Division.

For corporations which are require technical knowledge, director ships or vice presidencies might be assigned by specialty such as, for example, Vice President, Engineering.

For smaller companies, directors might be assigned to operate complete components of the business, under the general supervision of the CEO.

The source and employment status of directors will vary from corporation the corporation depending on the size of the corporation and the nature of its business.

The directors meet regularly, weekly, monthly, quarterly or at the call of the CEO, and is usually chaired by the CEO, which explains why that position is often known as President.

For larger corporations, the company is too large for the director to have anything but a macro view of his or her area of authority. This situation requires deployment of a further management level, the appointment of officers.

OFFICERS

Officers are on the front line of management.

The primary legal indicator of an officer is whether the corporate bylaws or constitutional documents declare that position to be that of an officer.

In the absence of a clear definition in the bylaws of a corporation, other legal indicators include that he or she was appointed by the board of directors, or has access to some confidential corporate information.

If, on an organizational chart, the employees are set out at the bottom, the officers would appear above the employees as reporting to their respective directors who, in turn, report to the CEO.

Officers are rarely appointed by the shareholders. Officers are usually appointed by directors in order to provide front-line, management level supervision of regular employees.

Almost like a military set up, officers report to the board of directors through a director, and a board of directors communicates to an officer through his or her director.

An example of officers might include a small team of chartered general accountants will report to the chief financial officer; or a small team of corporate counsel report to the General Counsel who, in turn, reports to the CEO; or a team of factory supervisors.

CONFLICT OF INTEREST AND FIDUCIARY DUTY

Directors and officers, as members of the management of the corporation, have a fiduciary duty to the corporation. The essence of that duty is that they must not place themselves or their private interests in conflict with the best interests of the corporation.

A good reflection of the common law duties of a director or officer, as codified in the statute, can be found at §142 of the Business Corporations Act of British Columbia:

“A director or officer of a company, when exercising the powers and performing the functions of a director or officer of the company, as the case may be, must act honestly and in good faith with a view to the best interests of the company, exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances ...and subject to ... (the above), act in accordance with the memorandum and articles of the company.”

REFERENCES

  • Business Corporations Act, S.B.C. 2002, c. 57
  • California Corporations Code, §300(a)
  • Canada Business Corporations Act, R.S.C. 1985, c. C-44
  • Duhaime, Lloyd, Consumer and Commercial Law
  • Duhaime, Lloyd, Legal Definition of Corporate Secretary
  • Duhaime, Lloyd, Legal Definition of Director
  • Duhaime, Lloyd, Legal Definition of Officer
  • Note 1: This, however, might be superseded by a share-holders agreement or by a specific right assigned to a privileged share.
  • Note 2: Under certain circumstances, it might be appropriate to have a non-employee (such as an independent contractor) act as director but other than temporary or emergency situations, these situations would necessarily be rare since the motivation, duties and responsibilities towards the corporation of the employee are far in excess of those owed by an independent contractor.
  • Note 3: In some jurisdictions, the word President is reserved for the person who chairs the shareholder AGM.