The Basics Of Corporate Structure
CEOs, CFOs, presidents and vice presidents: whats 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 20th century, many companies were small, family owned and family run. Today, many are large international conglomerates that trade publicly on one or many global exchanges.
In an attempt to create a corporation where 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. On the second tier is the upper management: these individuals are hired by the board of directors. Lets begin by taking a closer look at the board of directors and what its members do.
Board of Directors
Elected by the shareholders, the board of directors is made up of two types of representatives. The first type involves individuals chosen from within the company. This can be a CEO , CFO, manager or any other person who works for the company on a daily basis. The other type of representative is chosen externally and is considered to be independent from the company. The role of the board is to monitor the managers of a corporation, 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:
• Chairman – Technically the leader of the corporation, the chairman of the board is responsible for running the board smoothly and effectively. His or her duties typically include maintaining strong communication with the chief executive officer and high-level executives, formulating the companys business strategy , representing management and the board to the general public and shareholders, and maintaining corporate integrity. A chairman 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 management 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 companys 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 and impartial perspectives on issues brought to the board.
As the other tier of the company, the management team is directly responsible for the day-to-day operations (and profitability) of the company.
• Chief Executive Officer (CEO) – As the top manager, the CEO is typically responsible for the entire operations of the corporation and reports directly to the chairman and board of directors. It is the CEOs responsibility to implement board decisions and initiatives and to maintain the smooth operation of the firm, with the assistance of senior management . Often, the CEO will also be designated as the companys president and therefore also be one of the inside directors on the board (if not the chairman). (To learn about what CEOs sometimes do but shouldnt, see Pages From The Bad CEO Playbook.)
• Chief Operations Officer (COO) – Responsible for the corporations operations, the COO looks after issues related to marketing, sales, production and personnel. 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 Finance 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 this information 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 corporations financial health and integrity.
How Does This Affect Your Investment?
Together, management and the board of governors 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 are made up of management.
When you are researching a company, its 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 chairman roles and a variety of professional expertise on the board from accountants, lawyers and executives. Its not uncommon to see boards that are comprised of the current CEO (who is chairman), 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.