How CEOs Work

Corporate Structure: Board of Directors

Have you ever tried to understand the ranks of executives in a company only to get lost in acronyms and jargon? You're not alone; the balance of power in the corporate world can be confusing even to those entrenched in it. But don't dismay: We'll walk you through the basic corporate structure.

Just like many governments, corporations have a system of checks and balances so that not too much power is centered in one person or group. In companies, the structure is set up to separate powers of ownership and management. This wasn't always the case. Before the Industrial Revolution in the 19th century, companies were typically family-run and very small by today's standards. But eventually, powered by machines and advanced efficiency, individual companies grew exponentially. Soon after came the dawn of public ownership of companies, which helped fund these gargantuan institutions.

When various shareholders have partial ownership of a company, they want to make sure whoever's running the show is looking out for their best interests. This is what a board of directors is for. The board represents the shareholders and other stakeholders (those who have a vested interest in the company). The board of directors doesn't run the company itself, but it oversees those who do.

In a public company, the shareholders elect the members of a board of directors. The board is headed by a chairman and contains other directors, the number of which varies from company to company. Directors can be either inside directors or outside directors. Inside directors are those who are also managers in the company or happen to be major shareholders. Outside directors, on the other hand, don't have a role in the company. They typically have experience in the industry (or might even be chief executive officers of other companies), which allows them to make informed decisions about the business. Some have memberships on multiple boards.

While inside directors can share their unique insight from an internal perspective, outside directors are considered unbiased. Both kinds of directors have the same general responsibilities on a board. Directors oversee the management of the company collectively by approving strategies and budgets. They may not meet regularly, and the influence they truly wield over management can depend on the dynamics and atmosphere of the company.