The Basics Of Corporate Structure

By Investopedia Staff AAA

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 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. Let's begin by taking a closer look at the board of directors and what its members do. Please note this article focuses on corporate structure in the U.S.; in some other European countries corporate structure might be slightly different.

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 daily. 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 a corporation's managers, 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 board chairman 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 company's 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 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 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 and impartial perspectives on issues brought to the board.

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.

  • Chief Executive Officer (CEO) – As the top manager, the CEO is typically responsible for the corporation's entire operations and reports directly to the chairman and board of directors. It is the CEO's responsibility to implement board decisions and initiatives, and to maintain 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 chairman). However, it is highly suggested that a company's CEO should not also be the company's chairman to ensure the chairman'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. 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.

The Bottom Line
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 consist of management.

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 chairman 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 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.

Related Articles
  1. Utilizing Prisoner’s Dilemma In Business ...
    Economics

    Utilizing Prisoner’s Dilemma In Business ...

  2. Finding The Best Buyer For Your Small ...
    Entrepreneurship

    Finding The Best Buyer For Your Small ...

  3. Start Your Own Small Business
    Entrepreneurship

    Start Your Own Small Business

  4. Should You Incorporate Your Business?
    Entrepreneurship

    Should You Incorporate Your Business?

  5. Traditional MBA Or Business Graduate ...
    Professionals

    Traditional MBA Or Business Graduate ...

Trading Center