A:

The average shareholder, who is typically not involved in the day-to-day operations of the company, relies on several parties to protect and further his or her interests. These parties include the company's employees, its executives and its board of directors. However, each one of these parties has its own interests, which may conflict with those of the shareholder.

The board of directors is elected by the shareholders of a corporation to oversee and govern management and to make corporate decisions on their behalf. As a result, the board is directly responsible for protecting and managing shareholders' interests in the company.

For a board of directors to be truly effective, it needs to be objective and proactive in its policies and dealings with management. This helps to ensure that management is generating shareholder value. A more objective board of directors, or one that is separate from a company's management, is more likely to promote or protect the interests of the company's shareholders. For example, a board of directors made up entirely or primarily of management would clearly be hampered by conflicts of interest, and the preservation of shareholder value might not be a priority.

Another factor that has an impact on the effectiveness of a board of directors is compensation. Adequately compensating board members for their work is one way to ensure that they will make every effort to promote and protect investor interests. The members of a board of directors are paid in cash and/or stock. Likewise, management and employees also need to be aligned with investors and this can be achieved through the compensation that both groups receive. This may include making both parties owners (investors) in the company. When management and employees are also shareholders, they will be motivated to protect shareholder interests as their own. This helps to protect a company from mismanagement and weak employee productivity. Also, a bonus targeting system can be used in which employees and managers receive bonuses when certain goals are met. Such strategies help to align the interests of employees and management with those of investors.

If these groups are not aligned with the interests of investors, major problems can arise and destroy shareholder value. Although the average shareholder does not have control over the board of directors or the day-to-day operations of the company, the ultimate responsibility for the protection of shareholder value lies with each individual investor. The investor is ultimately responsible for reviewing corporate policy and governance as well as for the compensation of managers. Investors who feel that a company does not show an adequate level of commitment to shareholders can always sell their investment.

For additional reading, see Governance Pays, The Basics Of Corporate Structure and Knowing Your Rights As A Shareholder.

RELATED FAQS
  1. How do a corporation's shareholders influence its Board of Directors?

    Find out how shareholders can influence the activity of the members of the board of directors and even change official corporate ... Read Answer >>
  2. What is the investor rights movement?

    The investor rights movement, also called shareholder activism, refers to the efforts of shareholders of publicly traded ... Read Answer >>
  3. What rights do all common shareholders have?

    Learn what rights all common shareholders have, and understand the remedies that can be taken if those rights are violated ... Read Answer >>
  4. What are some characteristics of ordinary shares?

    Read about some of the primary characteristics of ordinary shares, also known as common shares, including voting rights and ... Read Answer >>
  5. What can shareholders vote on?

    Understand the usual voting rights of common stock shareholders, along with the importance of shareholders exercising their ... Read Answer >>
Related Articles
  1. Investing

    The Basics Of Corporate Structure

    CEOs, CFOs, presidents and vice presidents: learn how to tell the difference.
  2. Investing

    What Does the Board of Directors Do?

    Every public company must have a board of directors. These boards establish administrative policies including the hiring and firing of executives, the distribution of dividends, and executive ...
  3. Small Business

    Governance Pays

    Learn about how the way a company keeps its management in check can affect the bottom line.
  4. Investing

    Who is a Shareholder?

    A shareholder is a person, company or other entity that owns at least one share of a company’s stock.
  5. Managing Wealth

    Knowing Your Rights As A Shareholder

    We delve into common stock owners' privileges and how to be vigilant in monitoring a company.
  6. Managing Wealth

    How To Become A Corporate Board Member

    We look at how corporate boards are constructed, and how investors can get involved.
  7. Managing Wealth

    Retired Execs: How Much Do Corporate Boards Pay?

    If you have the right skill set, getting a seat on a company board can be a lucrative and stimulating way to spend some of your new free time.
  8. Managing Wealth

    3 Reasons To Separate CEO And Chairman Positions

    Separating these high-profile positions can help to strengthen the overall integrity of a company.
  9. Investing

    Evaluating The Board Of Directors

    Corporate structure can tell you a lot about a company's potential. Learn more here.
  10. Managing Wealth

    Putting Management Under The Microscope

    We tell you where to find the telltale signs of corporate misdeeds.
RELATED TERMS
  1. Board Of Directors - B Of D

    A group of individuals that are elected as, or elected to act ...
  2. Shareholders' Agreement

    An arrangement among a company's shareholders describing how ...
  3. Shareholder

    Any person, company or other institution that owns at least one ...
  4. Corporate Governance

    The system of rules, practices and processes by which a company ...
  5. Directorate

    An organization headed by a director. In finance, directorate ...
  6. Annual General Meeting - AGM

    A mandatory, public yearly gathering of a publicly traded company's ...
Hot Definitions
  1. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  2. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  3. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  4. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  5. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  6. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
Trading Center