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, executives, and board of directors. However, each one of these parties has its own interests, which may conflict with those of the shareholder.

Key Takeaways

  • Shareholders' interests are protected by several parties both within and outside the corporation.
  • The board of directors is elected by the shareholders to govern the management team and to make corporate decisions on their behalf.
  • The board is directly responsible for protecting and managing shareholders' interests in the company.
  • Proper compensation packages for employees and board members can help align their interests with the company's shareholders.

Understanding Who's Responsible for Shareholders Interests?

The board of directors is elected by the shareholders of a corporation to oversee and govern the 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.

Regulators, such as the U.S. Securities and Exchange Commission (SEC) also protect shareholders by helping to facilitate the smooth functioning of the financial markets. The SEC requires publicly-traded corporations to disclose their financial statements periodically throughout the year. As a result, investors and shareholders can access a company's SEC filings, which might include news of mergers, acquisitions, and financial information pertinent to shareholders' interests.

Who Are the Board of Directors?

The structure of a company's board helps to protect shareholders by having checks and balances in place and ensuring there aren't any conflicts of interest between the board members and management of the company.

The board of directors structure is made up of several representatives, including individuals chosen from within the company, called inside directors, as well as those chosen from outside the company called outside directors. The inside director could be an executive within the company or a major shareholder. The goal of the outside director is to provide an objective point of view and help with settling any disputes within the company.

The board of directors typically elects a chairman, who is responsible for ensuring the board runs effectively. The chairman also ensures that the corporation and its management team are acting responsibly. The board chairman represents a public face for the company on behalf of the management team to the shareholders. 

All publicly-traded companies in the United States must have a board of directors comprised of both inside and outside representatives. The role of the board of directors is to act as an advocate for shareholders and monitor the corporation's management team to ensure that they are promoting and maximizing the shareholders' interest. 

A board chairman is typically a different person than the chief executive officer (CEO), who is responsible for running the company's operation. The CEO's job is to execute the strategy laid out by the board, the management team, and it ensure that shareholders interests are met. Some corporations have the same individual occupy both the CEO and board chairman position. However, many companies opt to have the position occupied by two individuals to help prevent conflicts of interest and protect shareholders.

How The Board of Directors Protects Shareholders

A board of directors needs to be objective and proactive in its policies and dealings with management in order to be truly effective. This helps to ensure that management is maximizing 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.

Compensation

Compensation has an impact on the effectiveness of a board of directors. It's important to note the members of the board of directors can have an ownership interest in the company by owning stock. 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 can be paid in cash and 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.

The Role of Employees

When management and employees are also shareholders, they are typically more 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.

The Role 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.