Corporate Structure Basics With Examples

What Are the Basics of Corporate Structure?

CEOs, CFOs, presidents, and directors—what's the difference? Modern corporations have a variety of different leadership positions, with different responsibilities. Most public companies have a two-tier corporate hierarchy: the management team reports to the board of directors, who in turn are responsible to the shareholders.

Key Takeaways

• The most common corporate structure in the United States consists of a board of directors and the management team. 
• Boards of directors most often include inside directors, who work day-to-day at the company, and outside directors, who can make impartial judgments.
• Most management teams have at least a Chief Executive Officer (CEO), a Chief Financial Officer (CFO), and a Chief Operations Officer (COO).

Understanding the Basics of Corporate Structure

A company may choose to follow several models of corporate governance. These can have traditional, pyramid-shaped leadership roles, or have flexible leadership structures. Most public corporations consist of a board of governors or directors, and one or more executives. In some cases, the same person may occupy multiple positions.

These bodies exist because the evolution of public ownership has created a separation between ownership and management. Before the late 19th century, many companies were small, family-owned, and family-run. Today, many are gigantic international conglomerates with thousands of shareholders.

The modern system of corporate governance exists to ensure that companies represent the interests of their owners stockholders. The board of directors is elected by the shareholders of the corporation. They are responsible for overseeing the work of the management team, including the chief executive officer and other C-suite executives.

The Board of Directors

Elected by the shareholders, the board of directors is made up of two types of representatives. The first type involves inside directors 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 encompasses outside directors, chosen externally and considered independent of the company. The role of the board is to monitor a corporation's management team, 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:

Chair: Technically the leader of the corporation, the board chair is responsible for running the board smoothly and effectively. Their 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. The chair 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 the 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 perspectives on issues brought to the board. By being unbiased and detached from management, outside directors provide independent representation of shareholders, broaden the company's thinking beyond management's perspective, and help to insure transparency, accountability, and ethical conduct.

Note

In some corporations, the same person may serve multiple roles on the management team and board of directors. For example, Boeing's CEO is also the president, and a member of the Board of Directors.

The 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. They often work with lower-level staff managers, who, in turn. convey company orders to supervisors. Supervisors then work directly with the junior staff members frequently located in the bullpen.

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

Special Considerations

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 chair 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 chair), 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.

What Does a Board of Directors Do?

A company's board of directors is responsible for setting the long-term strategic direction of a company or organization. This can include appointing the executive team, setting goals, and replacing executives if they fail to meet expectations. In public companies, the board of directors is also responsible to the shareholders, and can be voted out in a shareholder election. Board members may represent major shareholders, or they may be executives from other companies whose experience can be an asset to the company's management.

What Does a Company President Do?

In large companies, the CEO is the highest-ranking executive and the president is the second-highest. However, it is also possible for one person to hold both offices, or for a company to have a CEO and no president. A president is typically responsible for the day-to-day operations of a company, and their role may overlap with a chief operating officer.

What Is the Difference Between a CEO and Chair of the Board?

In large corporations, the chairperson presides over the board of directors, ensuring effective governance and strategic planning. The management team, including the CEO, is responsible for executing that strategy and meeting the goals set by the board. It is possible for one person to hold both roles, although in larger companies they tend to be separate.

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 include members of the management team. 

Read the original article on Investopedia.