Question 4There are three ‘official’ centers of authority in a public corporation: the company’s shareholders, its Board of Directors, and its management. The shareholders are the corporation’s owners, and thus – at least in theory – are ultimately in charge. However, shareholders of a large public corporation are not normally in a position to manage the company in any very detailed way; the vast majority of individual shareholders have far too small a stake in the corporation to have any real influence on their own, and institutional shareholders (which nowadays usually constitute the largest shareholders) tend to be fairly passive in most situations.
The only way in which shareholders normally get to exercise their theoretical control over a publicly-traded company is to attend its annual general meeting (AGM) and vote their shares, or else to provide someone else with a proxy statement authorizing the latter person to vote the shares on their behalf. Shareholders vote for members of the corporation’s Board of Directors, and also on resolutions involving major issues such as executive pay policies, takeover defenses, and so on. Under normal circumstances, management is able to vote sufficient shares of stock (either through direct ownership or through proxies) to retain effective control of the AGM and elect management-friendly directors.
The exception to this is when a corporation has had particularly bad financial results or a scandal of some sort, in which case a ‘shareholder revolt’ may lead to meaningful change at the AGM; or when an activist shareholder has accumulated sufficient shares and proxies to get him/herself or a chosen nominee onto the Board of Directors. The Board of Directors is responsible for the top-level (but not day-to-day) management of a corporation: hiring and firing the top level of management, setting the broad outlines of corporate policies, and monitoring compliance with these policies.
In theory, the Board is supposed to represent shareholder interests and act as a check on management; but nowadays management usually has so much influence on the Board of Directors that the value of the Board as an independent power center has been much diluted. Management, headed by the corporation’s Chief Executive Officer (CEO), is responsible for the day-to-day administration of the company.
The CEO and other top managers report to the Board of Directors, and in turn are empowered to hire and fire lower-level managers and employees, and to manage all other affairs of the corporation in line with the policies determined by the Board of Directors. A. When corporate executives are awarded bonuses based purely on quarterly or annual profits, they may be tempted to sacrifice the corporation’s long-term interests in favor of short-term results – since successful strategic management typically pays off over many years, but often produces small or even negative short-term results.
‘Short-termism’ can result in decisions that are immediately profitable but costly in the long run; for example, managers may decide to squeeze more income out of current customers with high prices and charges, economize on customer-service staff, minimize investment in environmental quality and community relations, engage in risky transactions that show an immediate profit but may be very costly in the future, and so on.