What Is the Difference Between the Board of Directors & the Stockholders of a Corporation?
Stockholders own shares in companies, which makes them collective owners. They elect a board of directors to lead their companies and look out for their investment interests. Boards have a legal responsibility to govern on behalf of the stockholders and help companies prosper. Directors sometimes own shares in a company, just as stockholders do.
Understanding the difference between a board of directors and stockholders, and when they intersect, will help you better manage your small business if you decide to incorporate.
History of Corporate Boards
The board-governance model began in England, when merchants in the 14th through 16th centuries engaged in global trade, explains Hofstra University. Autocratic monarchs appointed democratic collective-governing bodies to oversee commerce abroad. U.S. corporate statutes have regulated board governance since the early 1800s. New York’s 1811 Act officially placed the responsibility of managing companies’ “stock, property and concerns” on boards of directors. Today, most corporations around the world follow the board-governance model.
What are Boards of Directors?
Board members steer or manage corporations. For instance, business partners with technical know-how might recruit a board member with the financial or marketing experience they lack. Directors in this role serve as business advisers.
They do not need to be stock holders, but often are in for-profit companies. State and federal laws require small businesses structured as C or S corporations and those receiving venture capital funds to have a board of directors to manage their operations. Sole proprietors and partnership owners may assemble a board at will. Board members with expertise or skills owners or managers need are frequent choices.
Boards draft bylaws and rules for governing. Each board member has equal say in a decision, with a chairman of the board sometimes holding two votes in order to break ties; majority rules when they disagree. Directors formulate policies and set priorities, leaving the companies’ daily operations to officers and managers, according to the Free Management Library. Directors see that companies have the resources needed to operate and that they comply with laws and regulations. Boards also appoint officers and, occasionally, senior executives.
Directors recruit and nominate fellow board members. Once elected, they serve for a set term, as specified in the bylaws. Board members meet regularly, often monthly or quarterly, depending on the size of the business. They convene when necessary to handle crises and other emergencies. Nonprofits have boards of directors, even though there are no shareholders.
Types of Stockholders
Stockholders, or shareholders, might be friends, family members or third-party investors who buy ownership, or shares, in a small or startup company, according to legal website FindLaw. Stockholders also are owners, employees, managers and directors, in some companies.
In some cases, stockholders own part of a private business. These are often family members or business partners who start and own a "closely held" business. Public corporations sell shares to the general population to raise more money and to increase the price of the stock, helping the original and majority owners of shares increase their net worth. Public companies must meet and follow U.S. Securities and Exchange Commissions rules and regulations.
Business owners issue public shares to raise operating capital, starting by holding an initial public offering. Shares represent a percentage of a company’s value. Shareholders gain returns on their investments when businesses are profitable.
Shareholders have the legal right to hold meetings, approve directors’ nominations and vote on proposals. Bylaws and “articles of incorporation,” which businesses must draft to initially incorporate, outline shareholders’ rights and responsibilities.
Elections of Officers
Stockholders don’t choose candidates for board membership; they vote to elect or reject them. Company executives occasionally hand-pick candidates, whom directors nominate during annual meetings. Membership associations often hold public elections, with the bylaws directing the board regarding how elections are held, when announcements are made and who can vote.