Corporate Governance

As you can imagine, a corporation takes a whole team or people and structure of governance to function. Corporate governance is the branch of corporate law which studies this relationship between those in charge of a corporation, and the people who elect them. As you might imagine, there may be considerable friction between what the shareholder wants and what happens to be in a board member’s immediate interests. Minimizing this friction and ensuring that the elected officials act in the company’s interest is the goal of effective corporate governance.

Board of Directors

In the United States, a single board of directors is the standard form of corporate governance used. This board of directors is elected by shareholders and is put in place to effectively run the corporation. Maintaining a good balance of power between shareholders and the elected board is important in creating a well-functioning company. While it makes sense to delegate many tasks to the board, certain issues are more appropriately voted-upon directly by shareholders in the company.

In order to ensure that the board acts in the interests of the company, most laws make it relatively easy to fire a board member if they have acted inappropriately. Board members must be very careful not to put themselves in a position where they would have a conflict of interest about their duties to the company---once a conflict has arisen or is suspected, the member must supply all potential gains they could net from the conflict.

The Corporate Constitution

Even though corporations are “people” in the eyes of the law, they all have something that normal people don’t have: constitutions or charter documents that lay out how the corporation will be organized and run. These documents are themselves governed by state and national law covering corporate law. For many U.S. companies, this law is the Delaware General Corporation Law, since over 50% of publically traded companies operate out of this state. The law discusses elections, voting, merging, stocks and dividends, and information about the powers of the board of directors.

Internal Suits

This corporate governmental structure is set up to protect shareholders and to keep the business entity operating in an ethical way. But what if it doesn’t? There are certain instances when shareholders may sue to protect their rights. If, for example, the company is not run in accordance with its constitution or a group of shareholders votes to perpetrate a fraud against the others, shareholders may choose to file a suit against the corporation. Shareholders can even file a suit on behalf of the company against another group in the company, something called a derivative suit.

 

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