In this lecture we will examine the governing structure of the business corporation. In examining the business corporation we will notice that in many ways the governing structure of a business corporation bears some similarities to the governing structure of a government. In a government there are generally three levels of individuals who are involved in the operation of a government. At the top of the governance of a government there will be an individual identified as a president or a prime minister. This is the individual who is responsible for the creation or setting of governmental policy. In the United States the president will set governmental policy whether it involves issues of defense, foreign relations, education agriculture etc. Below the President of the United States there is a level of cabinet secretaries whose function is to implement the policy decisions of the president. As an example if the President of the United States makes a decision regarding the deployment of American troops, the Secretary of Defense will be in charge of implementing this decision. At the lowest level of policy making within a government we find the citizen. The citizen has but one function in this hierarchy, which is to vote for the chief executive, specifically the president.

The corporate hierarchy operates in a similar fashion. At the very top of the corporate hierarchy we will find the corporate Board of Directors. This is where the business corporation is governed and where the business policy decisions will be made. The Board of Directors is where all corporate decisions are made and where corporate power lies. Beneath the Board of Directors we find the corporate officers. The corporate officers may be denominated as the corporate president or the Chief Executive Officer (CEO). There may be several layers of vice presidents, a corporate treasurer sometimes called the chief financial officer (CFO). The corporate officers do not create corporate policy, they implement corporate policy. An example of this may be seen in a large banking organization where a bank vice president may be directed by the corporate headquarters (board of directors) to urge the bank's customers to invest in certain financial products which the bank offers for sale. At the lowest level of the corporate hierarchy we find the shareholder. The shareholder is essentially the citizenry of the business corporation. The shareholder much like the citizen in our governmental model also has but one corporate function which is to vote. The shareholders elect the corporate Board of Directors when they vote at the annual shareholders' meeting. This is why we indicated in our last lecture, that when a corporation is formed the first function of the temporary Board of Directors is to set a date for a shareholders' meeting so that a permanent Board of Directors can be elected.

It is important to note that shareholders do not vote in the same manner that citizens of a nation - state vote. Ordinarily in a civic election a citizen will cast but one vote in an election. In a corporate election however, the shareholder will have as many votes as the shareholder holds of the corporations common stock. Hence if a shareholder owns 100 shares of Verizon (or any other corporate) stock, the shareholder will have 100 votes at the shareholders' meeting. It should be noted that often large corporations will issue preferred stock in addition to common stock. Preferred stock ownership often comes with certain advantages in terms of the corporate dividend payments and other matters, however preferred stock usually does not gives its owners (shareholders) any voting rights in the business corporation.

Duties of Directors

Generally a corporate director has a duty as part of the Board of Directors to take action on behalf of the corporation. Corporate directors are considered by the law as fiduciaries, persons who have an absolute duty of loyalty. Thus the primary duty of the corporate director(s) in terms of loyalty is to always act in the best interests of the corporate shareholders in terms of corporate operations. Specifically:

1) A director must use his/her best judgment in the operation of the corporation.

2) A director must avoid any activity that will result in a conflict as between their personal interests and their duties as a corporate director. Specifically a director may not act to reap a personal profit at the expense of the corporation.

Duties of Corporate Officers

In general corporate officers are charged with managing the day to day business affairs of the corporation. As such:

1)A corporate officer must perform the duties that are delegated to the corporate officer by the Board of Directors

2) A corporate officer must perform his/her duties in good faith. The legal standard for such performance has been established as requiring the corporate officer to exercise the care of an ordinary prudent person in a like position under similar circumstances.

Shareholders

Shareholders are considered by law to be the owners of the business corporation. When a person becomes a shareholder by the purchase of stock in a business corporation, he/she is purchasing an actual ownership interest in the business corporation. The ownership of corporate stock (shares) in a corporation gives the shareholder certain entitlements. They are as follows:

1) Shareholders have the right to vote. As stated earlier, generally common stock shareholders get to vote to the extent of the number of common corporate shares of stock they own.

2) Right of Distribution; Shareholders have an entitlement to receive a share of the corporate profits. This is often in the form of a declared dividend that is determined periodically by the Board of Directors as per the corporate by laws based upon corporate profitability.

Question:

Write a one to two page essay describing the obligations of corporate directors to a business corporation. In your essay include a discussion of the different duties that active and inactive directors have with respect to business corporation operations.