Board of Directors – who controls the Boardroom?

Control of a company means the right to take decisions about how corporate resources are managed. In practice, this means the right to appoint the CEO, because the CEO has operational decision-making authority with respect to the company’s resources.

The Board in control

The Board of Directors asserts control of the company in the Boardroom. The Board has the authority to appoint and dismiss the CEO, and if control means the right to appoint the CEO, then the Board has control.

But going beyond this meaning of control, the issue of who has control is more subtle and complex.

Shareholder control

To take matters up one level, although the Board asserts control in the Boardroom, the Board itself is controlled by the shareholders, who collectively have the right to appoint Directors by voting at shareholders’ meetings. On this meaning of control, the shareholders have ultimate control.

On the other hand, the shareholders find it hard to exercise control, collectively or individually. There may be many of them, so it is impractical for them to come together very often to take decisions jointly, and many are apathetic. The best they can manage is an annual meeting, which is poorly attended and has low proxy voting participation.

With this lack of clarity about where real control lies, investors with less than all the shares may find that taking control or a degree of control, is within their grasp.

Owning 100 percent of a company’s shares means controlling 100 percent of the company’s shareholder votes, and implies control of the Board of Directors. This is clearly full control of the company. This is the situation where a holding company has a wholly-owned subsidiary.

A public company usually has many shareholders and they are dispersed. Still, some public companies have a single shareholder with majority control – the holding of 50 percent plus one of the company’s shares and therefore of its shareholders’ votes. This majority shareholder can singlehandedly carry a majority vote at a shareholders’ meeting.

Even a minority shareholder can have control. A shareholder who holds a block of shares smaller than 50 percent can effective minority control of a public company. For example, holding 30 percent or even 20 percent of the shares may enable the shareholder to exercise control of the company, if that shareholder is the biggest blockholder and all other shareholders have small shareholdings and are dispersed and cannot coordinate opposition to the blockholder’s initiatives.

Control with zero shareholding

And then there is influence - the ability to affect the company’s projects and strategic decisions by engagement, persuasion or other negotiating leverage over the Board of Directors, without holding any shares.

Who has this influence? Outsiders sometimes, if they have personal contracts with Directors and are able to influence their decisions. In a public company dominated by one family, family members may have sway over the Board’s decisions even if they are not themselves shareholders. Major suppliers or customers may indicate that they will shut down commercial relationships if their plans are not implemented by the Board. Creditors are able to influence Board decisions based on their contractual rights against the company.

Activist investors are also in this spotlight. They sometimes use investments in private derivative contracts to exert influence or control over public companies. The strategy is to make public disclosure of holdings of derivative contracts, deemed under shareholder interest disclosure laws to be equivalent to equity interests. These disclosures enable the investors to threaten to use their derivative contracts to acquire shares in the future, and so to lean on the Board of Directors to accede to their demands.

So the answer to the question who controls the Boardroom may not always be as clear as it seems.