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However, in reality, shareholders and directors are distinct roles with important differences for a corporation.
What’s the difference between shareholders and directors?
What is a shareholder?
Because shares are units of ownership in a company, a person becomes a shareholder by purchasing shares and meeting the company's Shareholder Agreement requirements. The more shares they own, the greater the percentage of the company they own.
What is a director?
Take Apple Inc. as an example. It has over 6000 shareholders, the top 10 of them being other corporations. However, only nine directors represent the shareholders and make decisions for Apple.
The directors make business and financial decisions on the shareholders’ behalves and hire the managers and corporate officers that'll run the day-to-day operations.
If the shareholders aren't happy with the job a director is doing, they can also remove a person from that role. It's important to note that a director can be a shareholder in the company as well.
Some corporations have three types of directors:
- Chairperson: This person is the head of the board of directors and is in contact with the company president. They also often make sure director meetings run smoothly.
- Inside directors: These people are usually also shareholders, officers, or upper management within the corporation.
- Independent directors: These people generally don't hold another role within the company other than a director.
How are directors selected?
A majority vote is precisely what the name implies. A nominee needs to receive a vote from the majority of the company's shareholders. If they don't, they aren't elected to the board of directors. The CII says nine in 10 companies use this method.
The other method is a plurality vote, and it's when the nominees with the most votes from the shareholders earn a position on the board. For example, if a company has five directors on its board and 15 nominees are running, the nominees with the five most votes are elected as the directors.
How are directors removed?
In some states, like California, the court has the power to remove a director if it finds they committed fraud or abused their position of authority, or it determines the director of 'unsound mind.'
How does a shareholder stop being one?
To voluntarily give up their shares, a shareholder can sell their shares to a buyer. Some Shareholder Agreements also include a tag-along clause. This clause allows a minority shareholder to automatically sell their shares (if they choose) to a buyer purchasing a majority owner's shares. The clause protects them from third-party buyouts.
However, just like directors, shareholders can be forced to give up their position in a corporation. For an involuntary removal to occur, the board of directors needs to be presented with evidence of violating the Shareholder Agreement or Corporate Bylaws. For example, many agreements and bylaws prohibit conflicts of interest.
For shareholders who don’t own more than 25% of a company’s shares, the board then votes on their removal. If the agreement or bylaws don't specify the required number of votes to remove a shareholder, 75% in favor of removal is the default threshold. If the vote passes, the shareholder is forced to sell their shares to fellow shareholders or back to the company. It's worth noting that voting out shareholders is generally rare and more likely to occur in a private company with fewer shareholders than one that trades stock publicly.
What are a shareholder’s responsibilities?
These elections hold the directors accountable for their decisions. Although shareholders can't amend decisions already made, they can voice approval for specific actions or raise objections that will influence future decisions. If the shareholders disagree with the direction a director is taking the company, they may be able to remove the director from their position on the board.
Depending on the directors' and managers' philosophies, the shareholders sometimes need to push a company to evolve with the times. These changes can be related to products, internal tools, advertising, or even the optics surrounding environmental, social, and humanitarian issues.
Shareholders are also responsible for creating the Shareholder Agreement that outlines their rights, responsibilities, and procedures for buying, selling, or transferring shares.
What are a director’s responsibilities?
As the company’s fiduciary, directors determine its visions and goals with the shareholders in mind. It’s their job to ensure they’re protecting the business’ assets and providing financial oversight.
How do directors and shareholders make money from the company?
Shareholders, on the other hand, don't have a salary. Shareholders’ compensation comes from their ownership of shares. They can either make money on dividends or capital appreciation.
Dividends are a portion of a company's profit distributed back to the shareholders periodically. The other option, capital gains, is when a company's share value increases after its owner purchases it. For example, if a shareholder purchases a share at $10 and the value rises to $15, they could sell it and make a $5 profit.