Corporations, like representative governments, are structured differently from one another, according to their needs as defined by their charter or articles of incorporation. Because publicly traded companies must allow their shareholders the opportunity to influence corporate policies, it’s easiest to conceive of corporate governance as similar to representative democracy, with shareholders serving as the voting populace and members of the board acting as elected officials. The election and nomination process varies between corporate structures in choosing a chief executive officer.
Traditional CEO Elections
In most corporate structures, shareholders don’t directly elect a company’s chief executive officer. Instead, they vote to elect the board of directors using a weighted voting system in which shareholders with larger stakes in the company have more weight in the outcome of the vote. After a company chooses its board of directors, the board then elects its executive board, electing the CEO as well as the chief operating officer and chief financial officer. This structure corresponds to the parliamentary system of government employed in the United Kingdom where its executive – prime minister – is indirectly elected, by members of Parliament.
Direct CEO Elections
A minority of companies allow shareholders to elect members of the board as well as directly voting on the chief executive officer. With shareholders receiving a vote per share they own, voters cast votes for corporate governance, and directly elect a CEO in another election. Because this structure involves direct elections, it’s most akin to the United States’ representative government, with voters electing both Congress (the board) and the president (the CEO).
Advantages and Disadvantages
Most companies utilize the traditional, board-elected CEO structure rather than opening the voting up to all shareholders. This method provides shareholders the opportunity to influence the choice of the CEO by electing board members who represent their interests, while it keeps the CEO directly responsible to the board itself. Other companies allow shareholders to elect the CEO directly, giving them a stronger role in corporate governance, although this reduces the board’s control of the chief executive, providing for stronger executive leadership.
The Executive Board
While a company’s chief executive officer oversees all of a company’s functions, the board of directors typically elects other members of the executive board to set corporate policies. A chief of operations oversees management, marketing and all other aspects of a company’s tangible operations. A chief financial officer is in charge of maintaining a company’s finances, though accounting methods and overseeing external investments. In most cases, the board elects these officers, although depending upon corporate governance procedures, they may be elected directly by shareholders or appointed by the CEO.