Once a year, the company’s shareholders hold an annual shareholders meeting, during which they elect the company’s board of directors. The board members do not necessarily hold any of the company’s stocks; specifically, they represent the company’s shareholders. The board of directors does not manage the company’s day-to-day activities. It sets a general direction for the company to follow, determines the strategy, and makes decisions in matters of special importance to the firm. For example, the board of directors can decide that the company should adopt the following policies: Take steps to increase the scope of its exports. Not buy any new computers this year. Cooperate on a new project with one of its competitors. A group of managers, headed by the company’s CEO and others, makes the company’s day-to-day decisions, and this group is responsible for the company’s tactics. For example, if the board of directors decides that the company should strengthen its export efforts, management decides to whom the company should sell, how its products should be marketed, and what prices to charge for them. The board of directors has the right to fire the CEO and hire a new one, but the CEO usually appoints the rest of the company’s management. Decisions at the annual shareholders meeting are taken democratically, by majority vote. An investor holding a majority of the company’s votes can appoint whomever he wants to the board of directors in order to guarantee that its members will act in accordance with his or her interests. An investor can theoretically decide that the company should buy raw materials only from other companies he owns, or that his wife should be CEO and earn a salary of $50,000 a month, or even that the company should pay him $10,000 for his services as a consultant. It is therefore obvious that the value of a stock increases as the bearer’s voting rights increase, even if other shares have similar profit sharing rights.
The Stock Market
Table of Contents