Decades ago, most companies in the United States were small, simple, and family-owned. Today, however, the country is full of large, international, and publicly traded companies with hundreds to thousands of employees. This can make it quite challenging to keep track of where each individual stands on the corporate ladder.
Corporate structure and governance are critical components when it comes to establishing any type of organization in ensuring the smooth functioning and operation of a corporation and defining the roles, duties, and rights of its directors, officers, shareholders, and employees. In this article, we’ll review some essential elements of corporate structure and governance.
Importance of Corporate Structure and Governance
Corporate structure refers to the way a company is organized, including its ownership, management, and decision-making processes. The corporate structure determines how the company is run and how its resources are allocated and utilized.
A well-defined structure helps provide clarity on who is responsible for what, which ensures that tasks are completed both efficiently and effectively. As a result, corporations can expand and evolve, transforming small family-run businesses into globally traded enterprises.
On the other hand, corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled, and involves the relationships between the shareholders, board of directors, and management.
Effective corporate governance can enhance the reputation of a company and increase the confidence of shareholders. By ensuring that the goals and objectives of a company are in line with those of its stakeholders, integrity and transparency within the organization can be enhanced. This can help mitigate any risks that affect the company, which is essential for a corporation’s long-term sustainability.
The Role of Corporate Governance
In the United States, there are several types of corporate stakeholders that play crucial roles in the functioning of a corporation. They may be classified under one or more of the following categories:
- Board of Directors: The board of directors is responsible for controlling the business and protecting the shareholders’ interests. Board members are typically elected by shareholders per the company’s bylaws. In order to avoid tied votes, the board may be comprised of an odd number of directors.
- Officers: Corporate officers are appointed by the board of directors to manage the day-to-day operations of the corporation Key officer roles include the President or CEO, the Vice President of Chief Operations Officer (COO), the Treasurer or Chief Financial Officer (CFO) and the secretary.
- Shareholders: Shareholders own stock in the company and have a strong level of authority when it comes to making decisions in a corporation. There are two kinds of shareholders: common and preferred. Common shareholders have voting rights, allowing them to participate in important company decisions, while preferred shareholders may have preferential rights, such as receiving fixed dividends. Those who own more shares in a company have a greater interest in the company’s success, as well as more authority and influence over the corporation’s operations and decision-making.
- Employees: All other members of the corporation can be referred to as employees. In the United States, corporations are not legally required to have employees. Nonetheless, corporations must have shareholders, officers, and directors.
Types of Corporate Structure
Now that you have a better understanding of the roles and responsibilities within a corporation, it's time to examine the various ways in which these roles can be organized. There are several types of organizational corporate structures, each with their own advantages and disadvantages. A few of the most common types include:
- Hierarchical Structure: Most corporations in the United States use a hierarchical structure. According to this model, there is a clear chain of command and labor within a corporation. It includes several levels of management, such as top management, which includes the CEO, middle management, such as department managers, and lower-level management, such as supervisors.
- Functional Structure: In a functional corporate structure, the company is split into various departments based on specialized functions such as sales, marketing and production. In other words, employees may be grouped into these departments based on similarities in their skill sets and responsibilities. Common examples of functional departments include Human Resources (HR) Departments and Finance Departments.
- Divisional Structure: Divisional structure organizes a company into semi-autonomous units or divisions. Each department in a divisional structure has its own management and resources and is typically responsible for its own performance. For instance, a retail company may adopt a divisional structure with divisions set according to specific products or markets. The company may have a clothing division, a home goods division, and a food division.
- Matrix Structure: Matrix structures combine elements of both functional structures and divisional structures. This method balances department autonomy and interdepartmental interaction to maximize productivity and innovation within a corporation. Matrix structures, however, have several drawbacks, since they may lead to higher costs and disputes between various divisions in the company.
Ultimately, when founding a corporation, it can be crucial to have a comprehensive understanding of corporate structure and governance. Through AAL’s directory, you can find numerous skilled attorneys with extensive experience practicing business law to provide you with guidance and assistance in developing and implementing the best strategies for you and your business.