Understanding the roles of shareholders and directors
A limited liability company inside the European Union presents many benefits in setup and operation. Most of the fundamental roles of ownership and function are defined explicitly in the common laws that apply across all 27 countries and need to be adhered to. The following is a brief overview of the most essential roles and responsibilities of the leading players inside a company.
The shareholders
- In the simplest terms, a shareholder owns the company to the extent that the number of shares that he or she holds represents a percentage of the total number of shares that the company issues. Every company must issue a stated number of shares with a nominated paid-up value – for example, 100 shares each with a paid-up nominal value of €1 means that the company has a paid-up capital of €100. Not every share is necessarily issued.
- Ownership of a company rests entirely in the hands of its shareholders. It is possible for a company having a single shareholder to issue only one share, leaving 99 shares unissued. In fact, this means that this shareholder has total ownership of the company. In the same way, a company that effectively is set up with joint ownership could issue two shares – one each to each of the joint owners, leaving 98 shares unissued. Alternatively, they could each hold 50 shares, which would mean that the total nominal capital has been issued.
The rights of shareholders fall into two areas. Firstly, they are rights of ownership and profit-sharing. This means that the distribution of profits happens in direct proportion to the number of shares held relative to the total number of issued shares. It also means that in the event of the sale of the company, or its liquidation, the value will be distributed in direct proportion to the ratio of shares held to the number of issued shares.\ - Secondly, shareholders can vote for the passage of resolutions at any Annual General Meeting or Special General Meeting. Votes are counted strictly in terms of the number of shares held by the voter. It effectively gives shareholders the power to direct the board in whichever way the majority chooses.
Shareholders don’t usually have any rights to be directly involved in company management—their connection is via the Board of Directors as described below. Shareholders get to appoint directors, and if dissatisfied with their performance, they may refuse to re-elect them. Except for certain basic roles, shareholders do not usually take part directly in corporate decision-making. Directors may seek the views of the shareholders but are not required to comply with the wishes of shareholders.
The board of directors
- The primary responsibility of directors is for managing or supervising the company. The first duty is owed to the corporation based on principles of good faith and accountability.
Directors do not themselves have to be shareholders, but shareholders can be directors. The general management of the company itself in its day-to-day operations is under the control and responsibility of the board of directors. - In companies with more than a single director, it is necessary to have a mechanism by which decisions can be taken regarding the company’s activity. The authority to make such decisions rests with the powers delegated either to the directors individually or to a Board of Directors as a whole. Their powers are designated in the company’s Articles of Association, the founding document that outlines the broad conditions of the company.
- The board of directors effectively runs the company without day-to-day supervision by shareholders, who are not present at meetings. Typically, voting in a board is done by a show of hands, meaning that each director has a single vote; however, this can differ between companies.
A company that has registered as limited liability requires at least one person as a director. There is generally no restriction on the number of directors.
The management
Among European companies, there are significant differences in executive powers delegated to management compared to the powers of the board of directors. Issues like executive remuneration, managers’ appointment and removal, performance evaluation, and general directions to be taken by management are reviewed in board meetings, along with budgeting and reviews of performance. Management receives outlines of the resolutions taken by the board of directors and is empowered to execute the necessary steps.
The stakeholders
In Europe, there is also the definition of indirect interests, generally known as stakeholders. This could comprise employees, bankers, suppliers and customers, local communities, and statutory regulators and government bodies. In certain European countries, the rights of stakeholders are enshrined in the legislation of company law or others, such as employment protection legislation. In some other countries, the focus is narrower, concentrating on the interests of shareholders.
