In a publicly traded company, the shareholders actually own the company. The shareholders collectively appoint members of the board of directors according to an agreed upon process, and the board of directors controls the company for the shareholders. The board then hires C-level executives, including CEO (chief executive officer), to do the actual work of running the company. So ultimately the CEO is just an employee (albeit a very powerful one) who answers to the board who answers to the shareholders.

Some companies have a position called “president,” either on its own or combined with a position like CEO or COO (chief operating officer). The specific roles of each executive vary by company, but the president is usually below the CEO when they are separate positions. Sometimes a top executive position is combined with the role of chairperson of the board of directors. When a single individual is both chairperson of the board and CEO, they have near-complete control of the company.

Shareholders have limited influence, and that influence is apportioned based on the number of shares a person owns. Having a majority stake (over 50% of all shares) generally allows one to exert high-level control over the company due to the ability to make democratic shareholder decisions unilaterally. However, publicly traded companies often do not have majority shareholders, and instead whichever shareholder has the most shares (a plurality) is most influential but not in control.

It is often said that companies have a legal obligation to shareholders to maximize their returns. Sometimes, this is used to explain why companies act against the public’s interests, or even against their own long term interests, to make short term profit. However, this is based on a misconception. This perspective is known as “shareholder primacy,” and is actually not the law in the United States. Companies do have certain legal and financial obligations to their investors, but this is mainly to prevent fraud. Companies are not legally required to maximize profit at all costs. For one, it is obviously the case that shareholders’ interests could differ from profit alone, and they could choose to direct the company to pursue something like sustainability that wouldn’t have any measurable financial benefit. But also, it is legal for the company to act against the wishes of the shareholders in many cases. Shareholders delegate the responsibility of running the company to the board, and the board has some discretion regarding how best to balance competing interests such as short term profits, long term profits, risk, government regulations, and so on. The shareholders have recourse in that they can replace the board if they disapprove, but they do not have legal recourse in the sense of civil or criminal charges against the board.

Contrary to common belief, a board’s duty is to the interests of the corporation itself rather than the particular audience of shareholders. While the board can choose to deem shareholders as the only significant audience, it does not have to do so. The board must decide which audiences are most significant for the ability of the corporation to create value over the short, medium, and long term.

Robert G. Eccles and Tim Youmans (2015), Materiality in Corporate Governance: The Statement of Significant Audiences and Materiality. Harvard Business School.

Consequently, bad corporate behavior is freely chosen, and not done out of obligation. (Eccles and Youmans note that boards of directors may believe they have such an obligation.) Within the theory of corporate governance, shareholder primacy was the dominant view in the 20th century. It should be noted that in this context, shareholder primacy is a social obligation, not a legal one. However, following the turn of the millennium, there has been growing criticism of this perspective even as theoretical.

After all, the idea of “maximizing shareholder value” implicitly assumes that shareholder have but one “value,” today’s share price. Yet if different shareholders have different values—and, as we shall see, they inevitably must—shareholder primacy in its conventional form crumbles.

Lynn A. Stout, New Thinking on “Shareholder Primacy.” Accounting, Economics, and Law, Vol. 2 [2012], Iss. 2, Art. 4, p. 5. De Gruyter.

This all applies to companies that are traded on the stock market. Privately owned companies can generally have more flexible governance structures than publicly traded ones. The company may have one owner or just a few owners. Some private companies are owned by a sole individual who is also chairperson of the board of directors, CEO, and/or president. This enables a person to exert total control over a company, limited only by the law. A private company may not have a board nor indeed any conventional executive roles. Many other governance models exist, both in the US and internationally. For example, worker cooperatives use a democratic system of governance that does not involve any executives or upper management.