It’s important to understand where the Board of Directors fits in a corporation’s structure. In a corporation there are generally 3 types of individuals:

The shareholders are the owners of the corporation and they elect directors to the Board of Directors to act on behalf of them and the corporation. In turn, the directors generally elect officers to carry out the day-to-day decisions of the corporation. That’s why officers, like a Chief Executive Officer (CEO), reports to the Board. So, the order of power goes from the shareholders, to the directors (on the Board of Directors), to the officers of the corporation.

Only individuals can be directors on the Board. In other words, other businesses cannot be directors on the board. This is an important concept, because shareholders can be businesses or individuals. But directors must be individuals. Also, serving as a director is generally a temporary job, not a career, and may not even be a paying job.

Many times the directors on the Board are also shareholders and/or officers. In other words, one individual can actually be a shareholder, director, and officer for the same corporation. Individuals that do this wear multiple "legal hats" - i.e. they carry out more than one legal role for the corporation. Let’s go over a brief example to clarify this concept (which is important to understand and often one of confusion for many people).

Assume Ron is a shareholder and director of ABC, Inc. As such, Ron has 2 different legal roles, i.e. he wears 2 different legal "hats."

As a director, Ron must act in the best interests of the corporation. However, as a shareholder Ron is free to act in the best interests for himself. But Ron must be careful not to act like a shareholder when he is acting in the capacity as a director. For example, when Ron meets at a Board meeting, he is acting as a director and must act strictly for the benefit of the corporation. However, when Ron votes as a shareholder he can vote in the best interests for himself. Ron therefore wears 2 different "legal hats" for ABC, Inc.

Next, we’ll go over some of the differences between Board of Directors in public and private corporations.