The Board of Directors Is in Charge

The basic rule is that the board of directors of a company is in charge of the company, and when they are faced with a decision, the directors are supposed to make the choice that they believe is best for the company and all of its shareholders. The shareholders don’t make the decision; the board does.1

Now, the directors are elected by the shareholders, and when the company has a controlling shareholder, the idea that the directors are in charge can feel somewhat absurd. The controlling shareholder — say, a founder and chief executive officer who owns 60% of the stock — can come into the boardroom and say “I want you to sell all of the company’s assets to me for $1,” and the directors will say “no, in our independent judgment that’s a bad idea,” and the founder/CEO/shareholder will say “okay you’re fired,” and she will replace them with more pliable directors. And she can do that, because she has the votes.2 But still: The directors are supposed to exercise their independent judgment and do what is in the company’s best interests, and if they conclude that the founder/CEO’s plan is bad, they have to say no and get fired. They can’t just say “well, ultimately she controls the company, so we have to do what she asks.” Exercising independent judgment is their job.