How is a decision made by companies?

Louis DETALLE

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole – Master in Management, 2020-2023) explains how companies are organized to undertake the decision-making process…

What is a shareholder?

A shareholder is a person who owns part of the company’s capital, which is divided into shares.

A shareholder is therefore a person or institution that has invested money in a corporation in exchange for a “share” of ownership. This ownership is represented by ordinary or preferred shares issued by the company and held by the shareholders.

Shareholders of small and medium-sized private companies are often closely involved in the management of the company. They therefore contribute to the decision-making process on a regular basis. This is much rarer in large listed companies, where management teams take decisions on a day-to-day basis. In the case of the French company TotalEnergies, it would indeed be complex to take a decision by consulting all the shareholders, as more than 500,000 individual investors are shareholders in the company.

How do voting rights are attached to shares?

The capital is therefore represented by ordinary, or preference shares issued by the company and held by the shareholder.

An ordinary share is a simple share, which has a voting right associated with it and which is inseparable from it. A preference share, on the other hand, will allow its holder to benefit from certain advantages:
-financial: a preference share may be devoid of voting rights but in return allow its holder to benefit from priority dividends each year.
-control: a share with double voting rights may be financially less attractive than an ordinary share but at the same time offer twice as many voting rights as the latter.

Ordinary and preference shares therefore have different prices which fluctuate according to the control/financial balance they provide. They give shareholders rights to different proportions of the company’s profits and may or may not carry voting rights (i.e., the right to participate in the company’s decisions).

Who proposes a decision among companies?

The Board of Directors is a management body whose mission is to define its strategy by being a force of proposal to face the market context. The Board of Directors is therefore composed of:
• Directors (minimum of three and maximum of 18)
• A chairperson of the board of directors.

The chairperson of the board of directors is often also the chief executive officer (CEO) of the company: in this case he or she has the status of chairperson and chief executive officer. The chairman and chief executive officer are therefore a member of the company’s board of directors.

As for the rest of the Board of Directors, they are appointed by the company’s shareholders’ meeting. Some shareholders can therefore propose to work as a Director by applying for the job in front of their fellow shareholders. Once the Board of Directors is organized, they appoint the Chairman of the board of Directors and the decision-making process can start! Please bear in mind that in France only the Sociétés Anonymes (SA) and Sociétés par Actions Simplifiées (SAS) can legally create a board of directors.

Resources

“Who really decides in companies?” 1-hour conference with famous French CEOs

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About the author

The article was written in November 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole – Master in Management, 2020-2023).

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