How to run and manage a business

The owners of a company are its shareholders, but since there can be several thousand shareholders, many of them with little knowledge of business, they are obliged to delegate the direction of the company’s affairs to a board of directors.

The authority of the directors is a corporate authority, that is, it can only be exercised through a resolution of the board. The position of director does not carry personal authority to give instructions or make decisions on behalf of the company. Often, however, managers employed by the company are invited to become directors. It is easy to see why this happens. If the board is discussing production issues, it’s helpful to keep the site manager in mind, and if you’re discussing sales policy, you’ll want the sales manager to contribute. It’s a small step from inviting these executives to one-on-one meetings to inviting them to be regular board members. In fact, since policies in different fields are interrelated (there is an obvious interconnection between research, design, production, sales and finance), there is an advantage in having the main department heads on the board.

A manager who is also a director is often referred to as a chief executive officer. Sometimes CEOs have full membership on the board, including voting rights at meetings, sometimes they are not full members and have no vote. The trend in most large companies is for the board to consist of a majority of directors who also hold management positions in the company and are full members of the board. The board of some large companies consists of twenty directors, four of them full-time executives of the company. This practice, of course, tends to blur the distinction between leadership and management for the observer because the same individuals perform the same functions. The construction manager who is also a director tends to call himself ‘construction manager’ and the general manager ‘general manager’. There is nothing wrong with this as long as it is understood that such people do not exercise their management authority as directors, but rather as managers. Thus, the construction manager, for example, has two functions. While he is in the board room he shares with the other directors the determination of the company’s policy. When he walks out of the boardroom and into his own office, he becomes a manager, accountable to the managing director for carrying out the agreed policy.

We can say then, that the work of management consists of determining the general lines of a company’s policy in such a way that its objectives are achieved. Management, on the other hand, is concerned with the implementation of that policy by deploying the company’s resources in such a way as to achieve what the directors have decided.

In practice, this does not mean that managers do not have to make political decisions. The board can necessarily only determine the broad lines of policy, and this leaves substantial policy areas to managers. Whenever, in fact, a manager has discretion to act in alternative ways, he should have a policy by reference to which he exercises his discretion. A very simple example can be taken: suppose a man asks if he can come in late in the morning for domestic reasons. The manager should have a policy on when he allows this and when he doesn’t; in the absence of a policy there will be the risk of inconsistent decisions from one moment to the next and from one man to another. Politics is necessary to allow consistent and fair decisions to be made. It also allows delegating decision making because the manager can allow an assistant to make these decisions if he has established in advance the principles on which they must be made. Therefore, only the most important political decisions reach the board of directors.