Sure, as long as they own 100% of the stock, they can do pretty much anything they want, within tax laws of course. They can pay themselves any salary, issue dividends, make a loan to themselves, etc.
However, the minute one other person owns one single share of stock, this changes dramatically. Now they have what is called “A fiduciary duty” to the other shareholder(s) to do only things that are in the best interest of the company. This has a very high legal standard called “Utmost good faith”. And if you violate this principle, then you can be sued in civil court for damages.
Fiduciary duty refers to the highest standard of care. Board members and officers are fiduciaries, and by statutory and common law mandate, they must act with the utmost responsibility in the best interest of shareholders, not themselves. Any Officer of the company also has this duty and will be guilty of violating it if they know of any abuse by others without reporting this to the Board of Directors. For example, if the CEO or a VP is putting personal expenses on a company expense account, violating company policies or laws of any kind, anyone with this fiduciary duty is required to act. It is not optional.
If the improper behavior of anyone (CEO, officer or any employee) is illegal (statutory by state or federal law), and you do not act you could even become guilty of a criminal conspiracy or RICO racketeering and face jail time as these can be felonies. Hence, you are forced to take action. I had an employee once say “Since I am a founder I am going to do whatever I want and ignore your orders as the CEO”. I was legally required to remove him from his position as an officer immediately, and could fire him for simply saying that. Not just because he was insubordinate and lacked the understanding of how a corporation works legally (not a democracy) but because any officer can commit the company legally to any contract. So, basically to protect the shareholders, I had to take that power away from him immediately because he disclosed he was going to ignore the legal chain of command. My duty was to the shareholders over him in any way legally.
Fulfilling a fiduciary duty typically requires more than would be required to meet a normal “duty” under the law. Fiduciaries are required to protect the best interests of the entity or entities to whom they owe their duties. This generally means that a board of directors' fiduciary duties must focus on the best interests of the company and its shareholders. To this end, board decisions need to be made with care and diligence, in (utmost) good faith, and always with the goal of protecting the company's best interests.
Sometimes there is conflict and subjective issues here, like the salary of the CEO. Ideally this should be decided by the other directors with the CEO themselves abstaining from that vote. Whenever there is any perceived, or even possible, conflict of interest, it is best to have other directors make that decision and abstain. This can prevent a lawsuit by shareholders later if things go south. Even if the future failure had nothing to do with that decision, you could spend tens of thousands in court proving that, and it would be difficult to get the case dismissed without some hard proof.
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Corporate governance is an important skill set, and every board needs someone very familiar with these laws and duties on the board. I have been on many boards and often find other board members do not understand the subtle duties and things they cannot do, and must document with votes, etc.
Bob Norton is a long-time Serial Entrepreneur and CEO with four exits that returned over $1 billion to investors. He has trained, coached and advised over 1,000 CEOs since 2002. And is Founder of The CEO Boot Camp™ and Entrepreneurship University™. Mr. Norton works with companies to triple their chances of success in launching new companies and products. He helps established companies scale faster using the six AirTight Management™ systems. And helps companies raise capital.
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