Can Board of Directors Own Stocks by Law?

A corporation is a separate legal entity. It can act in many ways, including entering into contracts and doing business. A corporation needs a board of directors to act, however. The board may consist of shareholders or non-shareholders. Directors can own stocks, but if the stock ownership breaches a duty owed by the director to the corporation, it may be unlawful.

Corporations generally have many owners. A share of stock represents an ownership interest in a corporation. Owning stock grants certain rights to the shareholder. Rights include an entitlement to a portion of company profits and the right to vote in elections for the board of directors. When a person owns stocks in a company, she is invested in that company, and benefits when the company does well.

Corporations act through a board of directors. The directors vote on matters that affect the company’s business and dealings and generally shape the course of the organization. Directors may or may not be shareholders in the corporation. Stock ownership can be an incentive for directors, however. Typically, when the business does well, the stock reflects its success. Directors must abide by certain laws, regulated by the state. The duty of loyalty is of particular concern when discussing stock ownership.

Directors are bound by a duty of loyalty. When a director acts, he must act in the best interests of the corporation and the shareholders. Engaging in self-dealing or other conflicts of interest are a breach of the duty of loyalty. As long as the director acts based on reasonable and reliable information, and believes that the actions will benefit the company, the duty of loyalty is intact. Stock ownership may constitute a breach of this duty, however, if the director owns shares in a competing business.

Many directors can, and often do, own stock in the particular company where they sit on the board. Issues arise when a board member owns stock in a competitor’s business. Owning stock in a competitor’s business could constitute a conflict of interest and be a breach of the director’s duty of loyalty. Kellogg Company, for example, prohibits its directors from owning a substantial interest in a competitor’s company, unless the director receives approval from a ranking officer at Kellogg, such as the chairman of the board.