What is ‘control’ in business?
What is control in relation to business?
In business, the presence or lack of control dictates who has ultimate authority over decision-making.
Officially, control is in the hands of the person, or people, who own a majority share of the firm.
Practically, these shareholders will then entrust this control to the board of directors, who often entrust it again (or some of it) to the CEO and senior management. So, in practice, it can look more decentralised than it actually is.
What is control?
Control is the ability to make corporate decisions. By extension, it also refers to the person or people who have that ability.
In most companies, control comes down to the distribution of shares; in these cases, 51% is the magic number.
Having 51% of the shares means other stakeholders can never outvote you, meaning you have 100% of the decision-making ability. This is control.
What should a board know about control?
- How it defines their role
- What it means for potential changes
Control and the role of the board
First and foremost, boards should know that their existence is tied to whoever controls a company.
Day-to-day, it might feel like they are guiding company policy and direction. Still, they can only do so because shareholders have selected them for that job – or, more accurately, the controlling shareholders have chosen them.
Because of this, the majority shareholders are usually the ones a board has to please first.
Potential changes in control
Boards should also be aware that control of a company can shift quickly, sometimes overnight, leading to a drastic change of direction and a brand new list of priorities.
You don’t need to look further for a recent example of this than Twitter.
When Elon Musk bought the social media giant, he assumed ultimate authority, leading to a string of changes:
- Musk dismissed combatting misinformation as a top priority.
- In its place, he championed free speech.
- He fired the entire board at once, plus several key executives.
- He reversed the “lifelong” ban of former US president Donald Trump, who was kicked off for incitement of violence in one of Twitter’s most famous milestones.
When the majority stake in a company changes hands, events like the above are only sometimes certain, but they are always possible, so it’s something boards should note.
If you’re a director during a change in control, don’t be surprised to see new faces on the board, a rejig of organisational priorities or even a complete reboot of personnel.
How does control change?
There are several ways this can happen:
- The current controlling shareholder(s) decides to sell up.
- Someone or a group acquires enough of a stake to become the majority shareholder.
- A hostile takeover. This is where a buyer bypasses senior figures and makes an offer directly to shareholders. It can often happen to larger companies with a persistent record of underperformance.
- Nationalisation. This can follow a change in government. It can also result from governments stepping in during a heightened risk of bankruptcy because they deem the company ‘too big to fail’ – a common occurrence at the start of the Great Recession.
- A merger.
Control is the ability to make the major corporate decisions for a company.
While a board of directors might sometimes look like they hold this ability, it ultimately lies with majority shareholders – in other words, any individual or group holding at least a 51% stake.