What Is a Board of Directors?
A board of directors (BofD) is the governing body of a company, whose members are elected by shareholders (in the case of public companies) to set strategy, oversee management, and protect the interests of shareholders and stakeholders.
Every public company must have a board of directors. Some private companies and nonprofit organizations also have a board of directors.
Key Takeaways
- The board of directors of a public company is elected by shareholders.
- The board makes key decisions on issues such as mergers and dividends, hires senior managers, and sets their pay.
- Board of directors candidates can be nominated by the company's nominations committee or by outsiders seeking change.
- Public companies must have a board of directors.
- The New York Stock Exchange and the Nasdaq require that the majority of members on the boards of listed companies be outside, or independent, directors.
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How a Board of Directors Works
The structure and powers of a board aredetermined by a company's articles of incorporation and its corporate bylaws. Bylaws can set the number of board members, how the board is elected (e.g., by a shareholder vote at an annual meeting), and how often the board meets. The board typically meets at regular intervals.
The board makes decisions as a fiduciary on behalf of the company and its shareholders. Broadly speaking, it provides insight, advice, and leadership for important objectives such as:
Protecting the interests of shareholders–A board will promote efforts and activities that maximize the value that shareholders receive for their investment. In addition to ensuring an efficiently run and profitable operation, it makes certain that shareholders receive properly reported financial data and any other important information that could impact their holdings.
Managing risk–A board will establish policies that allow a company to identify, evaluate, and respond to financial, security, and legal risks, as well as to mitigate actual loss. Facilitating ongoing risk monitoring is an essential responsibility of a board.
Engaging with stakeholders–A board will communicate with individuals and firms with vested interests in the company so that it understands those interests, can address concerns, pursue necessary changes in corporate behavior, and make a positive impact that strengthens these relationships.
What A Board of Directors Does
A board of directors is responsible for overseeing and advising a company so that it functions as effectively as possible. The board ensures that an organization operates lawfully and in the interests of the company's shareholders and other stakeholders (such as its employees). It operates independently of company management and day-to-day operations.
A board of directors considers important issues relating to the company, its shareholders, its employees, and the public. It's involved in:
- Helping a company to define objectives, establish major goals, and stay focused on its direction over time
- The hiring and dismissal of senior executives and upper management
- Determining executive compensation
- Defining a process and schedule for its interactions with the company's CEO
- Establishing an overarching yet flexible company policy for employees
- Advising executives in their planning and decision-making
- Overseeing budgets and ensuring proper funding when important resources are required
- Monitoring, and making necessary changes to, financial and accounting activities to safeguard corporate finances and assets
- Establishing a company's dividend policies
- Declaring dividends and payouts
- Instituting policies for stock options
- Directing mergers, acquisitions, and the divesting of assets
- Leading crises management efforts
- Building and maintaining a strong, lasting, and positive brand identity for the company and the public
The New York Stock Exchange and the Nasdaq require listed companies to have boards with a majority of independent directors, and to include independent directors on key board committees such as the audit committee.
How a Board of Directors Is Chosen
While no set number of members is required for a corporate board, many pursuing diversity as well as cohesion settle on a range of 8 to 12 directors. Some boards require an uneven number of members to prevent votes from ending in a tie. Boards often stagger the terms of directors to avoid a full slate of yearly elections.
Election
For publicly listed companies in the U.S., members of the board of directors are elected by shareholders at the annual meeting. Board candidates can be nominated by the board's nomination committee, or by investors seeking to change a board's membership and policies.
For private companies, a board of directors can be chosen in a manner that abides by a company's bylaws or articles of incorporation. Directors may also be chosen by shareholders via simple agreement on whom to appoint.
Dismissal
Directors may be removed in elections or otherwise in instances of fiduciary duty violations. In addition, some corporate boards have fitness-to-serve rules that may lead to the removal of a director if broken.
For example, some rules are intended to prevent abuse of board power, director conduct that indicates a conflict of interest, using insider information for financial gain, selling one's votes for personal gain to outside interests, or attempting to sway other directors' votes to benefit an outside business.
Types of Boards
Different boards of directors can have different, broad mandates. For example:
Executive Board
The role of this board is to take on the role of a chief executive officer (where there is none) and manage a company's operations effectively and profitably. It acts to ensure that a company has and maintains a mission and a purpose, and meets its goals on an ongoing basis.
Governing Board
This board's purpose is to offer a company owner specific guidance related to the company's business mandate so that it can operate effectively and achieve its future goals.
Advisory Board
Like the governing board, this board brings insight to a company's top executive. It offers different perspectives and experience that can help the company meet specific goals, such as growing a network, achieving community brand recognition and connection, and building a new customer segment.
Fundraising Board
This board is focused on attracting funds that can help an organization meet its goals. Board members organize various opportunities, such as campaigns, special events, galas, tournaments, auctions, and more to raise money. They use their positions in the business community and personal relationships to help an organization financially.
Types of Board Members
The board of directors typically is formed from inside and outside directors. An inside director is most commonly defined as a company employee, though the category sometimes also covers significant shareholders.
Outside, or independent,directors are only involved with the company through their board membership. As a result, independent directors face fewer conflicts of interest than company insiders in discharging their fiduciary obligations.
In addition, they bring to the board different points of view and expertise related to different kinds of business. Outside directors can be invaluable to a board in helping it carry out its responsibilities effectively.
The board usually will include the company's chief executive officer (who is often the board's chairperson) and sometimes other senior officers or managers.
Directors may have specific roles and titles. For example:
Chairperson or President: This individual leads and manages the board of directors. They are responsible for setting agendas, running successful board meetings, establishing committees, and other duties. They normally represent the company at public events.
Vice chair or Vice president: The vice chair works closely with the chairperson or president in support of their responsibilities. They also help to facilitate directives and may address potential conflicts of interest of board members. The vice chair normally fulfills the chairperson's duties when the latter is unavailable.
Secretary: The secretary manages the board's administrative tasks. They take the board meeting minutes and maintain accurate corporate records.
Treasurer: The treasurer focuses on a company's budget, financial policies and accounting, investments, and other financial issues. They work with other professionals concerned with the company's financial well-being.
What Makes a Successful Board of Directors?
How effective a board of directors is ultimately depends on the quality and conduct of its members, and their ability to properly oversee and guide a company so that it can achieve its goals of building profitability and shareholder value.
Each member should bring to the table different expertise and skills that relate to the company's focus. They must be able to work together harmoniously and constructively to achieve common objectives and fulfill fiduciary responsibilities.
Their motivation should be the company's advancement rather than their own and therefore they must recognize and handle conflicts of interest that may arise.
Additionally, an effective board of directors maintains transparency of its oversight and decision-making, thus ensuring the accountability of its independent and ethical standards and conduct.
What Is the Job of a Board of Directors?
In general, a board sets broad policies and makes important decisions as a fiduciary on behalf of the company and its shareholders. Issues that fall under a board's purview include mergers and acquisitions, dividends and major investments, as well as the hiring and firing of senior executives and their compensation.
Does a CEO Outrank a Board of Directors?
No, the CEO (who may be on the board) and the directors work together on relevant company issues. The Board doesn't interfere with the CEO's handling of a company's daily operations. But it has the authority to evaluate the performance of a CEO and remove them, if deemed necessary.
Are Board Directors Paid?
Insider directors are not typically compensated for board duties since they're most often company employees. Outside directors are paid.
The Bottom Line
A board of directors is a group of individuals elected by a public company's shareholders to provide the expert and experienced guidance and oversight to ensure a company's profitability and sustainability.
The board has a fiduciary duty to make decisions and take actions in the interest of shareholders and stakeholders. It operates independently of management and focuses on a company's major issues rather than its day-to-day operations.
