What Is a Board of Directors?
A board of directors consists of elected individuals who serve as advisors to a corporation and act as a proxy (representative or substitute) for shareholders. Both for-profit and nonprofit corporations as well as some government agencies have a board of directors.
Boards vary according to the country in which they operate and the company they serve. Each company establishes guidelines for its boards under the state corporation commission guidelines. Boards may consist of any number of people, with most boards including anywhere from three to 30 members. Large, complex publicly-traded companies often have larger boards, while small, privately-held corporations have smaller boards.
Why Is a Board of Directors Important?
Boards have played an important role in corporations worldwide for over 150 years. By including a group of individuals with varying experience, insight, and wisdom, some from within the company or industry and some from without, the decision-making process includes many viewpoints and a collective wisdom.
Boards guide the success or failure of a company by steering the overall corporate direction, setting policy, choosing executives, and ensuring that major decisions are ethical and prudent. They make a commitment to building the mission and vision of the company, ensuring it is carried through all areas of the organization.
Since companies are composed of many shareholders, it would be impossible for them to gather and agree on policies and decisions. By electing a board, shareholders participate in many company decisions but do not need to be directly involved in the day-to-day aspects of operations.
What Does a Board of Directors Do?
Although corporations worldwide utilize the board structure, there’s little consensus about a board’s exact roles and purposes. The corporation’s organizing documents state the number of people who must serve on its board and the specific duties of its members. It also indicates when the board should meet, how often it should meet, and the titles and duties of the board’s officers.
Advice and Counsel
Most boards provide advice and counsel to senior executives, particularly in times of crisis. They may review applicants for senior-level positions and advise on the hiring and firing of C-suite leaders.
Boards also represent shareholders and thus vote (by proxy) on items such as distribution or reinvestment of dividends, dividend payouts, and executive compensation.
Duties of Loyalty and Care to an Organization
Each director has duties of loyalty and care to an organization.
Loyalty means a director must put the needs and concerns of the organization first. If evaluating a decision that may impact both personal and corporate fortunes, directors are expected to put the company’s needs first.
Care means that each director must exercise good judgment based on the facts available to them at the time decisions are made. Decisions must be made “in good faith” based on commitment to the company.
Types of Boards of Directors
There are many types of boards of directors. They include public/corporate, private, non-profit, advisory, and international boards. There may also be subtypes within each major type of board. For example, a non-profit board may have a separate board solely focused on fundraising.
Public/Corporate Board of Directors
A public or corporate board of directors serves the interests of shareholders in a public corporation. They represent shareholders at meetings, make hiring and firing decisions concerning executives, and oversee executive compensation.
Private Board of Directors
Private companies also have a board of directors if they are organized as an S or C corporation. Having a board of directors is optional for an LLC.
Non-Profit Board of Directors or Board of Trustees
Non-profit organizations also have a board of directors. Many non-profit educational organizations, colleges, and universities have a board of trustees instead of a board of directors. Trustees serve a similar role as directors, but they are not paid for their time.
Advisory boards are informational groups that provide strategic insight and direction to the management of a corporation. Often, companies have advisory boards as well as a board of directors. Advisory boards offer a flexible approach to industry experts to guide, mentor, and advise on key decisions and policies.
International Board of Directors
Boards differ across various countries. In many European and Asian countries, a two-tier board structure is used. Boards are split between an executive and supervisory board.
The executive board is headed by the CEO or managing officer and tends to include elected members chosen by shareholders and employees. The executive board oversees daily operations and has decision-making powers.
In the United States, a supervisory board acts more like a traditional board of directors. It is headed by someone outside of the company and advises and votes on major issues affecting shareholders and employees.
Who Is on a Board of Directors?
The people who serve on a board can include both internal members as well as external stakeholders. Boards strive for a balance between internal and external stakeholders to ensure all viewpoints are considered and that company executives receive the best advice possible.
Boards today are more diverse than ever before but there’s still much room for improvement. A Harvard study from 2019 indicates that Caucasian men make up 61% of boards nationwide, with Caucasian women make up 19%. Minority men make up approximately 14% of board members and minority women, 6%.
Internal board members are those with specific company knowledge or who hold a large number of shares. These board members are expected to keep the needs of employees and shareholders in mind when discussing or voting on issues. They often have deep corporate knowledge and may be C-suite executives, executive directors, retired company executives, union representatives, or majority shareholders.
Internal board members aren’t compensated for their time since they are already drawing a paycheck (or a pension/retirement benefits) from the company.
External directors are also called independent directors. They have never been involved in the day-to-day workings of the company but may have industry or specialized knowledge that could be helpful to the company. They are compensated for serving on the board.
Companies often look for certain characteristics in potential board members, such as expertise in finance, industry knowledge, or legal knowledge.
Board of Directors Titles
Board members can have varying titles, depending on what is described in their company’s organizing documents, the type of board, and the country in which the board is organized. Common board of director titles include:
- Chairman of the Board/President - runs board meetings, appoints leaders for committees, other duties as indicated in the organization’s bylaws
- Vice Chair/Vice President - serves as president when the president is unavailable
- Secretary - takes notes, calls meeting to order, submits the notes to the members for approval or correction
- Treasurer - maintains or keeps copies of the financial reports and records, oversees the organization’s finances
- Member - attends meetings, heads or serves on committees, votes on issues brought to the board
Are Board of Directors Members, Employees, or Shareholders?
Boards may include members (such as members of a nonprofit) or employees. They can also include shareholders.
Are Board of Directors Members Paid?
In public and private corporations, board members are paid. In non-profit organizations, members of a board of trustees are unpaid.
Board of Directors vs. CEO
The CEO is the head of a company who is responsible for the business’ daily operations. The CEO, however, reports to the board of directors. The board has the ultimate oversight of the CEO’s activities.
Can the Board of Directors Fire a CEO?
Yes, but to do so, they must have reasonable cause and often give the CEO several warnings. Boards typically call for a vote on whether to fire a CEO. The CEO may be released immediately or kept on until the end of the contract period, depending upon the individual’s agreement with the company.
Is a Board of Directors Elected or Appointed?
Board members are elected, usually after a nomination committee puts forth the names of potential members. Companies listed on the NYSE and NASDAQ require that independent directors make up the nomination committee.
Shareholders must vote to confirm board members. They do so by submitting votes electronically through a secure website or through the mail on paper ballots. Typically, only a small number of board seats are open each year, ensuring that there’s continuity among the board steering the company’s interests.
Boards can also vote to remove members, although it can be a difficult process. Many directors have contracts with clauses that include a generous payout (a “golden parachute”) if they are removed. Boards must present a resolution at a general meeting that calls for the removal of a member, which is then voted on.
Can Board Members Fire Employees?
Boards do not get involved in personnel issues, so they do not fire individual employees (with the exception of the CEO). The company’s executive directors or managers should be held accountable for hiring and firing workers.
Can a Board of Directors Be Held Liable?
Board members can be held liable for certain actions, but most companies have insurance for board members – as well as indemnification provisions – written into their bylaws to protect board members.
For example, in financial matters, profit and nonprofit corporations are liable for their debts. If the company runs into financial difficulty, the company is responsible for repaying debts, not the board.
However, board members sign the company’s 10-K (the annual report filed with the Securities and Exchange Commission) and other required financial documents. Board members have a fiduciary responsibility and must be diligent and faithful to their promises of loyalty and care. Although rare, some board members have faced legal action if shareholders feel they renege on their oversight responsibilities.
What Are the Advantages and Disadvantages of a Board of Directors?
There are many advantages to a board of directors. Boards legally fulfill the requirements of incorporation, thus helping companies maintain corporate status. Boards provide support and guidance to management and provide shareholders with a voice in the company’s major decisions.
Like any group of people, boards can work harmoniously or with great tension. Some do not provide the expertise required of them and act merely as a prop to uphold the corporate charter. Conversely, boards can be too hands-on, micromanaging the CEO and making it impossible for CEOs to lead effectively.
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Should a Board of Directors Be Independent?
Most companies prefer a balanced approach to board membership and include both independent and internal board members. Because they aren’t involved in the daily activities of the company, independent board members can offer a neutral perspective that’s often lacking in small, private, or family-owned and managed companies.
How Are a Board of Directors and Audit Committee Related?
An audit committee is a subcommittee of a board that oversees the financial evaluation of the company. Companies hire independent auditors to review their finances. An audit committee might evaluate and hire the auditing firm, gather both internal and external financial documents for the audit, and present the results to the board.
Can a Board of Directors Be Made Up of Trustees?
Some nonprofits (especially educational nonprofits, colleges, and universities) maintain a board of trustees rather than a board of directors. They function similarly, but unlike board members, trustees are unpaid.
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