What is a Board of Directors?
A board of directors is a governing committee that jointly supervises the activities of an organization. Members of a board of directors are typically recruited or elected to serve as shareholders’ representatives, oversee corporate management, and vote on corporate policies. The board of directors has a fiduciary duty to the company’s shareholders and are trusted to act in their best interests. In addition to supervising the actions of the company, the board also has administrative and financial duties within the company. In the US, all corporations are required by law to have boards of directors, but the rules around when they must be named and how many directors are required depends on the rules of the state where the company is incorporated.
The board has a strategic function in providing the vision, mission and goals of the company. These are usually determined in combination with the CEO or general manager of the business, as the head executive has a much more informed view of the company’s day-to-day operations, however if they come to an irreconcilable disagreement, the board will have the final say. This means that even though the CEO is responsible for running the company, the shareholders, through the board, hold the final decision making power for the company. The board has a commitment to the company’s shareholders to operate and steer the company in their best interests.
As they are the only corporate tier above the CEO and the rest of the C-suite, the board has administrative powers over the executive leadership. If the CEO is constantly at odds with the board of directors (and therefore the shareholders) over the direction of the company, or simply shows an inability to perform their role to an expected standard, the board has the ability to terminate the CEO. It is a sensitive, but crucial decision the board must make in order for a company to continue to operate effectively.
The board of directors is also responsible for supervising a large part of the financial operations within a company, including determining compensation for the CEO and other C-level executives. Also, the board of directors is responsible for setting the company’s annual budget, and making sure the company runs in adherence to this. They are also responsible for establishing and ensuring the organization’s compliance with proper financial systems and controls.
There is no limit on how many individuals make up a board of directors, but it is commonly around seven to nine people. Too many individuals and decision making will be slow and inefficient, while too few members can lead to biases and personal interests taking hold of the proceedings. A board should try to achieve some level of diversity between members who have a professional connection to the company, and those who do not. By striking a good balance, a business strategy that is both profitable and that does not lose sight of the company will be achievable.
Chairperson (or “Chair”)
The chairperson has the most power and authority on the board, and provides leadership to not only to the other board members, but to the executives of a company. The chair runs board meetings, and makes sure that they run efficiently and with appropriate conduct from all members. The chair usually holds extra decision making power in the board’s operations, making them the final say for large company decisions. The chair of the board ensures that the company's duties to shareholders are being fulfilled by acting as an intermediary between the board and the executive leadership. It is their duty to keep an eye on the workings inside the company, and relay their findings to the rest of the board. Unlike the other members of the board who are elected by shareholders, the chair is often elected by the directors themselves.
An independent director is a member of the board who does not have a professional connection to the company. In other words, aside from being on the board they are not officially employed by the company. These members are important as their focus will not be as concerned with the politics of the company, but more with the interests of the shareholders, and the company’s value in the public market. Therefore, independent directors are invaluable assets in objective decision making.
Executive directors are members of the board who are also employed by the company. These members bring a great level of insight and professional knowledge as to the inner workings of the company and can help bridge the gap between it and the board of directors. Without sufficient input from executive directors, the board may lose sight of the specific conditions within the company, such as core values, capabilities, limitations, etc. However, what they provide in insight, they may lack in objectivity. As non-independent members, they represent the executive branch of the company which may color their decision making.
Election and Removal
The election and removal of board members is decided by the company’s major shareholders at the board's mandertory annual general meeting. Based on the year’s financial performance, the shareholders decide on the individual director’s efficacy and suitability for the job. Members of the board of directors can also be removed through an official board motion if they are seen as not fulfilling their duties competently, or legally. Candidates for the board are expected to have strong business skills, and some companies may prefer those who can advocate for relevant public policies for the benefit of the organization.
The size of the company makes a difference to how board members are paid. Small companies are more likely to offer stock options to board members as compensation, however a big company may pay it’s directors up to $300,000 a year for sitting on the board, with stock options on top of that. According to Payscale.com, the average fee for a corporate director in the US is around $61,042 annually.