What is the Board of Directors?
A board of directors (B of D) is an elected group of individuals that represent shareholders. The board is a governing body that typically meets at regular intervals to set policies for corporate management and oversight. Every public company must have a board of directors. Some private and nonprofit organizations also have a board of directors.
A board of directors represents an elected or an appointed body of members who are responsible for overseeing a firm’s activities to the benefit of its stockholders. Other names include:
- board of directors and advisors;
- board of governors;
- board of managers;
- board of regents;
- board of trustees;
- board of visitors.
It may also be called “the executive board” and is often simply referred to as “the board”.
A board of directors is a group of people who jointly supervise the activities of an organization, which can be either a for-profit or a nonprofit organization such as a business, nonprofit organization, or a government agency.
The powers, duties, and responsibilities of a board of directors are determined by government regulations (including the jurisdiction’s corporate law) and the organization’s own constitution and bylaws. These authorities may specify the number of members of the board, how they are to be chosen, and how often they are to meet.
In an organization with voting members, the board is accountable to, and may be subordinate to, the organization’s full membership, which usually elect the members of the board. In a stock corporation, non-executive directors are elected by the shareholders, and the board has ultimate responsibility for the management of the corporation. In nations with codetermination (such as Germany and Sweden), the workers of a corporation elect a set fraction of the board’s members.
The board of directors appoints the chief executive officer of the corporation and sets out the overall strategic direction. In corporations with dispersed ownership, the identification and nomination of directors (that shareholders vote for or against) are often done by the board itself, leading to a high degree of self-perpetuation. In a non-stock corporation with no general voting membership, the board is the supreme governing body of the institution, and its members are sometimes chosen by the board itself.
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.
Typical duties of boards of directors include:
- governing the organization by establishing broad policies and setting out strategic objectives;
- selecting, appointing, supporting and reviewing the performance of the chief executive (of which the titles vary from organization to organization; the chief executive may be titled chief executive officer, president or executive director);
- terminating the chief executive;
- ensuring the availability of adequate financial resources;
- approving annual budgets;
- accounting to the stakeholders for the organization’s performance;
- setting the salaries, compensation and benefits of senior management;
The legal responsibilities of boards and board members vary with the nature of the organization, and between jurisdictions. For companies with publicly trading stock, these responsibilities are typically much more rigorous and complex than for those of other types.
Typically, the board chooses one of its members to be the chairman (often now called the “chair” or “chairperson”), who holds whatever title is specified in the by-laws or articles of association. However, in membership organizations, the members elect the president of the organization and the president becomes the board chair, unless the by-laws say otherwise.
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.
An inside director is a director who is also an employee, officer, chief executive, major shareholder, or someone similarly connected to the organization. Inside directors represent the interests of the entity’s stakeholders, and often have special knowledge of its inner workings, its financial or market position, and so on.
Typical inside directors are:
- A chief executive officer (CEO) who may also be chairman of the board
- Other executives of the organization, such as its chief financial officer (CFO) or executive vice president
- Large shareholders (who may or may not also be employees or officers)
- Representatives of other stakeholders such as labor unions, major lenders, or members of the community in which the organization is located
An inside director who is employed as a manager or executive of the organization is sometimes referred to as an executive director (not to be confused with the title executive director sometimes used for the CEO position in some organizations). Executive directors often have a specified area of responsibility in the organization, such as finance, marketing, human resources, or production.
An outside director is a member of the board who is not otherwise employed by or engaged with the organization, and does not represent any of its stakeholders. A typical example is a director who is president of a firm in a different industry. Outside directors are not employees of the company or affiliated with it in any other way.
Outside directors bring outside experience and perspectives to the board. For example, for a company that serves a domestic market only, the presence of CEOs from global multinational corporations as outside directors can help to provide insights on export and import opportunities and international trade options. One of the arguments for having outside directors is that they can keep a watchful eye on the inside directors and on the way the organization is run.
Outside directors are unlikely to tolerate “insider dealing” between inside directors, as outside directors do not benefit from the company or organization. Outside directors are often useful in handling disputes between inside directors, or between shareholders and the board. They are thought to be advantageous because they can be objective and present little risk of conflict of interest.
On the other hand, they might lack familiarity with the specific issues connected to the organization’s governance, and they might not know about the industry or sector in which the organization is operating.
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
A board of directors is a collection of individuals trying to operate as a group. Functioning as a group is something many people are not comfortable with. So each board evolves with its own culture. Each culture is dictated by the backgrounds of the individuals on the board. However, there are several governance models of how a board of directors can function. Examining and choosing the right model is important because it will impact the success of the value-added business.
Below are four governance models. The board of directors must decide which model is best for them.
1. Manager Focus
With this model, the manager dominates the board. We can all think of situations where we have had one dominant individual in a group. In this case the board functions are an advisory board and reacts to the views of the manager. It is essentially a “rubber stamp” for the CEO. This model often emerges when you have a charismatic CEO who is very dominant and proactive in running the organization. In most cases this is not a good model for a value-added business.
2. Proactive Board
This model is of a proactive board that speaks as one voice. It speaks as one voice for the board and often has a proactive manager that also speaks with one combined voice for the organization. This is a good model because the manager and the board are on the same page and speak with a single voice. This model is proactive in taking advantage of emerging opportunities and is especially valuable for entrepreneurial businesses.
3. Geographic Representation
This model focuses on the members/investors whom the board member represents. With this model, the board member feels that he/she has been elected to the board to represent individuals in a geographic location or special interest group. To better understand this model, think of an individual running for a political office and then representing the interests of the individuals located in that geography. This is often found in large boards, typically of 24 to 50 individuals. With a large group like this there is a temptation for the directors to represent the interests of the members/investors in their geographic area or special interest group rather than the best interests of the company. This is not a model that works well for most value-added businesses.
4. Community Representation
In this situation the board member is representing the community rather than the organization. An example of this is a school board where an individual is elected to represent certain interests within the community.
These four models are ways in which the board and its organization function. Often you have directors who have previously been on boards where they have been chosen to represent a certain group or have been a rubber stamp for the manager. So it is natural for a director to think that this is how all boards function. But it is a good practice for boards to actively investigate and discuss the models presented above and choose the right one for their situation. This is usually a model where the directors are all active and present a single voice of what is best for the organization. What is best for the organization will usually also be good for the various members/investors and the stakeholders in the community.