What is a 'Board Of Directors - B Of D'
A board of directors (B of D) is a group of individuals that are elected as, or elected to act as, representatives of the stockholders to establish corporate management related policies and to make decisions on major company issues. Every public company must have a board of directors. Some private and nonprofit companies have a board of directors as well.
BREAKING DOWN 'Board Of Directors - B Of D'
In general, the board makes decisions on shareholders’ behalf as a fiduciary and looks out for the financial wellbeing of the company. Such issues that fall under a board's purview include the hiring and firing of executives, dividend policies, options policies, and executive compensation. In addition to those duties, a board of directors is responsible for helping a corporation set broad goals, support executives in their duties, while also ensuring the company has adequate resources at it’s disposal and that those resources are managed well.
In recent years some boards of directors for publicly held companies have shifted focus from considering their fiduciary duty entailing watching after just the financial wellbeing of the corporation to a more broad goal of working to “promote the success of the company for the benefit of its members as a whole,” as the 2006 U.K. companies act lays out.
Structure and Makeup
The structure and the powers of the board is determined by an organizations’ bylaws, which can include number of members, the manner in which they’re elected, how often they’re elected, and how often they confer. The number of members of a board can vary in size: some companies have boards with as many as 31 members or as few as 3. The ideal size of a board is 7.
No matter the number, ideally the board of directors should be a representation of both management and shareholders' interests by consisting of both inside and outside members.
An inside director is a member who has the interest of major shareholders, officers, and employees in mind and whose expertise in their business and their market adds value to the board. They’re not compensated for their position on the board, as it is seen as a responsibility of their job with the company. These inside members can be C-level executives, major shareholders, or stakeholders like union representatives.
Independent or ‘outside’ board directors are not involved in the inner workings of the company and bring experience from working in with other businesses. These member are reimbursed, and usually get additional pay for attending meetings. Ideally, this position provides more of an objective view what goals need to be met and how to fairly settle disputes.
Too many insiders serving as directors will mean that the board will tend to make decisions more beneficial to management but possibly not to the company as a whole, and too many independent directors may mean management will be left out of the decision-making process and may cause good managers to leave in frustration. Because of these concerns, striking a balance on the types of members on any board is important for their success.
Structure differs slightly in some countries in the E.U., and in Asia where the governance of a company is split into two tiers: an executive board, and an supervisory board. The executive board is made up of insiders elected by employees and shareholders and is headed by the CEO or managing officer. This board is in charge of the daily business operations of the company. The Supervisory board is chaired by someone other than the presiding officer of the executive board, and concerns itself with issues closer to what a board of directors would deal with in the U.S.
While members of the board of directors are elected by shareholders, those put up for nomination are decided by a nomination committee. When executives within the corporation participated in the nomination process, they ended up nominating candidates who were less likely to aggressively monitor the managers of the corporation. In 2002 the NYSE and NASDAQ required the committee to consist of independent directors, so as to ensure the fiduciary duties of the board of directors would be fulfilled. In some cases, depending on the structure set up for the board of directors and the laws in the state, in the case of the death of a director or their resignation. Ideally, the terms of directors are staggered, so not all directors are up for election during the same year.
Removal by resolution in a general meeting is challenging because most bylaws allow for a director to be given a copy of the proposal, and then respond to it in the meeting, increasing the possibility of an unpleasant split. Even then, most director’s contracts include a disincentive for firing, a golden parachute clause that requires the corporation to pay the director a bonus upon being let go.
However, there are a series of foundational rules that if violated can lead to the expulsion of a director.
- Using powers as director for something other than the financial benefit of the corporation
- Making deals with third parties promising to vote one way or the other at a board meeting compromises a directors ‘unfettered discretion’
- Conflict of interest by engaging in transactions with the corporation. Members of the board cannot engage in business or deals with a corporation on which they serve on the board without ratifying the deal with the corporation or disgorging all funds received from deal
- Using information gathered in meetings for personal profit
In addition, some corporate boards have fitness to serve protocols that go into use when a director gets involved in a situation that has the potential to reflect negatively on the corporation. What exactly meets that definition is up to the board to decide.
An 1811 act put into law in the state of New York is generally considered to be the first instance of codifying the pre-existing practice of having elected directors serve a supervisory role of a corporation's management. The law reads that, “the stock, property and concerns of such company shall be managed and conducted by trustees, who, except those for the first year, shall be elected at such time and place as shall be directed by the laws of the said company…”. While this is the first law regarding a board of directors, the practice had been in place long beforehand with British companies.