Board of Directors: What It Is, What Its Role Is

Board of Directors

Investopedia / Michela Buttignol

What Is Board of Directors (B of D)?

A board of directors (B of D) is the governing body of a company, elected by shareholders in the case of public companies to set strategy and oversee management. The board typically meets at regular intervals. Every public company must have a board of directors. Some private companies and nonprofit organizations also 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.
  • The New York Stock Exchange and the Nasdaq require listed companies to have a majority of outside, or independent, directors on their board.

The Board of Directors

How a Board of Directors (B of D) Works

In general, the board makes decisions as a fiduciary on behalf of the company and its shareholders. Issues that fall under a board's purview include the hiring and firing of senior executives and their compensation, dividends, major investments, and mergers and acquisitions.

In addition, a board of directors is responsible for helping a corporation set broad goals, supporting senior management in pursuit of those goals, and ensuring the company has adequate, well-managed resources at its disposal.

The board of directors typically includes the chief executive officer and sometimes other senior managers, alongside board members not otherwise affiliated with the company.

An inside director is most commonly defined as a company employee, though the category sometimes also covers significant shareholders.

Independent, or outside, directors are only involved with the company through their board membership. Independent directors face fewer conflicts of interest than company insiders in discharging their fiduciary obligations.

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.

The structure and powers of a board are determined 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.

While there is no set number of members for a corporate board, many pursuing diversity as well as cohesion settle on a range of 8 to 12 directors.

Every public company listed on the New York Stock Exchange and the Nasdaq is required to have a majority of independent directors on its board.

Election and Removal of Board Members

For publicly listed companies in the U.S., members of the board of directors are elected by shareholders. Board candidates can be nominated by the board's nomination committee, or by investors seeking to change a board's membership and policies.

Directors may be removed in elections or otherwise in instances of fiduciary duty violations. In addition, some corporate boards have fitness-to-serve protocols.

Special Considerations

Corporate governance can differ in international settings. In some countries powers are split between an executive board and a supervisory board. The executive board is composed of insiders elected by employees and shareholders, is headed by the CEO or managing officer, and is in charge of daily business operations.

The supervisory board is chaired by someone other than the chief executive officer and fills a role similar to that of a board of directors in the United States.

What Does a Board of Directors Do?

In general, the 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.

Who Makes Up a Board of Directors?

Usually, the board of directors includes at least one company insider such as a chief executive officer, along with a majority of outside, or independent, directors with relevant expertise. Outside directors don't face the same conflicts of interest as the company insiders on a board.

Are Board Directors Paid?

Insider directors are not typically compensated for board duties since they're most often company employees. Outside directors are paid.

Article Sources
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  1. U.S. Securities and Exchange Commission. "NASD and NYSE Rulemaking Relating to Corporate Governance."