DEFINITION of 'Directorate'

A directorate, generally, is an organization that is headed by one or more directors. In finance, directorate is sometimes used in place of "board of directors" (B of D), which is the group of individuals that makes decisions for a corporation on behalf of its shareholders. In politics, directorates are government or quasi-government agencies or organizations (e.g., Norwegian Petroleum Directorate, OECD Trade and Agriculture Directorate, U.S. Directorate of Defense Trade Controls) that are run in similar fashion.

Directorates are the most common organizational structure for the corporate governance of public companies, where boards of directors control managers, and shareholders subsequently vote on the members of the board. Inside board members are directors who are intrinsically linked to the company itself, for example the company's chief executive officer (CEO). Outside directors are those who are not directly involved with the day to day operations of a firm, such as the executive vice president of one the company's suppliers.

BREAKING DOWN 'Directorate'

Directorates are common forms of an organization's corporate governance, where one or more directors (who sit on a board of directors) oversee the opeations of a company's management and formulate the firm's strategic vision and corporate identity. Good corporate governance is a keystone of efficient equity markets, and so the directors of a company must be voted on by shareholders. Voting should on individual members should be staggered year after year so that there is good continuity and so that new boards cannot be installed all at once by an aggressive large shareholder. Shareholders can thus hire and fire board members based on their actions and performance. The head of a board is often referred to as the chairman (COB). Good corporate governance also suggests that there be several outsider board members, who are not intrinsically linked to the day to day operations of the company to ensure that shareholder interests are aligned with the coporation rather than directors seeking to line their own pockets. Directors may also be distinguished as executive directors and non-executive directors.

When an individual sits on the board of directors of more than one publicly traded corporation, this situation is called an interlocking directorate. Interlocking directorates are common, but can be problematic and even illegal if that individual belongs to the boards of competing companies in the same industry. A board member is obliged to act in the best interests of the shareholders of any company he or she represents and must be careful to avoid conflicts of interest.

Directorates can be contrasted with other forms of corporate governance such as partnerships, limited partnerships (LPs), cooperatives (co-ops), limited liability companies (LLCs), and sole proprietorships.

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