What Is Board of Directors (B of D)?
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 corporate management and oversight policies. Every public company must have a board of directors. Some private and nonprofit organizations also have a board of directors. This also applies to German GMBH companies.
- The board of directors is elected to represent shareholders’ interests.
- Internal board members are not usually monetarily compensated for their work, but outside board members are paid.
- The board makes decisions concerning the hiring and firing personnel, dividend policies and payouts, and executive compensation.
- A board member is likely to be removed if they break foundational rules, for example, engaging in a transaction that is a conflict of interest or striking a deal with a third party to influence a board vote.
- A board of directors is elected by shareholders but nominated by a nominations committee.
How a Board of Directors (B of D) Works
In general, the board makes decisions as a fiduciary on behalf of shareholders. Issues that fall under a board’s purview include the hiring and firing senior 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, supporting executive responsibilities, and ensuring the company has adequate, well-managed resources at its disposal.
The board of directors should represent both management and shareholder interests and include both internal and external members. An inside director is a member who has the interest of significant shareholders, officers, and employees in mind and whose experience within the company adds value. An insider director is not typically compensated for board activity as they are often already a C-level executive, major shareholder, or another stakeholder, such as a union representative.
Independent or outside directors are not involved in the day-to-day inner workings of the company. These board members are reimbursed and usually receive additional pay for attending meetings. Ideally, an outside director brings an objective, independent view to goal-setting and settling any company disputes. When putting together a board, It is considered critical to strike a balance of internal and external directors.
The structure and powers of a board are determined by an organization’s 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 board, most range from three to 31 members. Some analysts believe the ideal size is seven.
Every public company must have a board of directors composed of members who are both internal and external to the organization.
Election and Removal Methods of Board Members
While members of the board of directors are elected by shareholders, which individuals are nominated is decided by a nomination committee. In 2002, the NYSE and NASDAQ required independent directors to compose a nomination committee. Ideally, directors’ terms are staggered to ensure only a few directors are elected in a given year.
Removal of a member by resolution in a general meeting can present challenges. Most bylaws allow a director to review a copy of a removal proposal and then respond to it in an open meeting, increasing the possibility of a rancorous split. Many directors’ contracts include a disincentive for firing — a golden parachute clause that requires the corporation to pay the director a bonus if they are let go.
Breaking foundational rules can lead to the expulsion of a director. These infractions include but are not limited to the following:
- Using directorial powers for something other than the financial benefit of the corporation
- Using proprietary information for personal profit
- Making deals with third parties to sway a vote at a board meeting
- Engaging in transactions with the corporation that result in a conflict of interest
In addition, some corporate boards have fitness-to-serve protocols.
Board structure can differ slightly in international settings. In some countries in Europe and Asia, corporate governance is split into two tiers: an executive board and a supervisory board. The executive board is composed of insiders elected by employees and shareholders, and it is headed by the CEO or managing officer. In addition, the executive board is in charge of daily business operations.
The supervisory board is chaired by someone other than the presiding executive officer and addresses similar concerns as a board of directors in the United States.
What Does a Board of Directors (B of D) Do?
In general, the board makes decisions as a fiduciary on behalf of shareholders. Issues that fall under a board’s purview include the hiring and firing of senior 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, supporting executive duties, and ensuring the company has adequate, well-managed resources at its disposal. Essentially, B of D is responsible for oversight of management’s actions to ensure that the company’s vision is being adhered to.
Who Makes Up a Board of Directors (B of D)?
Usually, the B of D includes a mix of company insiders and qualified outsiders with expertise in associated fields. An inside director is a member who has the interest of major shareholders, officers, and employees in mind and whose experience within the company adds value. Outside directors, while not involved in the daily operations, should bring an objective, independent view to goal-setting and settling any company disputes. Striking a balance between the two is critical to the success of the board.
Are Board Directors Paid?
An insider director is not typically compensated for board activity as they are often already a C-level executive, major shareholder, or another stakeholder, such as a union representative. Outside directors are paid. Aside from attending board meetings, outsiders are often chosen for their expertise in associated fields that can add value in fostering a healthy business structure. Compensation can vary depending on the company’s size.
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