ⓘ Board of directors
A board of directors is a group of people who jointly supervise the activities of an organization, which can be either a for-profit business, nonprofit organization, or a government agency. Such a boards powers, duties, and responsibilities are determined by government regulations and the organizations 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 might be subordinate to, the organizations full membership, which usually vote for the members of the board. In a stock corporation, non-executive directors are voted for by the shareholders, with the board having ultimate responsibility for the management of the corporation. 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.
Other names include board of directors and advisors, board of governors, board of managers, board of regents, board of trustees, or board of visitors. It may also be called "the executive board" and is often simply referred to as "the board".
Typical duties of boards of directors include:
- ensuring the availability of adequate financial resources;
- accounting to the stakeholders for the organizations performance;
- setting the salaries, compensation and benefits of senior management;
- governing the organization by establishing broad policies and setting out strategic objectives;
- approving annual budgets;
- terminating the chief executive;
- 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;
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.
The directors of an organization are the persons who are members of its board. Several specific terms categorize directors by the presence or absence of their other relationships to the organization.
3.1. Directors Inside director
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 entitys 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
- 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
- Other executives of the organization, such as its chief financial officer CFO or executive vice president
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.
3.2. Directors Outside director
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 organizations governance, and they might not know about the industry or sector in which the organization is operating.
3.3. Directors Terminology
- Executive director – an inside director who is also an executive with the organization. The term is also used, in a completely different sense, to refer to a CEO
- Nominee director – an individual who is appointed by a shareholder, creditor or interest group whether contractually or by resolution at a company meeting and who has a continuing loyalty to the appointor/s or other interest in the appointing company
- Director – a person appointed to serve on the board of an organization, such as an institution or business.
- Shadow or de facto director – an individual who is not a named director but who nevertheless directs or controls the organization
- Non-executive director – an inside director who is not an executive with the organization
- Outside director – a director who, other than serving on the board, has no meaningful connections to the organization
- Inside director – a director who, in addition to serving on the board, has a meaningful connection to the organization
Individual directors often serve on more than one board. This practice results in an interlocking directorate, where a relatively small number of individuals have significant influence over a large number of important entities. This situation can have important corporate, social, economic, and legal consequences, and has been the subject of significant research.
4. Process and structure
The process for running a board, sometimes called the board process, includes the selection of board members, the setting of clear board objectives, the dissemination of documents or board package to the board members, the collaborative creation of an agenda for the meeting, the creation and follow-up of assigned action items, and the assessment of the board process through standardized assessments of board members, owners, and CEOs. The science of this process has been slow to develop due to the secretive nature of the way most companies run their boards, however some standardization is beginning to develop. Some who are pushing for this standardization in the USA are the National Association of Corporate Directors, McKinsey and The Board Group.
4.1. Process and structure Board meetings
A board of directors conducts its meetings according to the rules and procedures contained in its governing documents. These procedures may allow the board to conduct its business by conference call or other electronic means. They may also specify how a quorum is to be determined.
Most organizations have adopted Roberts Rules of Order as its guide to supplement its own rules. In this book, the rules for conducting board meetings may be less formal if there is no more than about a dozen board members present. An example of the informality is that motions are not required if its clear what is being discussed.
4.2. Process and structure Size
Historically, nonprofit boards have often had large boards with up to twenty-four members, but a modern trend is to have smaller boards as small as six or seven people. Studies suggest that after seven people, each additional person reduces the effectiveness of group decision-making.
5. Non-corporate boards
The role and responsibilities of a board of directors vary depending on the nature and type of business entity and the laws applying to the entity see types of business entity. For example, the nature of the business entity may be one that is traded on a public market public company, not traded on a public market a private, limited or closely held company, owned by family members a family business, or exempt from income taxes. There are numerous types of business entities available throughout the world such as a corporation, limited liability company, cooperative, business trust, partnership, private limited company, and public limited company.
Much of what has been written about boards of directors relates to boards of directors of business entities actively traded on public markets. More recently, however, material is becoming available for boards of private and closely held businesses including family businesses.
A board-only organization is one whose board is self-appointed, rather than being accountable to a base of members through elections; or in which the powers of the membership are extremely limited.
5.1. Non-corporate boards Membership organizations
In membership organizations, such as a society made up of members of a certain profession or one advocating a certain cause, a board of directors may have the responsibility of running the organization in between meetings of the membership, especially if the membership meets infrequently, such as only at an annual general meeting. The amount of powers and authority delegated to the board depend on the bylaws and rules of the particular organization. Some organizations place matters exclusively in the boards control while in others, the general membership retains full power and the board can only make recommendations.
The setup of a board of directors vary widely across organizations and may include provisions that are applicable to corporations, in which the "shareholders" are the members of the organization. A difference may be that the membership elects the officers of the organization, such as the president and the secretary, and the officers become members of the board in addition to the directors and retain those duties on the board. The directors may also be classified as officers in this situation. There may also be ex-officio members of the board, or persons who are members due to another position that they hold. These ex-officio members have all the same rights as the other board members.
Members of the board may be removed before their term is complete. Details on how they can be removed are usually provided in the bylaws. If the bylaws do not contain such details, the section on disciplinary procedures in Roberts Rules of Order may be used.
In a publicly held company, directors are elected to represent and are legally obligated as fiduciaries to represent owners of the company - the shareholders/stockholders. In this capacity they establish policies and make decisions on issues such as whether there is dividend and how much it is, stock options distributed to employees, and the hiring/firing and compensation of upper management.
6.1. Corporations Governance
Theoretically, the control of a company is divided between two bodies: the board of directors, and the shareholders in general meeting. In practice, the amount of power exercised by the board varies with the type of company. In small private companies, the directors and the shareholders are normally the same people, and thus there is no real division of power. In large public companies, the board tends to exercise more of a supervisory role, and individual responsibility and management tends to be delegated downward to individual professional executives such as a finance director or a marketing director who deal with particular areas of the companys affairs.
Another feature of boards of directors in large public companies is that the board tends to have more de facto power. Many shareholders grant proxies to the directors to vote their shares at general meetings and accept all recommendations of the board rather than try to get involved in management, since each shareholders power, as well as interest and information is so small. Larger institutional investors also grant the board proxies. The large number of shareholders also makes it hard for them to organize. However, there have been moves recently to try to increase shareholder activism among both institutional investors and individuals with small shareholdings.
A contrasting view is that in large public companies it is upper management and not boards that wield practical power, because boards delegate nearly all of their power to the top executive employees, adopting their recommendations almost without fail. As a practical matter, executives even choose the directors, with shareholders normally following management recommendations and voting for them.
In most cases, serving on a board is not a career unto itself. For major corporations, the board members are usually professionals or leaders in their field. In the case of outside directors, they are often senior leaders of other organizations. Nevertheless, board members often receive remunerations amounting to hundreds of thousands of dollars per year since they often sit on the boards of several companies. Inside directors are usually not paid for sitting on a board, but the duty is instead considered part of their larger job description. Outside directors are usually paid for their services. These remunerations vary between corporations, but usually consist of a yearly or monthly salary, additional compensation for each meeting attended, stock options, and various other benefits. such as travel, hotel and meal expenses for the board meetings. Tiffany & Co., for example, pays directors an annual retainer of $46.500, an additional annual retainer of $2.500 if the director is also a chairperson of a committee, a per-meeting-attended fee of $2.000 for meetings attended in person, a $500 fee for each meeting attended via telephone, in addition to stock options and retirement benefits.
6.2. Corporations Two-tier system
In some European and Asian countries, there are two separate boards, an executive board for day-to-day business and a supervisory board elected by the shareholders and employees for supervising the executive board. In these countries, the CEO chief executive or managing director presides over the executive board and the chairman presides over the supervisory board, and these two roles will always be held by different people. This ensures a distinction between management by the executive board and governance by the supervisory board and allows for clear lines of authority. The aim is to prevent a conflict of interest and too much power being concentrated in the hands of one person. There is a strong parallel here with the structure of government, which tends to separate the political cabinet from the management civil service. In the United States, the board of directors elected by the shareholders is often equivalent to the supervisory board, while the executive board may often be known as the executive committee operating committee or executive council, composed of the CEO and their direct reports other C-level officers, division/subsidiary heads.
6.3. Corporations History
The development of a separate board of directors to manage/govern/oversee a company has occurred incrementally and indefinitely over legal history. Until the end of the 19th century, it seems to have been generally assumed that the general meeting of all shareholders was the supreme organ of a company, and that the board of directors merely acted as an agent of the company subject to the control of the shareholders in general meeting.
However, by 1906, the English Court of Appeal had made it clear in the decision of Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame BCLC 498 the court held that the rule in Equitable Fire related only to skill, and not to diligence. With respect to diligence, what was required was:"such care as an ordinary man might be expected to take on his own behalf."
This was a dual subjective and objective test, and one deliberately pitched at a higher level.
More recently, it has been suggested that both the tests of skill and diligence should be assessed objectively and subjectively; in the United Kingdom, the statutory provisions relating to directors duties in the new Companies Act 2006 have been codified on this basis.
6.4. Corporations Remedies for breach of duty
In most jurisdictions, the law provides for a variety of remedies in the event of a breach by the directors of their duties:
- injunction or declaration
- summary dismissal
- account of profits
- damages or compensation
- restoration of the companys property
- rescission of the relevant contract
6.5. Corporations Current trends
Historically, directors duties have been owed almost exclusively to the company and its members, and the board was expected to exercise its powers for the financial benefit of the company. However, more recently there have been attempts to "soften" the position, and provide for more scope for directors to act as good corporate citizens. For example, in the United Kingdom, the Companies Act 2006 requires directors of companies "to promote the success of the company for the benefit of its members as a whole" and sets out the following six factors regarding a directors duty to promote success:
- the likely consequences of any decision in the long term
- the impact of the companys operations on the community and the environment
- the need to act fairly as between members of a company
- the desirability of the company maintaining a reputation for high standards of business conduct
- the interests of the companys employees
- the need to foster the companys business relationships with suppliers, customers and others
This represents a considerable departure from the traditional notion that directors duties are owed only to the company. Previously in the United Kingdom, under the Companies Act 1985, protections for non-member stakeholders were considerably more limited. The changes have therefore been the subject of some criticism.
Board of Directors Technology
The adoption of technology that facilitates the meeting preparation and execution of directors continues to grow. Board directors are increasingly leveraging this technology to communicate and collaborate within a secure environment to access meeting materials, communicate with each other, and execute their governance responsibilities. This trend is particularly acute in the United States where a robust market of early adopters garnered acceptance of board software by organizations resulting in higher penetration of the board portal services in the region.
6.6. Corporations The Board and Society
Most companies have weak mechanisms for bringing the voice of society into the board room. They rely on personalities who werent appointed for their understanding of societal issues. Often they give limited focus both through time and financial resource to issues of corporate responsibility and sustainability. A Social Board has society designed into its structure. It elevates the voice of society through specialist appointments to the board and mechanisms that empower innovation from within the organisation. Social Boards align themselves with themes that are important to society. These may include measuring worker pay ratios, linking personal social and environmental objectives to remuneration, integrated reporting, fair tax and B-Corp Certification.
Social Boards recognise that they are part of society and that they require more than a licence to operate to succeed. They balance short-term shareholder pressure against long-term value creation, managing the business for a plurality of stakeholders including employees, shareholders, supply chains and civil society.
6.7. Corporations Sarbanes–Oxley Act
The Sarbanes–Oxley Act of 2002 has introduced new standards of accountability on boards of U.S. companies or companies listed on U.S. stock exchanges. Under the Act, directors risk large fines and prison sentences in the case of accounting crimes. Internal control is now the direct responsibility of directors. The vast majority of companies covered by the Act have hired internal auditors to ensure that the company adheres to required standards of internal control. The internal auditors are required by law to report directly to an audit board, consisting of directors more than half of whom are outside directors, one of whom is a "financial expert."
The law requires companies listed on the major stock exchanges NYSE, NASDAQ to have a majority of independent directors - directors who are not otherwise employed by the firm or in a business relationship with it.
6.8. Corporations Size
According to the Corporate Librarys study, the average size of publicly traded companys board is 9.2 members, and most boards range from 3 to 31 members. According to Investopedia, some analysts think the ideal size is seven. State law may specify a minimum number of directors, maximum number of directors, and qualifications for directors e.g. whether board members must be individuals or may be business entities.
6.9. Corporations Committees
While a board may have several committees, two - the compensation committee and audit committee - are critical and must be made up of at least three independent directors and no inside directors. Other common committees in boards are nominating and governance.
6.10. Corporations Compensation
Directors of Fortune 500 companies received median pay of $234.000 in 2011. Directorship is a part-time job. A recent National Association of Corporate Directors study found directors averaging just 4.3 hours a week on board work. Surveys indicate that about 20% of nonprofit foundations pay their board members, and 2% of American nonprofit organizations do. 80% of nonprofit organizations require board members to personally contribute to the organization, as BoardSource recommends. This percentage has increased in recent years.
6.11. Corporations Criticism
According to John Gillespie, a former investment banker and co-author of a book critical of boards, "Far too much of their time has been for check-the-box and cover-your-behind activities rather than real monitoring of executives and providing strategic advice on behalf of shareholders". At the same time, scholars have found that individual directors have a large effect on major corporate initiatives such as mergers and acquisitions and cross-border investments.
The issue of gender representation on corporate boards of directors has been the subject of much criticism in recent years. Governments and corporations have responded with measures such as legislation mandating gender quotas and comply or explain systems to address the disproportionality of gender representation on corporate boards. A study of the French corporate elite has found that certain social classes are also disproportionately represented on boards, with those from the upper and, especially, upper-middle classes tending to dominate.