What is a Board of Directors?

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Definition:

A board of directors is a group of individuals who have been chosen to oversee the activities of a particular organization.

🤔 Understanding boards of directors

A board of directors is the governing body of a nonprofit organization, public corporation, or private company. Depending on the type of organization, board members may have different responsibilities. For example, in the case of a public corporation’s board of directors, the board of directors has a fiduciary responsibility to the shareholders, meaning it has a legal and ethical responsibility to act in the shareholders’ best interests. A board of directors doesn’t usually have a hands-on role in the operations of the organization that it oversees. Instead, the board often chooses someone else to lead. For example, a corporate board of directors would choose a chief executive officer (CEO), who leads the company in a more hands-on way.

Example

Suppose you’re a shareholder of a fictional national restaurant corporation, Food Co. You decide to attend the annual shareholders meeting, which is a gathering of the corporation’s owners. As a shareholder, you get to vote in the board of directors elections, meaning you get to help choose the leaders to oversee the activities of the corporation. The board members that the shareholders choose will help to craft the vision for the company, as well as choose the company’s CEO.

Takeaway

A board of directors is like Congress…

Congress is the governing body of the United States. The citizens get to vote to elect members of Congress who they think will lead the country well and be good stewards of taxpayer dollars. Just like Congress, a board of directors is also a governing body. Boards of directors can oversee publicly traded corporations, nonprofit organizations, and private companies. Board members are chosen to make sure they’re being good stewards of shareholder and donor dollars.

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What is a board of directors?

A board of directors is the governing body of a company or nonprofit organization. The responsibilities and makeup of any particular board might vary by organization, but the board of directors is generally responsible for crafting the big-picture goals and overseeing the process to reach them.

Consider the example of a board of directors of a large corporation. First, the shareholders would choose the board of directors at an annual shareholder meeting. Then, the board would craft the short-term and long-term goals for the company. Finally, the board would monitor the progress of the company to make sure it's meeting those goals. And if the company isn’t meeting the goals, then the board steps in to make any necessary changes to the company’s leadership.

What is the role of a board of directors?

The role of the board of directors is primarily big-picture. The board of directors helps to craft the long-term goals of a company or nonprofit organization. Then, the board chooses the leaders who will take those goals and turn them into concrete strategies to reach them. Finally, the board of directors provides oversight to the individuals who are responsible for carrying out the strategy to help the organization reach its goals.

What are the primary functions of the board of directors?

Even though boards of directors don’t play an active role in the daily operations of a company or nonprofit organization, they still have an important role to carry out. Some of the primary jobs of a board of directors are:

  • Choosing the organization’s leader. Depending on the type of organization, it might choose a chief executive officer, executive director, or foundation manager. The leader the board chooses leads the organization in reaching its goals.
  • Approving and overseeing the implementation of plans. The board crafts the long-term goals for the organization and hands them off to the leader to reach. But the board still oversees the progress and approves the plans.
  • Approving and overseeing the budget. The leader that the board chooses is often responsible for creating a budget for the organization, but the board usually has to approve that budget.
  • Act as a fiduciary. Corporate and nonprofit board members have a fiduciary duty to the shareholders and donors of their organization, meaning the board has a legal and ethical responsibility to act in their best interests.

What are the types of boards of directors?

There are different types of organizations that might have a board of directors. Public companies, nonprofit organizations, and private companies all may have (or in some cases, must have) a board of directors.

First, most states require that corporations within the state have a board of directors. Though the laws don’t generally state exactly what the boards must be responsible for, corporate boards usually have a few key responsibilities including selecting the chief executive officer and crafting the long-term goals for the company.

Nonprofit organizations also must have boards of directors. The board of a nonprofit handles the governance of the organization, just as a corporate board handles the governance of the company.

As with corporations, nonprofit boards of directors have a hands-off approach to governance. They help to craft the big-picture strategy, but they usually aren’t involved in the operations of the organizations. For many nonprofit boards, being a board member is a volunteer position and the members don’t get paid.

Finally, though private companies don’t have to have boards of directors in the same way that public corporations and nonprofit organizations do, many choose to have one. A private company might choose to have a board of directors if it’s considering going public in the future or if it’s working to attract private investors.

What is the structure of a board of directors?

There’s no single structure that every organization follows when it comes to its board of directors. Instead, the structure varies depending on factors such as the size and complexity of the company.

First, the size of a company’s board of directors often correlates with the amount of revenue the company generates. For smaller companies, meaning those with less than $10M in annual revenue, seven is the average number of directors on a board. For large companies, meaning those with revenue of more than $10B, the average number of members is 12. Having more members allows for more expertise and specialization on the board, but it also costs more and results in slower decision making on the part of the board.

Boards also vary depending on whether the members are independent of the organization itself. Independent directors (aka outside directors) are those who don’t have another role within the company. An inside director is one who has another role within the company. Often the CEO serves as an inside director.

Boards often include specific officer positions. Boards might have more positions depending on the size of the board, but most corporate and nonprofit boards include the following positions:

  • President or Chair: The president or chair is the leader of the board and oversees all of the board’s activities. In for-profit organizations, the CEO often serves as the president of the board.
  • Secretary: The secretary of a board records the discussion and votes at each meeting and keeps a record of the board’s activities. The secretary makes sure that all of the board’s activities fall within the scope of the organization’s bylaws. Finally, the secretary communicates necessary information such as upcoming meetings to board members.
  • Treasurer: The treasurer does the board’s accounting and recording receipts. The treasurer has access to any bank accounts the board has and keeps the rest of the board up-to-date on the financial situation of the board.

Is the CEO a part of the board of directors?

A corporation’s board of directors and its chief executive officer (CEO) are two separate parties within a company. The board of directors is made up of the members the shareholders choose to govern and oversee the activities of the company. The CEO is a person that the board of directors hires to run the business operations and carry out the big-picture strategy of the company.

While the board and the CEO are two entirely different roles, it’s not at all uncommon for the CEO to also serve as a member, or even the board chair, of the board of directors. In fact, this is the case in most for-profit corporations.

In the nonprofit world, the CEO (often called the executive director or foundation manager), is far less likely to sit on the board or to have voting rights.

In the case of both nonprofit organizations and for-profit companies, there might be downsides to having the CEO sit on the board of directors. Since the board of directors is technically the CEO’s boss, having the CEO on the board might blur those professional lines and make it more difficult for the board to manage and direct the activities of the CEO. Having the CEO on the board can also create a conflict of interest when it comes to matters such as setting the CEO’s salary, or even replacing the CEO.

There are also advantages to having the CEO on the board. First, the CEO’s involvement might allow the board to make more informed decisions. The CEO is the one working in the company each day and has a lot of valuable information to share with the rest of the board. There’s certainly an advantage to having one of the people helping to set a company’s goals also being the person to spearhead the effort to reach them.

Does a CEO or the board of directors have more power?

The chief executive officer (CEO) runs the company and creates a long-term business strategy, but he or she isn’t the most powerful individual in the company. The board of directors has more power than the CEO.

One of the primary roles of the board of directors is choosing a CEO and working with that person to craft the company’s long-term goals. The CEO is the one who carries out the strategy to reach those goals, but under the oversight of the board. If the CEO isn’t acting in the best interests of the shareholders or bringing the company in a direction the board approves of, then it can remove the CEO and replace him or her with a new leader.

Even though the board of directors has more power than and the authority to remove the CEO, the CEO still has most of the decision-making power as it relates to the daily operations of the company.

First, the CEO handles business operations and strategic planning as it relates to meeting the company’s long-term goals as decided on by the board of directors. The CEO is also responsible for capital allocation. He or she can make recommendations as to how the company should be using its resources and how much the company should give out to shareholders (though these recommendations are subject to the approval of the board).

The CEO also has a hands-on role in ensuring the accuracy and transparency of the company’s financial statements. The CEO works closely with the company’s chief financial officer (CFO) on this and on setting up the company’s operating plan and budget.

All of the decisions that a CEO makes are subject to the oversight of the board of directors. But since the CEO does so much of the operational management, including hiring and firing other company leaders, he or she still has a lot of power. Because of this, boards are generally careful to choose CEOs they trust, knowing what an influence that one person can have on the company.

What are the election and removal methods of board members?

The shareholders of a particular company choose the board members. This voting often occurs at the company’s annual meeting, which is a gathering of the corporation’s shareholders. Shareholders can vote for members that the nomination committee has nominated. The nominating committee, also known as the corporate governance committee, sets the criteria for corporate directors and recommends members for approval from the shareholders.

When it comes to removing a member from the board of directors, the process can often be automatic. The shareholders often elect board members for terms of a particular number of years. When the term is over, the shareholders may have to vote again to approve the member. If the shareholders or the nominating committee no longer feel the member is a good addition to the board, they can choose not to reelect that member.

Board members also might leave a board as a result of a term limit or mandatory retirement age. The nominating committee might create provisions like this one to prevent members from serving on the board for too long. Once a member reaches the term limit or retirement age, he or she may no longer serve on the board.

Shareholders may also remove a board of directors member without waiting for that member’s term to end. A corporation’s bylaws, which it sets at the time the corporation starts, often set forth the terms that allow shareholders to remove a member of the board of directors. Often they can do this by resolution at a meeting specifically called for that purpose. To remove a board member, the number of votes necessary is usually equal to the number of votes that was necessary to elect him or her.

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