Board of directors

A board of directors is a governing body that watches over a business, a nonprofit organization, or a government agency. It helps make big decisions to guide the group.

The powers, duties, and tasks of a board of directors are set by government regulations (including the area's corporate law) and the group's own constitution and by-laws. These rules decide how many people are on the board, how they are picked, and how often they meet.

In a group with members who can vote, the board answers to all the members, who usually pick the board members. In a stock corporation, non-executive directors are chosen by the shareholders, and the board looks after the corporation. The board chooses the chief executive officer and sets the main plans for the group's future.

Terminology

A group that looks after an organization can be called many things. Common names include the board of directors, advisors, board of governors, board of managers, board of regents, board of trustees, and board of visitors. It might also be called the executive board.

Roles

A board of directors helps guide an organization by making big decisions and setting goals. They choose and support the top leader, such as the chief executive or president. They make sure the organization has enough money and a budget. They also tell people how well the organization is doing and decide salaries for senior managers.

The duties of board members can change depending on the type of organization and where it is located. For companies whose shares are sold to the public, these duties are usually more detailed and strict. The board usually picks one member to be the chairman, or chair, who leads the board's meetings. In some groups, members elect a president who also serves as the board chair.

Directors

Directors are people who help guide an organization, such as a business or charity. They can be different types based on how they are connected to the organization.

Some directors work for the organization they are part of, like a company's CEO or a major shareholder. These are called inside directors. They know a lot about how the organization works because they are part of it.

Other directors, called outside directors, do not work for or have any other connection to the organization. They come from different areas and can offer new ideas and perspectives. This helps make sure the organization is run fairly and well.

Process and structure

A board of directors runs by choosing members, setting goals, sharing information before meetings, making plans together, and checking on how well they work. Some groups in the US, like the National Association of Corporate Directors, McKinsey, and The Board Group, are helping make these processes more standard.

Board meetings

Board meetings follow rules set in their documents. These rules might let boards meet using conference calls or other electronic methods and explain how to decide if there are enough members present to make decisions.

Non-corporate boards

The jobs of a board of directors change depending on the group they help run and the laws that apply. Boards can be for businesses that sell shares, private companies, family-owned businesses, or groups that do not aim to make money.

Boards can also be for groups where people join to share a common interest or goal. In these groups, the board helps run things when members are not meeting, like between yearly meetings. How much power the board has depends on the group's rules. Sometimes the board can decide everything, and other times they can only suggest ideas. Boards in these groups can be set up in different ways, and sometimes the group's leaders also become part of the board. Boards can also have members who join because of another job they have. These members have the same rights as other board members.

Members of a board can sometimes be removed before their term ends, depending on the group's rules. If the rules do not say how this can happen, a book called Robert's Rules of Order can be used for guidance.

types of business entity • board-only • membership organizations • annual general meeting • Robert's Rules of Order

Corporations

In a publicly held company, directors are chosen to represent the owners—the shareholders or stockholders. They decide important things like paying dividends, how much to pay employees through stock options, and who to hire or fire as top managers.

Governance

The control of a company is shared between the board of directors and the shareholders in general meeting. In small private companies, the directors and shareholders are often the same people. In large public companies, the board mainly supervises, while professional executives handle daily tasks.

In large public companies, the board often has more power because most shareholders do not attend meetings and give their voting rights to the board. However, the board must still follow the shareholders' directions. Sometimes, top managers choose the directors, and shareholders usually agree with these choices.

Two-tier system

In some European and Asian countries, there are two boards: an executive board for daily business and a supervisory board to oversee the executive board. The chairman of the supervisory board is like the chairman of a single board, and the chairman of the executive board is like the company's top manager. This helps prevent one person from having too much power.

History

The idea of a separate board of directors to manage a company developed over time. Originally, all shareholders met together to make decisions, and the board just helped carry out those decisions. By 1906, courts in England said that if the company's rules gave the board power to manage, then the shareholders could not interfere with those decisions.

Demographics

The age of board members has become more noticeable. Some companies, like Sanrio, which makes Hello Kitty, have made efforts to include younger members on their boards.

Election and removal

Shareholders usually choose and can remove directors by voting. In some countries, workers also help choose some directors. Directors can also leave by resigning or passing away.

Exercise of powers

Boards usually make decisions during meetings. Legal systems often require that all directors are told about these meetings beforehand.

Duties

Directors must act in good faith and for the right reasons. They cannot use their position for personal gain or put their own interests above the company's. Directors must also act with care and skill.

Board of directors technology

More and more directors are using technology to help prepare for and run their meetings. This technology lets them share information securely and communicate before meetings.

The board and society

Many companies do not include societal issues in their boards. A "social board" includes members who focus on societal issues. These boards balance the needs of employees, shareholders, and the community.

India

India has rules for good corporate governance, especially for companies listed on stock exchanges.

United States

Sarbanes–Oxley Act

The Sarbanes–Oxley Act of 2002 set new rules for U.S. companies. The law also requires strong internal controls and independent audit boards.

Size

The average board of a publicly traded company has about 9.2 members. Some think the ideal size is seven. State laws can set minimum and maximum numbers of directors.

Committees

Boards often have committees. Two important ones are the compensation committee and the audit committee, which must have at least three independent directors and no inside directors. Other common committees include nominating and governance committees.

Compensation

Directors of large companies are paid well. Being a director is part-time work, with directors spending about 4.3 hours a week on board duties.

Criticism

Some say directors spend too much time on routine tasks instead of carefully watching executives and giving good advice. There is also criticism about who gets to be on boards, with some groups being represented more than others.