The board of directors plays a vital role in the governance and success of any company, whether it is a startup, small business, or multinational corporation. As the highest governing authority, the board is responsible for overseeing the company’s management team and ensuring that the interests of shareholders are protected. In this article, we’ll examine the key duties and responsibilities of the board of directors and how they contribute to effective company leadership and governance.
What is the Role of the Board of Directors?
The board of directors is an elected group of individuals that represent shareholders. The board is responsible for establishing policies, selecting and evaluating the CEO, setting strategic goals and objectives, overseeing financial audits and reporting, managing risk, and ensuring good corporate governance. Essentially, the board is tasked with making major corporate decisions and overseeing the management and direction of the company.
While the board delegates the day-to-day management of the company to the CEO and executive team, they provide high-level oversight and hold the power to hire or fire the CEO. The board must balance the interests of shareholders, management, employees, and other stakeholders. By law, the board has a fiduciary duty to make decisions that are in the best interests of the shareholders.
Key Responsibilities of the Board of Directors
Though the specific duties may vary slightly based on the company industry and location, boards of directors typically have the following core responsibilities
Selecting and Evaluating the CEO
One of the most important jobs of the board is to select a competent CEO to lead the company. They are involved in identifying potential candidates, interviewing applicants, and ultimately appointing the CEO. The board also conducts regular evaluations of the CEO’s performance and oversees their compensation, including salary, bonuses, and stock options.
Providing Guidance and Oversight of Strategy
While management develops corporate strategy, the board plays an important role in reviewing, shaping, and approving the overall strategic plans. They offer guidance on topics like mergers and acquisitions, new market entry, product development, business partnerships, and more. The board monitors implementation of strategic plans and provides course correction when needed.
Monitoring Financial Performance and Risk
Boards oversee the company’s financial reporting and auditing processes. They review financial statements, annual budgets, and corporate policies regarding spending, debt, acquisitions, equity financing, and more. The board also evaluates and approves annual budgets and capital expenditure plans. Additionally, the board monitors risk by overseeing internal controls and identifying major risks to the company and ways to mitigate them.
Succession Planning
Boards are involved in succession planning, especially for the CEO and other senior leadership positions. They identify and develop a pipeline of potential successors over the long-term through mentoring, training and role rotations. This ensures continuity of leadership for the company.
Establishing Best Practices in Corporate Governance
The board sets governance policies and practices that align with ethical and legal standards. This includes creating committees, designating committee chairs, determining the frequency of board meetings, and implementing good governance principles. The board serves as a check and balance on management.
Providing Advice and Counsel to Management
Board members, especially independent directors, should ask tough questions of management and provide impartial advice on company issues. Many board members are current or former executives with invaluable management experience that can benefit the leadership team.
Composition of the Board of Directors
To carry out their duties effectively, the board must include knowledgeable and experienced directors. The ideal board composition depends on factors like company size, industry, business situation, and more. Here are some common guidelines on structure:
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Independent vs. Inside Directors: Most boards aim for a majority of independent, outside directors who do not have ties to the company to avoid conflicts of interest. Insiders like top executives offer important company knowledge.
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Board Size: Average size is 8-12 directors, allowing for diversity of perspective while still facilitating cohesive discussion.
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Committees: Key committees like audit, compensation, and nominating are made up of independent directors.
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Diversity: Boards should represent diversity in areas like gender, race, expertise, and work experience.
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Director Term Limits: Limits ensure fresh perspectives, often 3-4 terms of 2-3 years.
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Leadership Structure Either an independent Chair or Lead Director role counters the power of an insider CEO-Chair
Characteristics of Effective Board Members
In addition to the appropriate board composition, having competent directors with relevant skills makes a significant impact. Here are some traits of effective board members:
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Integrity and ethics: Directors must demonstrate high ethical standards and integrity. They should have no conflicts of interest.
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Business expertise: Directors should have experience in areas like accounting, finance, operations, marketing, technology, management, law, and the company’s industry.
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Critical thinking: Strong analysis skills, logic, and strategic thinking enable directors to advise management.
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Curiosity: Curiosity leads to probing questions and evaluation of alternatives before decision-making.
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Interpersonal skills: Directors should communicate clearly, actively participate in dialogue, and collaborate effectively.
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Commitment: Directors must be committed to fulfilling their fiduciary duties and devoting the necessary time and effort.
How are Board Members Selected?
For public companies, shareholders elect the board of directors, generally on an annual basis at the shareholder meeting. Board seats may be hotly contested since directors wield significant influence. Shareholders also have the power to remove directors by voting them out before their terms end. The process works as follows:
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Nominations: The nominating committee and shareholders put forth nominees based on needs of the board.
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Proxy statements: Director candidates and their qualifications are detailed.
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Shareholder vote: Shareholders elect directors according to the proxy statement or submit their own candidates.
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Board approval: Elected directors are officially appointed to the board after the shareholder meeting.
For private companies, the process is less formalized and directors are often selected by the shareholders through private agreements. Additionally, venture capital investors may secure a board seat as a condition of their investment in a private company.
Characteristics of High-Functioning Boards
When it comes to governance, not all boards are created equal. Here are some hallmarks of high-performing boards:
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Aligned with company strategy: The board constructs a governance plan that focuses on strategic priorities and objectives.
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Culture of transparency and trust: Open communication and transparency between the board and management enables quality decisions.
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Willing to take action when needed: Effective boards take decisive action when the company’s direction needs adjustment and are not passive.
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Individual accountability: Directors feel accountable for their specific duties rather than relying on groupthink.
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Continuous improvement mindset: High-functioning boards continually assess their performance and processes to improve their effectiveness.
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Focus on long-term success: these boards evaluate decisions through the lens of long-term value creation beyond quarterly earnings.
The Role of the Board of Directors
The board of directors, including the general manager or CEO (chief executive officer), has very defined roles and responsibilities within the business organization. Essentially, it is the role of the board of directors to hire the CEO or general manager of the business and assess the overall direction and strategy of the business. The CEO or general manager is responsible for hiring all of the other employees and overseeing the day-to-day operation of the business. Problems usually arise when these guidelines are not followed. Conflict occurs when the directors begin to meddle in the day-to-day operation of the business. Conversely, management is not responsible for the overall policy decisions of the business.
The board of directors selects officers for the board. The major office is the president or chair of the board. Next there is a vice-president of vice-chair who serves in the absence of the president. These positions are filled by board members. Next it usually has a secretary and treasurer or combined secretary/treasurer. These positions focus on very specific activities and may be filled by electing someone who is serving on the board of directors or appointing someone who is not a member of the board of directors. The selection process is often based on who is willing and who is the most qualified, although seniority may come into play. Each board may have their own ways of handling those issues.
The seven points below outline the major responsibilities of the board of directors.
1) Recruit, supervise, retain, evaluate and compensate the manager. Recruiting, supervising, retaining, evaluating and compensating the CEO or general manager are probably the most important functions of the board of directors. Value-added business boards need to aggressively search for the best possible candidate for this position. Actively searching within an industry can lead to the identification of very capable people. Don’t fall into the trap of hiring someone to manage the business because they are out of work and need a job. Another major error of value-added businesses is under-compensating the manager. Managerial compensation can provide a good financial payoff in terms of attracting top candidates who will bring financial success to the value-added business.
2) Provide direction for the organization. The board has a strategic function in providing the vision, mission and goals of the organization. These are often determined in combination with the CEO or general manager of the business.
3) Establish a policy based governance system. The board has the responsibility of developing a governance system for the business. The articles of governance provide a framework but the board develops a series of policies. This refers to the board as a group and focuses on defining the rules of the group and how it will function. In a sense, it’s no different than a club. The rules that the board establishes for the company should be policy based. In other words, the board develops policies to guide its own actions and the actions of the manager. The policies should be broad and not rigidly defined as to allow the board and manager leeway in achieving the goals of the business.
4) Govern the organization and the relationship with the CEO. Another responsibility of the board is to develop a governance system. The governance system involves how the board interacts with the general manager or CEO. Periodically the board interacts with the CEO during meetings of the board of directors. Typically that is done with a monthly board meeting, although some boards have switched to meetings three to four times a year, or maybe eight times a year. In the interim between these meetings, the board is kept informed through phone or video conferences or postal mail or e-mail.
5) Fiduciary duty to protect the organization’s assets and member’s investment. The board has a fiduciary responsibility to represent and protect the member’s/investor’s interest in the company. So the board has to make sure the assets of the company are kept in good order. This includes the company’s plant, equipment and facilities, including the human capital (people who work for the company.)
6) Monitor and control function. The board of directors has a monitoring and control function. The board is in charge of the auditing process and hires the auditor. It is in charge of making sure the audit is done in a timely manner each year.
A board of directors is a collection of individuals trying to operate as a group. Functioning as a group is something many people are not comfortable with. So each board evolves with its own culture. Each culture is dictated by the backgrounds of the individuals on the board. However, there are several governance models of how a board of directors can function. Examining and choosing the right model is important because it will impact the success of the value-added business.
Below are four governance models. The board of directors must decide which model is best for them.
1) Manager Focus – With this model, the manager dominates the board. We can all think of situations where we have had one dominant individual in a group. In this case the board functions as an advisory board and reacts to the views of the manager. It is essentially a “rubber stamp” for the CEO. This model often emerges when you have a charismatic CEO who is very dominant and proactive in running the organization. In most cases, this is not a good model for a value-added business.
2) Proactive Board – This model is of a proactive board that speaks as one voice. It speaks as one voice for the board and often has a proactive manager that also speaks with one combined voice for the organization. This is a good model because the manager and the board are on the same page and speak with a single voice. This model is proactive in taking advantage of emerging opportunities and is especially valuable for entrepreneurial businesses.
3) Geographic Representation – This model focuses on the members/investors whom the board member represents. With this model, the board member feels that they have been elected to the board to represent individuals in a geographic location or special interest group. To better understand this model, think of an individual running for a political office and then representing the interests of the individuals located in that geography. This is often found in large boards, typically of 24 to 50 individuals. With a large group like this there is a temptation for the directors to represent the interests of the members/investors in their geographic area or special interest group rather than the best interests of the company. This is not a model that works well for most value-added businesses.
4) Community Representation – In this situation the board member is representing the community rather than the organization. An example of this is a school board where an individual is elected to represent certain interests within the community.
These four models are ways in which the board and its organization function. Often there are directors who have previously been on boards where they have been chosen to represent a certain group or have been a rubber stamp for the manager. So it is natural for a director to think that this is how all boards function. But it is a good practice for boards to actively investigate and discuss the models presented above and choose the right one for their situation. This is usually a model where the directors are all active and present a single voice of what is best for the organization. What is best for the organization will usually also be good for the various members/investors and the stakeholders in the community.
Board of Directors | Definition | Meaning | Structure | Functions | Responsibilities | Roles
What is the role of the board?
Here we discuss what the role of the Board involves. It is for the board to judge, on a case-by-case basis, which stakeholders it treats as ‘relevant’ and which of their interests it is appropriate to meet, taking into account the law, relevant regulations and commercial considerations.
What is a board of directors?
A board of directors is a panel of people who are elected to represent shareholders. Every public company is legally required to have a board of directors. Nonprofits and many private companies, while not required to have a board of directors, may elect to have one to help govern and guide the organization.
What does a board director do?
Identify and manage risks – Risk management and mitigation is a large part of a board director’s role. The board must identify potential risks and establish effective policies that respond to risks across several areas including the financial, technological, and security spheres.
What does a board of directors do in a public company?
When it comes to calling the shots at a public company, CEOs run businesses on a day-to-day basis, but the board of directors shares in oversight of the company business. A public company’s board of directors is chosen by shareholders, and its primary job is to look out for shareholders’ interests.
