In any public company, shareholders are the ones who open the door to innovation and growth. They are also the ones with perhaps the most vested interest in the financial wellbeing of the enterprise. Therefore, their interests, ideas and opinions are not to be taken lightly. This is where the board of directors steps in.
What is a board of directors?
By law, all public companies must have a board of directors elected to represent shareholders ad a governing body. Nonprofits and private companies are not legally obliged, but many install a board anyway as it can be effective to have a respected panel of peers in charge of company oversight.
The board of directors is responsible not only for protecting the interests of shareholders, but also for making the kind of important decisions that can mean the difference between a successful and an unsuccessful company.
What role does the board of directors play?
The board first and foremost is a fiduciary for the shareholders, which is to say their primary role is to act in the best interests of the company. Directors make company strategy and spending decisions based solely on how the results are going to affect the shareholders. However, the roles are often a lot more involved than that. The board is the last line of defence.
The directors decide everything from who runs the company (even the CEO is beholden to the shareholders) to overall business goals and maintaining resources. They are also in charge of establishing compensation for executives, creating company policies and acting as a support network for executives and their teams.
How is a board of directors structured?
The structure of the board is going to depend on several factors. In the UK, the most common structure is a unitary board that requires all board members to attend board meetings at the same time. The directors represent both internal and external members.
In many European and Asian countries, meanwhile, it’s more common to have a tiered structure with an executive and supervisory board. The executive board is often headed by the CEO, is elected by employees and shareholders and is in charge of day-to-day operations. The supervisory board, meanwhile, acts similarly to a UK style board of directors.
Regardless of board structure, however, the company bylaws will set out how many board members are required, how they are elected and how regularly they meet. There is no ideal board size, although consensus seems to be that between 5 and 10 directors is the ideal number. Any fewer and you won’t get a wide enough representation of the company and any larger and it will be very difficult to ever reach a unanimous decision.
Internal and external board members
Internal (or inside) board members are those operating actively within the business while external (or outside) members are shareholders from outside the business. In an ideal board of directors, there’s a good balance of the two, with the internal members bringing their insider knowledge of the business to the table and external members bringing an element of objectivity.
Electing and removing board members
Shareholders might get to select the final board of directors, but when it comes to nomination a dedicated committee must select who is in the running for board membership. Removing a board member, meanwhile, can be a complicated process and “golden parachute” clauses are often written into director contracts that require payment of a bonus if they’re let go.
There are, however, several foundational rules that can result in a director expulsion. This includes directors who use their position of power for a personal gain that doesn’t benefit the company, those who use proprietary information for personal gain or those who make deals to sway member votes.
Greater than the sum of its parts
The board of directors are not just the voice of the shareholders, they are the backbone of the company. A bad board, however, can do more harm than good so it’s in the interests of all businesses to ensure they elect a board of directors with the genuine best interests of the business at heart.
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