Board of directors

"Board Room" redirects here. For the "Board Room" member lounge, see Alaska Airlines.

A meeting of a board of directors of theLeipzig–Dresden Railway Company in 1852

A board of directors is a body of elected or appointed members who jointly oversee the activities of

a company or organization. Other names include board of governors, board of managers, board

of regents, board of trustees, and board of visitors. It is often simply referred to as "the board".

A board's activities are determined by the powers, duties, and responsibilities delegated to it or

conferred on it by an authority outside itself. These matters are typically detailed in the

organization's bylaws. The bylaws commonly also specify the number of members of the board, how

they are to be chosen, and when they are to meet. However, these bylaws rarely address a board's

powers when faced with a corporate turnaround or restructuring, where board members need to act

as agents of change in addition to their traditional fiduciary responsibilities.[1]

In an organization with voting members, the board acts on behalf of, and is subordinate to, the

organization's full group, which usually chooses the members of the board. In a stock corporation,

the board is elected by the shareholders and is the highest authority in the management of the

corporation. In a non-stock corporation with no general voting membership, the board is the supreme

governing body of the institution;[2] its members are sometimes chosen by the board itself.[3][4]

Typical duties of boards of directors include:[5][6]

governing the organization by establishing broad policies and objectives;

selecting, appointing, supporting and reviewing the performance of the chief executive;

ensuring the availability of adequate financial resources;

approving annual budgets;

accounting to the stakeholders for the organization's performance;

setting the salaries and compensation of company management;

The legal responsibilities of boards and board members vary with the nature of the organization, and

with the jurisdiction within which it operates. 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, who holds whatever title is

specified in the bylaws.

Directors

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.[7]

Inside director[edit]

An inside director is a director who is also an employee, officer, major shareholder, or someone similarly connected to the organization. Inside directors represent the interests of the entity's 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

Other executives of the organization, such as its chief financial officer (CFO) or executive vice president

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

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). Executive directors often have a specified area of responsibility in the organization, such as finance, marketing, human resources, or production.[8]

Outside director[edit]

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.[9]

Outside directors bring outside experience and perspective to the board. They keep a watchful eye on the inside directors and on the way the organization is run. 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 organization's governance.

Terminology [edit]

Director - a person appointed to serve on the board of an organization, such as an institution or business.

Inside director - a director who, in addition to serving on the board, has a meaningful connection to the organization

Outside director - a director who, other than serving on the board, has no meaningful connections to the organization

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

Non-executive director - a director who is not an executive with the organization

Shadow director - an individual who is not a named director but who nevertheless directs or controls the organization

Individual directors often serve on more than one board.[10] 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.[citation needed]

Process[edit]

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.[11] 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 Consulting and The Board Group.

Non-corporate boards[edit]

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 (a non-profit, not for profit, or tax-exempt entity). 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.[12] More recently, however, material is becoming available for boards of private and closely held businesses including family businesses.[13]

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.[citation needed]

Corporations[edit]

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.

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Appointment of directors

The ultimate control as to the composition of the board of directors rests with the shareholders, who can always appoint, and – more importantly, sometimes – dismiss a director. The shareholders can also fix the minimum and maximum number of directors. However, the board can usually appoint (but not dismiss) a director to his office as well. A director may be dismissed from office by a majority vote of the shareholders, provided that a special procedure is followed. The procedure is complex, and legal advice will always be required.

Roles of the board of directors

The roles of the board of directors include :-

Establish vision, mission and values

Determine the company's vision and mission to guide and set the pace for its current operations and future development.

Determine the values to be promoted throughout the company.

Determine and review company goals.

Determine company policies

Brefi Group facilitates corporate retreats to help boards review strategy or develop vision, mission and values statements.

Set strategy and structure

Review and evaluate present and future opportunities, threats and risks in the external environment and current and future strengths, weaknesses and risks relating to the company.

Determine strategic options, select those to be pursued, and decide the means to implement and support them.

Determine the business strategies and plans that underpin the corporate strategy.

Ensure that the company's organisational structure and capability are appropriate for implementing the chosen strategies.

Brefi Group's free e-course includes modules to help you set strategy:

PEST and SWOT analyses

Determining strategic options

Strategies and plans

Delegate to management

Delegate authority to management, and monitor and evaluate the implementation of policies, strategies and business plans.

Determine monitoring criteria to be used by the board.

Ensure that internal controls are effective.

Communicate with senior management.

Brefi Group's free e-course includes a module on delegation to management. You could subscribe to the e-course, or access the module here.

Exercise accountability to shareholders and be responsible to relevant stakeholders

Ensure that communications both to and from shareholders and relevant stakeholders are effective.

Understand and take into account the interests of shareholders and relevant stakeholders.

Monitor relations with shareholders and relevant stakeholders by gathering and evaluation of appropriate information.

Promote the goodwill and support of shareholders and relevant stakeholders.

Find out more about corporate governance.

Responsibilities of directors

Directors look after the affairs of the company, and are in a position of trust. They might abuse their position in order to profit at the expense of their company, and, therefore, at the expense of the shareholders of the company.

Consequently, the law imposes a number of duties, burdens and responsibilities upon directors, to prevent abuse. Much of company law can be seen as a balance between allowing directors to manage the company's business so as to make a profit, and preventing them from abusing this freedom.

Directors are responsible for ensuring that proper books of account are kept.

In some circumstances, a director can be required to help pay the debts of his company, even though it is a separate legal person. For example, directors of a company who try to 'trade out of difficulty' and fail may be found guilty of 'wrongful trading' and can be made personally liable. Directors are particularly vulnerable if they have acted in a way which benefits themselves.

The directors must always exercise their powers for a 'proper purpose' – that is, in furtherance of the reason for which they were given those powers by the shareholders.

Directors must act in good faith in what they honestly believe to be the best interests of the company, and not for any collateral purpose. This means that, particularly in the event of a conflict of interest between the company's interests and their own, the directors must always favour the company.

Directors must act with due skill and care.

Directors must consider the interests of employees of the company.

Brefi Group provides a range of customised director development and training services.

Calling a directors' meeting

A director, or the secretary at the request of a director, may call a directors' meeting. A secretary may not call a meeting unless requested to do so by a director or the directors. Each director must be given reasonable notice of the meeting, stating its date, time and place. Commonly, seven days is given but what is 'reasonable' depends in the last resort on the circumstances

Non-executive directors

Legally speaking, there is no distinction between an executive and non-executive director. Yet there is inescapably a sense that the non-executive's role can be seen as balancing that of the executive director, so as to ensure the board as a whole functions effectively. Where the executive director has an intimate knowledge of the company, the non-executive director may be expected to have a wider perspective of the world at large.

The chairman of the board

The articles usually provide for the election of a chairman of the board. They empower the directors to appoint one of their own number as chairman and to determine the period for which he is to hold office. If no chairman is elected, or the elected chairman is not present within five minutes of the time fixed for the meeting or is unwilling to preside, those directors in attendance may usually elect one of their number as chairman of the meeting.

The chairman will usually have a second or casting vote in the case of equality of votes. Unless the articles confer such a vote upon him, however, a chairman has no casting vote merely by virtue of his office.

Since the chairman's position is of great importance, it is vital that his election is clearly in accordance with any special procedure laid down by the articles and that it is unambiguously minuted; this is especially important to avoid disputes as to his period in office. Usually there is no special procedure for resignation. As for removal, articles usually empower the board to remove the chairman from office at any time. Proper and clear minutes are important in order to avoid disputes.

Role of the chairman

The chairman's role includes managing the board's business and acting as its facilitator and guide. This can include:

Determining board composition and organisation;

Clarifying board and management responsibilities;

Planning and managing board and board committee meetings;

Developing the effectiveness of the board.

Find out more about director development and training.

Shadow directors

In many circumstances, the law applies not only to a director, but to a 'shadow director'. A shadow director is a person in accordance with whose directions or instructions the directors of a company are accustomed to act. Under this definition, it is possible that a director, or the whole board, of a holding company, and the holding company itself, could be treated as a shadow director of a subsidiary.

Professional advisers giving advice in their professional capacity are specifically excluded from the definition of a shadow director in the companies legislation.

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