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What Is a Board of Directors?
The board of directors is essentially a company’s governing body. By ensuring that a business’s management is acting in their best interest, this decision-making body has a fiduciary responsibility to protect the assets of the organization’s shareholders by making “good faith” decisions for a company.
While corporate governance with annual meetings is a requirement for public companies, this is not true for nonprofit organizations or private companies––though many still choose to form a nonprofit board or board of trustees. An advisory board, which is also commonly found in an organization, is a group of business experts explicitly selected by the management team or the CEO.
3 Responsibilities of a Corporate Board of Directors
The board of directors should hold regular board meetings to make critical decisions on a company’s policies, hiring, and compensation.
- Policies: The board of directors creates bylaws and collaboratively makes decisions about the company’s policies.
- Leadership: Members of the board select and evaluate the company's chief executive officer.
- Compensation: The board of directors forms a compensation committee that approves executive salaries.
Structure of a Board of Directors
An organization’s bylaws determine the structure of its board of directors. Most boards range in membership size from three to 30 and have an uneven number to avoid ties. Still, a board of directors may consist of any number of people, with publicly traded companies having larger boards than privately-held organizations. The chief executive officer (CEO) usually holds a position on the board, and in some cases, the chief financial officer (CFO) does as well.
An audit committee is a subcommittee of most boards, and it oversees the company’s financial evaluation. Some countries in Europe and Asia operate with both a supervisory board and an executive board or executive committee. The supervisory board acts as a traditional board of directors, while the executive board deals with the organization’s day-to-day operations.
Electing and Removing Members of a Board of Directors
A company’s shareholders elect individual board members through a three-step process:
- Nomination: A nominating committee consisting of independent directors generally puts forth potential candidates’ names for a board of directors.
- Vote: Shareholders then vote to approve board members.
- Rotating terms: In the interest of avoiding a complete board change, many organizations operate on rotating systems, meaning only a certain number of directors are up for election in any given year.
Board members can be removed through a proxy statement and voting process during a general meeting, but it can be difficult, as many of them have contracts that specify a large payout if removed. Reasons for removal may include conducting transactions that are considered a conflict of interest or abusing directorial authority.