Board of directors


A board of directors is a governing body that supervises the activities of a business, a nonprofit organization, or a government agency.
The powers, duties, and responsibilities of a board of directors are determined by government regulations and the organization's own constitution and by-laws. These authorities may specify the number of members of the board, how they are to be chosen, and how often they are to meet.
In an organization with voting members, the board is accountable to, and may be subordinate to, the organization's full membership, which usually elect the members of the board. In a stock corporation, non-executive directors are elected by the shareholders, and the board has ultimate responsibility for the management of the corporation. In nations with codetermination, the workers of a corporation elect a set fraction of the board's members.
The board of directors appoints the chief executive officer of the corporation and sets out the overall strategic direction. In corporations with dispersed ownership, the identification and nomination of directors are often done by the board itself, leading to a high degree of self-perpetuation. In a non-stock corporation with no general voting membership, the board is the supreme governing body of the institution, and its members are sometimes chosen by the board itself.

Terminology

Other names include board of directors and advisors, board of governors, board of managers, board of regents, board of trustees, and board of visitors. It may also be called the executive board.

Roles

Typical duties of boards of directors include:
  • Governing the organization by establishing broad policies and setting out strategic objectives
  • Selecting, appointing, supporting, reviewing the performance, and terminating 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, compensation, and benefits of senior management
The legal responsibilities of boards and board members vary with the nature of the organization, and between jurisdictions. For companies with shares publicly listed for negotiation, 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 by-laws or articles of association. However, in membership organizations, the members elect the president of the organization and the president becomes the board chair, unless the by-laws say otherwise.

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.

Honorary members

Corporations may designate a former senior executive and ex-board member as an honorary board member, a position that does not carry any executive authority but represents recognition of the person's corporate governorship and performance.

Inside director

An inside director is a director who is also an employee, officer, chief executive, 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:
An inside director who is employed as a manager or executive of the organization is sometimes referred to as an executive director. Executive directors often have a specified area of responsibility in the organization, such as finance, marketing, human resources, or production.

Outside director

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. Outside directors are not employees of the company or affiliated with it in any other way.
Outside directors bring outside experience and perspectives to the board. For example, for a company that serves a domestic market only, the presence of CEOs from global multinational corporations as outside directors can help to provide insights on export and import opportunities and international trade options. One of the arguments for having outside directors is that they can keep a watchful eye on the inside directors and on the way the organization is run. Outside directors are unlikely to tolerate "insider dealing" between inside directors, as outside directors do not benefit from the company or organization. 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, and they might not know about the industry or sector in which the organization is operating.

Terminology

  • 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
  • De facto director – an individual who acts as a director of the company but has not actually or validly been appointed as such.
  • Shadow director – an individual who acts as a director of the company but is not a named director and does not claim or purport to act as director.
  • Nominee director – an individual who is appointed by a shareholder, creditor or interest group and who has a continuing loyalty to the appointors or other interest in the appointing company
Individual directors often serve on more than one board. This practice results in an interlocking directorate, where a relatively small number of individuals have significant influence over many important entities. This situation can have important corporate, social, economic, and legal consequences, and has been the subject of significant research.

Process and structure

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. 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 US are the National Association of Corporate Directors, McKinsey and The Board Group.

Board meetings

A board of directors conducts its meetings according to the rules and procedures contained in its governing documents. These procedures may allow the board to conduct its business by conference call or other electronic means. They may also specify how a quorum is to be determined.

Non-corporate boards

The responsibilities of a board of directors vary depending on the nature and type of business entity and the laws applying to the entity. For example, the nature of the business entity may be one that is traded on a public market, not traded on a public market, owned by family members, or exempt from income taxes. 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. More recently, however, material is becoming available for boards of private and closely held businesses including family businesses.
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.

Membership organizations

In membership organizations, such as a society made up of members of a certain profession or one advocating a certain cause, a board of directors may have the responsibility of running the organization in between meetings of the membership, especially if the membership meets infrequently, such as only at an annual general meeting. The amount of powers and authority delegated to the board depend on the bylaws and rules of the particular organization. Some organizations place matters exclusively in the board's control while in others, the general membership retains full power and the board can only make recommendations.
The setup of a board of directors varies widely across organizations and may include provisions that are applicable to corporations, in which the "shareholders" are the members of the organization. A difference may be that the membership elects the officers of the organization, such as the president and the secretary, and the officers become members of the board in addition to the directors and retain those duties on the board. The directors may also be classified as officers in this situation. There may also be ex-officio members of the board, or persons who are members due to another position that they hold. These ex-officio members have all the same rights as the other board members.
Members of the board may be removed before their term is complete. Details on how they can be removed are usually provided in the bylaws. If the bylaws do not contain such details, the section on disciplinary procedures in Robert's Rules of Order may be used.