A board of directors sets a company’s strategic direction, oversees management, and protects shareholder interests. Elected by shareholders, board members ensure compliance, manage risks, and guide corporate policies for long-term success.
By Brad Nakase, Attorney
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In public companies, shareholders elect members to the board of directors (BofD), which is responsible for setting the company’s strategic direction, supervising management, and safeguarding stakeholder and shareholder interests.
Boards of directors are required for all publicly traded companies. An organizational board of directors, also known as a trustee board, is common in both for-profit and non-profit businesses and organizations.
Articles of incorporation and corporate bylaws detail the organizational framework and authority of a board of directors in a corporation. The bylaws have the power to determine the board’s size, the method of election (such as holding an annual meeting vote among shareholders), and the frequency of board meetings.
As trustees for the business and its stockholders, the board decides matters. In a nutshell, it offers guidance, direction, and advice for crucial goals like:
For a company to run smoothly, its board of directors must keep a close eye on it and offer advice when needed. It is the responsibility of the board to make sure the company follows all applicable laws and acts in the best interests of its stakeholders, including shareholders and employees. It is not involved in the day-to-day operations or management of the company.
A company’s board of directors thinks about big issues that affect the business, its owners, its workers, its neighborhood, and the public. Consequently, it frequently takes part in:
Listed companies are required by the New York Stock Exchange and Nasdaq to have boards with a majority of independent directors and to have independent directors on important board committees, like the audit committee.
A corporate board does not have to have a certain number of members, although most businesses choose between five and ten. In order to avoid deadlocks in board meetings, some boards mandate an uneven number of members. In order to prevent a full slate of annual elections and, in some cases, to ward off hostile takeovers, boards stagger the terms of directors.
In the United States, shareholders elect board members at the annual meeting of publicly traded companies. Investors who want to see changes to a board’s composition or policies can do so through the nominating committee or directly to the board itself.
The articles of incorporation or company bylaws dictate the procedure for selecting the board of directors of a private company. Shareholders can also select directors by simply agreeing on names to nominate.
The removal of a director may occur through an election or through other procedures in cases like breaches of fiduciary duty. There are also corporate boards that have fitness-to-serve regulations that, if violated, might result in a director’s removal from office.
The purpose of certain regulations is to ensure that board members do not abuse their position of authority, that they do not engage in conflicting interests, that they do not profit from inside information, that they do not sell their votes to outside interests, or that they do not try to influence the votes of other directors in favor of businesses outside their own.
The overarching responsibilities of various boards of directors might vary. As an illustration:
1. Executive Board
If a company does not have a chief executive officer, this board should step in and run things efficiently and profitably. Its function is to make sure that a business has a goal, stays focused on its purpose, and achieves its objectives consistently.
2. Governing Board
The objective of this board is to help owners run their businesses efficiently and reach their objectives by providing them with detailed recommendations based on the company’s mission.
3. Advisory Board
It is the goal of this type of board, similar to that of a governing board, to advise the chief executive officer of the company. It provides new insights and experiences that can aid the business in reaching its objectives, such as expanding its network, strengthening its ties to the community, and attracting a different type of customer.
4. Fundraising Board
A nonprofit’s board of directors is typically responsible for raising funds to support the organization’s mission. Membership on the board will be responsible for planning campaigns and one-off events like galas, competitions, and auctions. A person’s capacity to use their network of professional contacts is a major factor in their selection. Volunteers often serve without compensation on nonprofit boards.
Boards of directors often include both insiders and outsiders. Most of the time, an inside director is someone who works for the company, but sometimes big shareholders are also considered inside directors.
Outside, or independent, directors have no other ties to the business other than their position on the board. Consequently, when it comes to fulfilling their fiduciary duties, independent directors encounter fewer conflicts of interest compared to company insiders. Also, they may have experience in various industries and perspectives that the board can benefit from. When it comes to fulfilling its duties, a board can greatly benefit from having outside directors on board.
Members of a board typically consist of insiders, such as the chief executive officer (often also the chairperson of the board) and other senior managers or officers of the company.
Directors may hold a variety of titles and responsibilities. Among them are:
The competence and behavior of the board members, as well as their capacity to direct and supervise the company to attain its objectives, determine the board’s efficacy.
Members should complement one another by bringing unique knowledge and abilities that are directly applicable to the business’s mission. They need to be able to put their differences aside and work together positively to accomplish their goals and live up to their duties as trustees.
They need to be able to identify and resolve conflicts of interest since their primary goal should be the success of the business and not their personal gain.
Furthermore, in order to ensure accountability for its actions, a good board of directors keeps its oversight and decision-making processes open and transparent.
In its fiduciary capacity, the board typically acts on behalf of the shareholders and the company by establishing broad policies and making important decisions. The board is responsible for overseeing the company’s operations, including making decisions about mergers and acquisitions, dividends, and large investments, and for selecting and compensating senior executives.
No, actually, the directors and CEO (who might also be a board member) collaborate on important business matters. The board stays out of the way when the CEO is running day-to-day operations. The board can assess the CEO’s performance and remove them from office if they’re not up to snuff.
The majority of inside directors are also employees of the company, so they do not receive compensation for their board duties. Directors who are located outside of the company receive compensation.
The ordinary shareholder or board member might think that new board members appear out of nowhere on corporate documents around a certain time of year. Recruitment, nomination, and election of new board members typically follows a predetermined procedure and follows a lengthy schedule. Nominations and elections for the board take place behind the scenes, and the company newsletters and email blasts don’t show it all.
While the process of electing new board members is dynamic and continuous, it reaches its peak during election season. Directors’ elections are a crucial part of a board’s role. For the most innovative and forward-thinking outcomes, it’s best to form a board with directors of high caliber. This will create a synergy in the boardroom.
Envision a board in which every director’s term ends simultaneously. At regular intervals, a new board of directors would take over. Is that a negative thing? It might be because the newly elected board is inexperienced or doesn’t believe in the organization’s purpose. If the board were to undergo a total shakeup, it could pave the way for a hostile takeover. To avoid these situations, most American board of director bylaws outline a staggered term process.
Boards can foster a culture of collaboration by integrating and orienting new members to the board’s culture through staggered terms.
Establishing a schedule for the annual election of board directors is an important part of company bylaws. Annual elections tend to occur around the same time for the majority of organizations. The annual meeting is often the designated location for elections, as stated in the bylaws.
If the board wants to have the most qualified people serving on it, recruiting new members should be an ongoing effort.
Despite the continuous nature of board member recruitment, the majority of organizations maintain a nominating committee. Any current member has the authority to suggest a candidate for board membership, and the nominating committee is responsible for vetting these candidates. Having a large pool of candidates to choose from is beneficial for the nominating committee.
The nominating committee should double-check their adherence to the nomination procedures by reviewing the bylaws as the election draws near.
Every member of the nominating committee is responsible for choosing one or more candidates to research further and report their results back to the group. In order to determine whether a candidate is interested, qualified, and a good fit for the board, it is necessary to contact them. An application outlining the requirements, credentials, and expectations of the organization’s board members is often required of candidates for many boards.
Before settling on a final list of nominees, the committee discusses and evaluates each candidate. The employment of an impartial third party has been useful for some companies in identifying top candidates by providing an unbiased viewpoint.
The chief executive officer (CEO) of a company may be asked or given the chance to meet with potential nominees and give their thoughts to the selection committee.
There should be a competent financial expert on every board. A board does not require five of them. In a boardroom, a diverse set of skills is essential for success. The nominating committee should take a look at the board’s makeup in three different ways: separately, professionally, and collaboratively. This will help them get the right mix.
The Red Cross is an organization that exemplifies the desire for a diverse board of directors. Their bylaws clearly state that they value diversity in all its forms, including ethnicity, gender, race, age, disability, and geography.
Among the many qualities sought after by nominating committees when selecting board members are the following:
The board’s additional requirements might change as the organization evolves.
Presenting the board with the slate of nominees is the next task for the nominating committee. Each nominee should have their name, biography, résumé, and maybe even a photo included in a packet that the nominating committee puts together. There ought to be sufficient time for board members to review each nominee after they receive these packets.
Each nominee receives a “yes” or “no” vote from the entire board at the scheduled meeting. In order to vote for full board membership, only nominees who pass this first round will be considered. In accordance with the provisions of the bylaws, the voting may take place orally or in writing. If the board feels the need to avoid an uncomfortable situation while discussing, they can enter executive session. It is respectful of the nominees’ privacy to have them absent from the meeting during the vote so that board members may ask questions and share background information without fear of retaliation.
It is usual practice to accept nominations from the floor, as stated in Robert’s Rules of Order. The bylaws will specify when this should take place. The board chair may take nominations from the floor for a single seat or for several seats simultaneously, as specified in the bylaws.
It is the responsibility of the board secretary to document the vote’s outcome in the minutes.
The process of welcoming new board members is a time to celebrate. A new board can get off to a good start when the directors and the nominating committee take a strategic and thoughtful approach to director elections and nominations. Bringing fresh energy to an otherwise lifeless board is the enthusiasm of newly elected directors. Now is the moment to proudly prepare announcements for print and online, full of optimism about what the future holds.
Once the board has finished any post-election rituals and extended well-deserved congratulations, the next step is to arrange a formal orientation for the newly elected directors. The CEO or president of the board is involved in a separate committee that deals with orientation. Orientations can be very basic or very complex. A board handbook and an explanation of the new director’s responsibilities should be part of the orientation process. You can also take this opportunity to meet important people and get a tour of the facilities.
For publicly traded companies, the shareholders choose a group of people to serve on the board of directors, whose job it is to keep the company on track financially and make sure it stays in business. The board’s fiduciary responsibility is to act in the best interests of the company’s stakeholders and shareholders. Focusing on big issues rather than day-to-day operations, it works autonomously from management. A board of directors can help private businesses and nonprofits achieve their objectives.
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