What Is A Board Of Directors And What Do They Do?

6 min min read
Updated on August 18, 2021
by Michelle Kleiman
What Is A Board Of Directors And What Do They Do?

 

Key Takeaways

  • A board of directors works alongside the CEO of a company. They will guide them on how to best make decisions that benefit the whole organization. 
  • It’s mostly publicly traded companies that appoint a board of directors. But, some private and most nonprofit organizations do as well. 
  • They are chosen via voting methodology by existing board members and are fired the same way.

A board of directors is set up to assist an organization. They help with a variety of tasks from legally binding ones to company growth ones. They’re meant to create a way to manage and control senior executives like a CEO or Director. They also prevent them from being the last voice available. But, they’ll also keep the brand’s best interest at heart without personal biases being involved. 

Have you ever thought about who’s above a CEO or Director of a company? Especially for big names like Google, Facebook, or Walmart. Or maybe you’ve been curious about who does a CEO turn to for help? What about who’s in charge of firing a Director of an organization who’s not doing their job properly anymore? All of those tasks, and many more, fall under the care of a board of directors. 

In this article, we will discuss exactly what a Board of Directors does and how they are chosen. We’ll also discuss what type of companies require them, and how they’re fired.

What is a board of directors?

A board of directors is a group of people elected to represent the shareholders of an organization. Their overall goal is to support and build the value of the company without letting individual shareholders or internal groups (like directors or managers) sway their objective decisions. They mostly tend to be a group of people with previous high positions within companies. 

While it will vary based on the rules of each country and territory, here are some things they’re generally in charge of. 

Choosing executive management

They are the ones to choose (and fire) executive team members, and also determine their salary. A board of directors will support and guide them so they can in turn do the same with their teams. This system is set up like this so the President or CEO has someone to report to and isn’t the final hierarchy in the company.

Determining policies

Given that most companies that have a board of directors are publicly traded ones, their job also involves determining dividend and option policies.  This means they’ll help to decide how much, and when, shareholders get paid. 

Measuring results

A board of directors will also have the task of keeping a bird’ eye view of the organizational results. From making sure they’re actually set, to keeping track of their progress. Their objective after all is to keep the shareholder’s financial interest in mind and pushing that down all the way to entry-level positions via executive members.  

Advising 

Another task that falls under the board of directors is helping set company goals, and find the best way to maintain resources (both financial and others). They’re there to advise and guide more than taking action.

Keeping legal responsibilities

There’s a variety of legal-based responsibilities the board of directors must take ownership of. From a fiscal point of view, their job is to make sure the company is working in a financially responsible manner. They also have a statutory responsibility on them in the sense that they need to make sure all laws regarding people and employers are correctly followed. 

When companies first start out, they’re small enough that the tasks above overlap. This means there’s no need for a corporate board of directors. However, as companies grow and scale, they need a team to specifically focus on the bigger picture requirements.

How do they compare to other high positions in an organization?

The most common title we hear about when it comes to large organizations is CEO. As the Chief Executive Officer, a CEO is in charge of guiding the company to scale and succeed in a way that’s sustainable and profit-based. However, when it comes to a CEO’s standing in comparison to a board of directors, they are one stepping stone below. 

A board of directors then will meet to advise and guide the CEO on what next big step is needed to guide the company into the future. But, they’re not the ones running the day-to-day operations.

How is a board of directors chosen or removed?

The ideal board of directors involves a mix of internal and external people to balance out individual and general interests. They’re commonly chosen based on their previous experience in the industry or a specific area. By doing this, the board ends up being made up of a well-rounded source of knowledge and information.  

They are elected via a public vote. This means that the shareholders of each organization get to choose who they want at the table. In some countries, a small percentage of the board must be elected by active employees of the organization. 

In terms of removal, while it’s a complicated process to complete, the shareholders are also the ones able to fire a board member. The process will again be based on the country in which the company is located, and any additional internal policies the organization holds.

What type of company has a board of directors?

By law, any organization that’s publicly traded in the stock market must appoint a board of directors. This helps protect the interests of the shareholders that don’t actually work in the company. Some nonprofit organizations will also appoint a board of directors. This is to ensure the overall goal of helping and not making money is what stays at the forefront of the decision-making process.

Added to that, there are certain rules set by countries and territories that require a board of directors for companies with certain specifications. For example, in the United States if your company is registered as an S or C corporation you will need one. How they’re chosen and how many people you need in it will vary based on corporation type. It also doesn’t have any effect if they’re a for-profit or not-for-profit organization.

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