Board of Directors Meaning
The board of directors is the premier governance body of a business. Its members are usually elected by shareholders. The board is usually tasked with:
- Protection of shareholder interest.
- Declaring dividends.
- Setting major business strategy.
- Overseeing and advising senior management.
- Senior management compensation.
- Management of financial, legal, security and other business risks.
- Engaging key stakeholders.
- Ensuring social responsibility.
All public companies, some private companies and some not for profit organizations have boards of directors. Boards are useful irrespective of company size. Typically though, the larger the organization, the greater the need for a board. For public companies, regulators may require that a minimum proportion of the board be composed of independent or outside directors.
Either way, board members are required to use their position to objectively advance company interests while staying clear of potential conflicts of interest. It must demonstrate transparency in decision making and adhere to the highest ethical standards.
The powers and structure of the board are defined by the company’s bylaws and articles of incorporation. These determine the number of members, the election process and the frequency of meetings. The board makes company decisions on behalf of the shareholders. It is often more future-focused while the company’s management concentrates on day-to-day operations.
The effectiveness of a board is dependent on the conduct and quality of its members. Ideally, each individual should bring specific skills and expertise that are aligned with the company’s overarching goals. Since the CEO cannot be an expert in everything, a good board should bring important external insights that can help senior management navigate challenging times.
The board should also be driven by collaboration, communication, accountability and independence.
Boards usually have smaller teams created to deal with specific areas or issues. These include governance, audit, compensation, risk management and corporate social responsibility committees.