What is a Board of Directors?
A board of directors is essentially a panel of people who are elected to represent shareholders. Every public company is legally required to install a board of directors; nonprofit organizations and many private companies – while not required to – also name a board of directors.
The board is responsible for protecting shareholders’ interests, establishing policies for management, oversight of the corporation or organization, and making decisions about important issues a company or organization faces.
Functions of a Board of Directors
In a broad sense, a corporate board of directors acts as a fiduciary for shareholders. The board is also tasked with a number of other responsibilities, including the following:
- Creating dividend policies
- Creating options policies
- Hiring and firing of senior of executives (especially the CEO)
- Establishing compensation for executives
- Supporting executives and their teams
- Maintaining company resources
- Setting general company goals
- Making sure that the company is equipped with the tools it needs to be managed well
Basic structure of a Board of Directors
The structure, responsibilities, and powers given to a board of directors are determined by the bylaws of a company or organization. The bylaws generally determine how many board members there are, how the members are elected, and how frequently the board members meet. There’s not a set number or structuring for a board of directors; it depends largely on the company or organization, the industry in which the company or organization operates, and the shareholders.
It’s widely agreed upon that the board needs to represent shareholder and owner/management interests and that it’s usually a good idea for the board to include both internal and external members. Accordingly, there is usually an internal director – a member of the board that is invested in the daily workings of the company and manages the interests of shareholders, officers, and employees – and an external director who represents the opinions and interests of those who function outside of the company.
The Chief Executive Officer (CEO) often also serves as chairman of the company’s board of directors.
International structure of a Board of Directors
The structuring of a board of directors tends to be more varied outside of the United States. In certain countries in Asia and the European Union, the structure is often split into two primary boards: executive and supervisory.
The executive board is made up of company insiders that are elected by employees and shareholders. In most cases, the executive board is headed up by the company CEO or a managing officer. The board is typically tasked with overseeing the daily business operations.
The supervisory board concerns itself with a broader spectrum of issues when dealing with the company, and acts much like a typical U.S. board. The chair for the board varies but is always headed up by someone other than the preeminent executive officer.
We hope you enjoyed our guide to the basic structure and functions of a board of directors. CFI is the official provider of the Financial Modeling & Valuation Analyst (FMVA)™ certification, designed to turn anyone into a world-class financial analyst. For more information on corporate operations, CFI suggests the following resources for you to check out: