Which of the following duties are primary responsibilities of a board of directors?

What Is Board of Directors (B of D)?

A board of directors (B of D) is the governing body of a company, elected by shareholders in the case of public companies to set strategy and oversee management. The board typically meets at regular intervals. Every public company must have a board of directors. Some private companies and nonprofit organizations also a board of directors.

Key Takeaways

• The board of directors of a public company is elected by shareholders.
• The board makes key decisions on issues such as mergers and dividends, hires senior managers, and sets their pay.
• Board of directors candidates can be nominated by the company's nominations committee or by outsiders seeking change.
• The New York Stock Exchange and the Nasdaq require listed companies to have a majority of outside, or independent, directors on their board.

The Board of Directors

How a Board of Directors (B of D) Works

In general, the board makes decisions as a fiduciary on behalf of the company and its shareholders. Issues that fall under a board's purview include the hiring and firing of senior executives and their compensation, dividends, major investments, and mergers and acquisitions.

In addition, a board of directors is responsible for helping a corporation set broad goals, supporting senior management in pursuit of those goals, and ensuring the company has adequate, well-managed resources at its disposal.

The board of directors typically includes the chief executive officer and sometimes other senior managers, alongside board members not otherwise affiliated with the company.

An inside director is most commonly defined as a company employee, though the category sometimes also covers significant shareholders.

Independent, or outside, directors are only involved with the company through their board membership. Independent directors face fewer conflicts of interest than company insiders in discharging their fiduciary obligations.

The New York Stock Exchange and the Nasdaq require listed companies to have boards with a majority of independent directors, and to include independent directors on key board committees such as the audit committee.

The structure and powers of a board are determined by a company's articles of incorporation and its corporate bylaws. Bylaws can set the number of board members, how the board is elected (e.g., by a shareholder vote at an annual meeting), and how often the board meets.

While there is no set number of members for a corporate board, many pursuing diversity as well as cohesion settle on a range of 8 to 12 directors.

Every public company listed on the New York Stock Exchange and the Nasdaq is required to have a majority of independent directors on its board.

Election and Removal of Board Members

For publicly listed companies in the U.S., members of the board of directors are elected by shareholders. Board candidates can be nominated by the board's nomination committee, or by investors seeking to change a board's membership and policies.

Directors may be removed in elections or otherwise in instances of fiduciary duty violations. In addition, some corporate boards have fitness-to-serve protocols.

Special Considerations

Corporate governance can differ in international settings. In some countries powers are split between an executive board and a supervisory board. The executive board is composed of insiders elected by employees and shareholders, is headed by the CEO or managing officer, and is in charge of daily business operations.

The supervisory board is chaired by someone other than the chief executive officer and fills a role similar to that of a board of directors in the United States.

What Does a Board of Directors Do?

In general, the board sets broad policies and makes important decisions as a fiduciary on behalf of the company and its shareholders. Issues that fall under a board's purview include mergers and acquisitions, dividends and major investments, as well as the hiring and firing of senior executives and their compensation.

Who Makes Up a Board of Directors?

Usually, the board of directors includes at least one company insider such as a chief executive officer, along with a majority of outside, or independent, directors with relevant expertise. Outside directors don't face the same conflicts of interest as the company insiders on a board.

Are Board Directors Paid?

Insider directors are not typically compensated for board duties since they're most often company employees. Outside directors are paid.

Not sure whether your company needs its own board of directors? Learn about the role and responsibilities of a board to see if one is the right choice for your small business.

While most people think of boards of directors within the context of large, public corporations, a board can also play an important role in the success of small, private companies, even though such companies are not required to have a board. Private companies often choose to have a board of directors for the expertise the individual members bring, particularly when it comes to strategic guidance and additional oversight. Whether or not your company is required to have a board of directors, it's a good idea to become familiar with the role a board can play and the duties and responsibilities it might undertake.

Role of the Board of Directors

Unlike your upper management, your company's board of directors is not there to oversee the day-to-day operations of your company. Instead, your board's role is to make decisions about the bigger, broader issues that are critical to your company's success. For example, a board of directors often makes decisions related to strategic planning, such as the company's future direction or the hiring of key personnel. Your board of directors should also help provide company oversight, or governance, such as ensuring that the actions of the company are not in conflict with the interests of various stakeholders, including shareholders or members.

In keeping with its role in providing the company with strategic guidance and oversight, a board of directors has several specific duties and responsibilities, the exact nature of which varies depending on your company's mission, its goals, and the industry in which it operates. Each specific duty and responsibility should be set out in a formal company document such as your company's operating agreement, articles of incorporation, or bylaws.

Fiduciary Duties of the Board of Directors

An important point to note is that a board of directors owes its primary responsibility to your company and its shareholders. In legal terms, this duty is known as a fiduciary duty. Fulfilling a fiduciary duty typically requires more than would be required to meet a normal duty under the law.

Fiduciaries are required to protect the best interests of the entity or entities to whom they owe their duties. This generally means that a board of directors' fiduciary duties must focus on the best interests of the company and its shareholders. To this end, board decisions need be made with care and diligence, in good faith, and always with the goal of protecting the company's best interests. Additionally, individual directors must avoid any situations that place them in a conflict of interest with the company's interests.

Board of Directors Meetings

Your board of directors must have regular meetings in order to fulfill its role of making decisions concerning the important and often critical issues facing your company. While it's generally important for all directors to attend board meetings, company bylaws often provide for directors to attend either in person or through electronic means. The following are important concepts to understand when it comes to holding your meetings:

• Quorum. Your bylaws should outline how many directors must be present in order for a decision to be valid. In legal terms, this is known as a quorum. If a company's bylaws do not address this, in most cases a majority of the directors present must approve of a decision for it to be valid.
• Resolution. Once a decision has been made in a meeting, a resolution is often drawn up to document the decision. A typical board resolution outlines the decision and the actions authorized by the board to implement that decision.
• Meeting minutes. It's important to properly document a board meeting with meeting minutes, which describe the issues discussed as well as the decisions made by the board, any actions the board may have been authorized, and any resolutions that may have been passed.

Understanding Who Elects the Board of Directors

Within a public corporation, directors are elected by the shareholders at a shareholders' meeting. However, aside from having to adhere to any state regulations regarding company boards, private companies can address the formation of a board of directors in whatever way it chooses. For example, a company with members might choose to have only certain members elect board directors, or it might require the company founder to always sit as a board director.

These rules regarding how the board of directors should be formed are then set out in the documents that create the company, such as its articles of incorporation or operating agreement, or in the company's bylaws.

When a director resigns, another director needs to be appointed. The rules set out in the company's documents should therefore provide for what happens if a director submits a resignation letter.

How to Get on a Board of Directors

It is often quite difficult to get seated on the boards of large, publicly traded companies. If becoming a director is something that appeals to you, it's far more feasible to start at a small, local company or nonprofit. Even though such organizations often do not provide direct compensation, you might receive some indirect benefits. such as networking opportunities and the ability to build credentials within your chosen industry.

If you've decided that a board of directors is a smart tool for your new business, it's important to include an outline of your new board's role, duties, and responsibilities in your business formation documents. By carefully considering the kind of advice or guidance you want your board to provide, you can set the stage for your board of directors to become a crucial component of your business success.

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