What Does A Board Of Directors Do?

In short, the primary role of a board of directors is to oversee the management and direction of the company from the highest level.

With a diverse set of responsibilities, the board acts as a guardian of the company's interests and as a guiding force for its success. Here are some of the responsibilities that boards of directors have:

• Hiring Senior Management: The board of directors is responsible for hiring the CEO as well as other senior-level employees. They are also responsible for monitoring, and overseeing the performance of these senior-level employees.
• Determining Executive Compensation: The board of directors is also responsible for determining what to pay senior management employees.
• Providing Guidance and Support To Senior Management: Drawing on their diverse backgrounds and expertise, board members offer insights and advice on key business decisions and challenges. This collaborative approach helps management navigate complexities and make informed choices in line with the company's goals and values.
• Representing Shareholder Interests: A fundamental duty of the board is to represent the interests of the company's shareholders. With a fiduciary responsibility, the board works diligently to ensure that the company is maximizing shareholder value. By evaluating strategic initiatives, overseeing financial performance, and making decisions that align with long-term shareholder interests, the board acts as a steward of shareholder value.
• Setting Strategic Direction: The board of directors plays an instrumental role in setting the overall direction and strategy of the company. By establishing strategic goals and objectives, the board provides a roadmap for management to follow. Regularly reviewing and assessing progress, the board ensures that the company is on track and taking the necessary steps to achieve its strategic vision. This strategic oversight helps drive growth, adapt to changing market dynamics, and seize new opportunities.
• Ensuring Compliance and Ethical Standards: One of the primary responsibilities of the board is to ensure that the company operates in compliance with all applicable laws, regulations, and industry standards. By diligently monitoring the company's activities, the board safeguards against legal risks and attempts to uphold the highest ethical standards. This commitment to compliance not only protects the company's reputation but also fosters trust among stakeholders.

In summary, the board of directors serves as a cornerstone of corporate governance, ensuring responsible and effective operations. By prioritizing compliance, providing guidance and support, representing shareholder interests, and setting strategic direction, the board contributes to the long-term success and sustainability of the company. With their collective expertise and commitment, board members play a crucial role in steering the company towards growth, profitability, and delivering value to all stakeholders.

How Does A Board Of Directors Work?

The specific structure and powers of the board are established by the company's articles of incorporation and corporate bylaws, which dictate the number of board members, the method of their election, and the frequency of board meetings.

As fiduciaries, the board acts in the best interests of the company and its shareholders.

These board members will vote on the issues brought up at board meetings, and normally the majority of board member votes wins. Some companies deliberately structure their boards of directors to have an odd number of members in order to avoid a vote ending with a tie.

There is no official number of members that is required for the board of a corporation. However, it's common to see boards of directors with five to ten members, depending on the size of the business.

As mentioned above, publicly traded companies in the united states are legally required to have a board of directors. The shareholders of these public companies typically elect the members of their board of directors at the annual shareholders meeting. Board candidates must first be nominated before they can be voted in.

For privately held companies their board of directors are elected as required by their articles of incorporation or company bylaws and are often chosen via simple agreements with the owners of these companies.

Board members may be removed via votes or in the event that they violate their duties as fiduciaries. Often there will be rules established for the grounds upon which a board member may be dismissed.

How Is A Board of Directors Structured?

Given the nature of the board's responsibility of maximizing shareholder value, boards of directors are typically comprised of both internal and external members.

• Internal members are board members that are employed by the company or organization. These members often include the CEO and CFO, and can include other senior-level management. The CEO is almost always a member of the board of directors, but also usually reports to the board of directors.
• External members are board members that are not employees of the company or organization. These members often include investors, and independent consultants. Often these independent consultants are chosen because of their industry experience. As an example, an external board member might be an individual that previously worked as the CFO for a similar company.

Both internal and external board members are obligated to represent the shareholders of the business. Here is an infographic to help visualize the structure of a board of directors:

Typically boards of directors will have an elected chairperson.

This chairperson is the one responsible for setting the agenda for board meetings, ensuring that all board members participate, and generally presiding over the board meetings.

They are responsible for ensuring that the other board members are informed of any material developments that occur in the business. This chairperson works more closely with the CEO than the other members of the board (except the internal employees that report directly to the CEO).  

They are ultimately the one that ensures the board of directors fulfils it's responsibilities to shareholders.

Recommended Resources:

• Strategic Analysis
• Total Addressable Market (TAM)
• Porter's Five Forces
• SWOT Analysis‍