A board of directors is a governing body that supervises the activities of a business, a nonprofit organization, or a government agency.
The powers, duties, and responsibilities of a board of directors are determined by government regulations (including the jurisdiction's corporate law) and the organization's own constitution and by-laws. These authorities may specify the number of members of the board, how they are to be chosen, and how often they are to meet.
In an organization with voting members, the board is accountable to, and may be subordinate to, the organization's full membership, which usually elect the members of the board. In a stock corporation, non-executive directors are elected by the shareholders, and the board has ultimate responsibility for the management of the corporation. In nations with codetermination (such as Germany and Sweden), the workers of a corporation elect a set fraction of the board's members.
The board of directors appoints the chief executive officer of the corporation and sets out the overall strategic direction. In corporations with dispersed ownership, the identification and nomination of directors (that shareholders vote for or against) are often done by the board itself, leading to a high degree of self-perpetuation. In a non-stock corporation with no general voting membership, the board is the supreme governing body of the institution, and its members are sometimes chosen by the board itself.
Terminology Other names include board of directors and advisors, board of governors, board of managers, board of regents, board of trustees, and board of visitors. It may also be called the executive board.
Roles
Typical duties of boards of directors include: Governing the organization by establishing broad policies and setting out strategic objectives Selecting, appointing, supporting, reviewing the performance, and terminating the chief executive (of which the titles vary from organization to organization; the chief executive may be titled chief executive officer, president or executive director, or even Director-General) Ensuring the availability of adequate financial resources Approving annual budgets Accounting to the stakeholders for the organization's performance Setting the salaries, compensation, and benefits of senior management
For corporate boards, the G20/OECD Principles of Corporate Governance identify reviewing and assessing risk-management policies and procedures as a key function, including determining the company's risk appetite and overseeing internal controls.
The legal responsibilities of boards and board members vary with the nature of the organization, and between jurisdictions. For companies with shares publicly listed for negotiation, these responsibilities are typically much more rigorous and complex than for those of other types.
Typically, the board chooses one of its members to be the chairman (often now called the "chair" or "chairperson"), who holds whatever title is specified in the by-laws or articles of association. However, in membership organizations, the members elect the president of the organization and the president becomes the board chair, unless the by-laws say otherwise.
Directors The directors of an organization are the persons who are members of its board. Several specific terms categorize directors by the presence or absence of their other relationships to the organization.This section was developed from numerous definitions in USLegal.com, BusinessDictionary.com , Dictionary.com, The Free Dictionary by Farlex ("inside director"; "executive director"; "outside director"; "non-executive director"), Macmillan Dictionary , and Economics-dictionary.com.
Honorary members Corporations may designate a former senior executive and ex-board member as an honorary board member, a position that does not carry any executive authority but represents recognition of the person's corporate governorship and performance.
Inside director An inside director is a director who is also an employee, officer, chief executive, major shareholder, or someone similarly connected to the organization. Inside directors represent the interests of the entity's stakeholders, and often have special knowledge of its inner workings, its financial or market position, and so on.
Typical inside directors are: A chief executive officer (CEO) who may also be chair of the board Other executives of the organization, such as its chief financial officer (CFO) or executive vice president Large shareholders (who may or may not also be employees or officers) Representatives of other stakeholders such as labor unions, major lenders, or members of the community in which the organization is located
An inside director who is employed as a manager or executive of the organization is sometimes referred to as an executive director (not to be confused with the title executive director sometimes used for the CEO position in some organizations). Executive directors often have a specified area of responsibility in the organization, such as finance, marketing, human resources, or production.
Outside director
An outside director is a member of the board who is not otherwise employed by or engaged with the organization, and does not represent any of its stakeholders. A typical example is a director who is president of a firm in a different industry. Outside directors are not employees of the company or affiliated with it in any other way.
Outside directors bring outside experience and perspectives to the board. For example, for a company that serves a domestic market only, the presence of CEOs from global multinational corporations as outside directors can help to provide insights on export and import opportunities and international trade options. One of the arguments for having outside directors is that they can keep a watchful eye on the inside directors and on the way the organization is run. Outside directors are unlikely to tolerate "insider dealing" between inside directors, as outside directors do not benefit from the company or organization. Outside directors are often useful in handling disputes between inside directors, or between shareholders and the board. They are thought to be advantageous because they can be objective and present little risk of conflict of interest. On the other hand, they might lack familiarity with the specific issues connected to the organization's governance, and they might not know about the industry or sector in which the organization is operating.
Terminology Director – a person appointed to serve on the board of an organization, such as an institution or business. Inside director – a director who, in addition to serving on the board, has a meaningful connection to the organization Outside director – a director who, other than serving on the board, has no meaningful connections to the organization Executive director – an inside director who is also an executive with the organization. The term is also used, in a completely different sense, to refer to a CEO Non-executive director – a director (inside or outside) who is not an executive with the organization De facto director – an individual who acts as a director of the company but has not actually or validly been appointed as such. Shadow director – an individual who acts as a director of the company but is not a named director (a de jure director) and does not claim or purport to act as director. Nominee director – an individual who is appointed by a shareholder, creditor or interest group (whether contractually or by resolution at a company meeting) and who has a continuing loyalty to the appointors or other interest in the appointing company
Individual directors often serve on more than one board. This practice results in an interlocking directorate, where a relatively small number of individuals have significant influence over many important entities. This situation can have important corporate, social, economic, and legal consequences, and has been the subject of significant research.
Process and structure
A board of directors conducts its meetings according to the rules and procedures contained in its governing documents. These procedures may allow the board to conduct its business by conference call or other electronic means. They may also specify how a quorum is to be determined.
The process for running a board, sometimes called the board process, includes the selection of board members, the setting of clear board objectives, the dissemination of documents or board package to the board members, the collaborative creation of an agenda for the meeting, the creation and follow-up of assigned action items, and the assessment of the board process through standardized assessments of board members, owners, and CEOs. The science of this process has been slow to develop due to the secretive nature of the way most companies run their boards, however some standardization is beginning to develop. Some who are pushing for this standardization in the US are the National Association of Corporate Directors, McKinsey and The Board Group.
Members of the board may be removed before their term is complete. Details on how they can be removed are usually provided in the bylaws. If the bylaws do not contain such details, the section on disciplinary procedures in Robert's Rules of Order may be used.
Board members may be selected to ensure a balance of skills, experience and demographic characteristics. Jennifer Lovell has found that a growing percentage of major businesses facing strategic supply chain challenges have appointed a board member with a procurement or supply chain background. In smaller companies, engaging directors with a financial background remains a priority.Lowell, J., "How supply skills are entering the boardroom" in Supply Management, July-September 2023, pages 12-12
Non-corporate boards The responsibilities of a board of directors vary depending on the nature and type of business entity and the laws applying to the entity (see types of business entity). For example, the nature of the business entity may be one that is traded on a public market (public company), not traded on a public market (a private, limited or closely held company), owned by family members (a family business), or exempt from income taxes (a non-profit, not for profit, or tax-exempt entity). There are numerous types of business entities available throughout the world such as a corporation, limited liability company, cooperative, business trust, partnership, private limited company, and public limited company.
Much of what has been written about boards of directors relates to boards of directors of business entities actively traded on public markets.See generally, Bowen, William G., The board book: an insider's guide for directors and trustees (2008 W.W. Norton & Co.); Murray, Alan S., Revolt in the boardroom: the new rules of power in corporate America (2007 Collins); Charan, Ram, Boards that deliver: advancing corporate governance from compliance to competitive advantage (2005 Jossey-Bass); Carver, John, Corporate boards that create value: governing company performance from the boardroom (2002 Jossey-Bass); Harvard Business Review on corporate governance (2000 Harvard Business School Press). More recently, however, material is becoming available for boards of private and closely held businesses including family businesses.
Organizational types Membership organizations