Board of Directors Definition

One crucial job of the board is to keep a firm on its feet even during a crisis. Other jobs include policy formation, corporate decision-making, the firm’s overall management and law abidance. It also allows answerability amongst the concerned parties.

Key Takeaways

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Understanding Board of Directors

A board of directors is a group of officials who the shareholders of a firm elect. State laws obligate public corporations to keep a BOD. In the case of non-profit or private entities, it is optional to have a board of directors. The idea behind a BOD is to have a body that safeguards shareholders’ interests as they are the firm’s owner.

The relationship between a BOD and shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company’s total shares.read more flows from the theory of the principal-agent relationship. Here the shareholders are the principal or the owners. The BOD is the agent that ensures the safety of shareholders’ investments. As such, the board needs to ensure organizational efficiency to allow profit maximization, which will add to the shareholders’ wealth.

In the process, the BOD as a governance body also needs to work in the best interest of other stakeholders apart from shareholders. This is because a business needs to cater to its stakeholders for continued existence. For instance, the BOD needs to ensure that the company functions as per the laws to avoid drawing negative attention from the law enforcement agencies.  

Structure of Board of Directors

The board size is limited by a company specifying the minimum and maximum limit in its Articles of AssociationArticles Of AssociationArticles of association is a legally binding document that states the corporate rules, regulations, and purpose. It serves as a user’s guide for executing the organizational tasks, directors’ appointment and recording the financial information.read more. Organizations commonly have 3 to 31 directors. Let us look at some designations and positions common to a BOD in public corporations.

Roles and Responsibilities of Board of Directors

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  • The board of directors’ foremost responsibility or duty is towards the company’s stakeholders. Here, the board ensures that the company doesn’t risk the shareholders’ and investors’ assets. It frames policies for dividendsDividendsDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more, payouts, present their perspective to the organization, etc.Another important board of directors function includes holding the annual shareholders’ meetingShareholders’ MeetingShareholders Meeting means a meeting of the stockholders of the corporation wherein resolution are placed before the shareholders to discuss and approve the corporate matters and other matters required by the bylaws of the company.read more. In such board meetings, the panel announces annual dividends, elects and appoints new members and high-level executives, and changes corporate rules.The BOD builds a company’s foundation by framing its vision, purpose, and mission. The board ensures that the executive board of the company is working as per organizational goals and plans. Company executives hold answerability to the board and must act in the best interest of the firm and its stakeholders. The board also takes crucial strategic decisions and plans for mergers and acquisitionsMergers And AcquisitionsMergers and acquisitions (M&A) are collaborations between two or more firms. In a merger, two or more companies functioning at the same level combine to create a new business entity. In an acquisition, a larger organization buys a smaller business entity for expansion.read more, stock splitStock SplitStock splits refer to the process whereby a company increases its number of shares, reducing the per-share price of the stocks. read more, etc. The BOD’s also votes and elects the company’s chief executive officer (CEO). It can also sack a CEO who is bringing problems to the firm.It ascertains compensation for the organization’s top officials. It even amends and approves the company’s annual budget.Crisis management is perhaps one of the most crucial roles played by a company’s BOD. When a company is in crisis, the BOD gives it a shield as it represents the firm and is accountable for its actions. Executives rely on the board’s counsel when a crisis strikes.  One such example where the leadership of higher authority pulled the company out from a crisis is Johnson and Johnson’s case. In 1982, after intaking Johnson and Johnson’s Tylenol capsules, seven people died of poison as they were laced cyanide. James Burke, the company’s chairman back then, is still admired for his prompt action, leadership and honesty.

Immediately after receiving the news of deaths, the company warned and urged customers not to take Tylenol. The company removed its capsules from the market, costing it over $100 million. A year later, Tylenol bounced back. In the $1.2 billion drug market, Tylenol shares had fallen to $7 from $37 but after the crisis was averted, they came back to $30.

Interesting BOD Aspects

Liability: Since a company pertains to a separate legal entity, the directors cannot be held personally liable for the corporate debts. Although, they are responsible for the losses incurred.

Tenure: The director’s tenure on the board can be between 5-10 years, but this differs amongst companies. Extensions to tenure in a board of directors are sometimes allowed after a special resolution.

Remuneration: Board of directors are usually liable to receive an annual salary and stock options. As per a study, in 2017, half of the large US companies paid over $300,000 compensation to board members. Sometimes, the members are also given additional compensation for participating in meetings. 

Directors’ Information: The company’s directors’ information can be acquired from various sources as discussed below:

  • The “About Us” page on a company’s website;Incumbency CertificateIncumbency CertificateAn incumbency certificate refers to an official document containing the names of a firm’s directors, board members, and other key management members. Companies or limited liability entities are required to keep an incumbency certificate.read more issued by a company to list its corporate positions;Business journal, news columns, and magazines featuring the articles on corporate board;List of company directors in the yellow pages and directories;Public company directors are also mentioned on government websites.

Disqualification of a BOD

A board member can be disqualified from the panel for a specific period or banned permanently for the following reasons:

  • Involvement in fraud or misconductUtilized corporate assets or funds for personal gainsFailure to maintain fair corporate accounts or inability to submit accounting records with the corporate houseContinued trading even when the company became bankrupt or insolventInsolventInsolvency is when the company fails to fulfill its financial obligations like debt repayment or inability to pay off the current liabilities. Such financial distress usually occurs when the entity runs into a loss or cannot generate sufficient cash flow.read moreExecuted trading in circumstances when the company was incapable of meeting debtsFailure to pay the taxes owed by the company.

As an example of disqualification, readers can refer to the case of Buckinghamshire-based company Masstech Ltd. The company’s sole director Ulhaque Lone Ahtamad was found guilty of a VAT fraud. He was disqualified and banned for 15 years as a penalty of the fraud.

This has been a guide to what is a Board of Directors and its definition. Here we discuss the structure along with the roles & responsibilities of directors of the board. You can learn more from the following articles –

A board of directors is a corporate panel of elected members who represent shareholders of a company. The board participates in board meetings, ensures that the company runs efficiently, and protects the interest of shareholders and other stakeholders of the company.

The significant functions performed by a board of directors include • Protecting company’s assets and shareholders’ interest; • Forming corporate policies such as for dividend and payouts; • Monitoring, making policies and controlling the organization to ensure maximum efficiency • Crisis management • Strategic decision making like executives’ compensation; • Hiring high-level managers and executives, and the auditor.

The BOD holds more powers when compared to the company’s chief executive officer (CEO). The CEO is appointed by the board and can even be sacked by the board members. Thus, the CEO needs to take the approval of the chairman before taking crucial corporate decisions.

Corporate shareholders vote for the BOD in the company’s annual shareholders’ meeting. However, the nominees for the shareholders’ voting are elected by a special nomination committee (comprising the independent directorsIndependent DirectorsThe term “independent director” refers to a member of the board who is not associated with the organization and who provides a neutral opinion because he or she is not tied to the current management.read more).

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