Who are the Board Members?
Board Members is a group of elected people by the shareholders of a company who supervise all aspects of the company and keep everything aligned with the company’s objectives so as to maintain that the best interest of shareholders.
Roles & Responsibilities of Board Members
The following are some of the roles & responsibilities of Board Members.
#1 – Establish Company Values
Company values drive the direction of the company. They are at the core of all the activities done by the company and they need to be followed by every employee of the company. It is the responsibility of the Board Members to establish those values and flow them down to each and every employee so that their actions can reflect those values.
#2 – Appoint Senior Management
This is one of the most important responsibilities that need to be fulfilled. Since they only supervise the company activities and are not directly involved in them, they need to appoint a competent team of Senior Management, including the CEO, that will drive the company. The Board Members evaluate the candidates and appoint the best-suited ones so that they can work in the best interests of all stakeholders.
#3 – Appoint Independent Committees
There are some functions of the company which are preferred to have independent committees under the Good Corporate Governance practices. These committees include the Audit CommitteeThe Audit CommitteeA company's audit committee is a group of non-executive directors who are in charge of ensuring the integrity of internal controls, auditing, and financial reporting procedures. It works under the supervision of the Board of Directors and strives to sustain the corporate governance system., Compensation Committee, etc. Since these are independent committees and will naturally be trusted more by the shareholders/investors, the Board Members need to appoint reliable committees that can accurately carry out the intended tasks.
#4 – Establish Company Objectives
Apart from the company values that drive the method of the company’s actions, The Board Members also have the responsibility to set the long term objectives of the company. These objectives decide the direction in which the company will work so that they can act in the best interest of all the stakeholders. The most obvious objective is shareholder wealth maximizationWealth MaximizationWealth maximization means the maximization of the shareholder’s wealth as a result of an increase in share price thereby increasing the market capitalization of the company. The share price increase is a direct function of how competitive the company is, its positioning, growth strategy, and how it generates profits., but it can include other things such as making an impact on the environment.
#5 – Review Performance
Since the Board Members represent all the shareholders of the company, they have the responsibility to review the performance of the company and the senior management and make changes if needed as per their assessment. If they feel that senior management is not acting in the best interest of the stakeholders, they can make changes such as firing the CEO or changing policies of the company.
Qualities of Good Board Members
There are some qualities of a good Board of Directors listed under good corporate governance practices. These are very important from an analytical point of view because the analysts put a lot of focus on the corporate governanceThe Corporate GovernanceCorporate governance is a set of rules or practices through which an entity is directed and controlled to increase shareholders wealth by increasing the economic value and is concerned about its relations with various entity stakeholders. of the company when valuing its securities. A company could have high-profit margins but it could be the case that the management is not competent enough to continue that in the long term. The following are some qualities of a good Board of Directors.
#1 – Independence
The Board Members could not be independent due to various reasons such as interlinked board, CEO being on the Board, Personal Relationship with the management, etc. Ideally, at least 3/4th of the Board Members should be independent, not holding any motives except driving the growth of the company. The CEO should not be a Board Member, and the Chairman of the Board should also be an independent Board Member.
#2 – Expertise
Board Members should have some level of expertise in the industry that the company operates in. This helps them understand the reasons behind the failures and successes of the company and act accordingly. A Member who has no knowledge of the industry is not adding any value to the company. Having expertise will also save the Board Members from being misled by faulty management practices.
#3 – Ethics
Ethics and good morals are also very preferable qualities. Ethics makes any person from committing and wrong deeds. Board Members with good ethics and morals will ensure that the company also acts according to those ethics and morals and consequently flow them down to all the employees of the company. However, it is not easy to assess how ethical a person is, it is usually reflected in the past work that the Board Member has done.
#4 – Board Elections
Since Board Members are elected by the shareholders to represent them in taking company decisions, they are subject to re-elections after a certain period of time. They can be elected under one of the two types of elections- Annual Elections where all the Board Members are up for re-election every year, or Staggered Elections where every year some Members are up for Re-elections. Good Corporate Governance practices prefer Annual Elections so that the shareholders have the choice of not electing any Board Members that they feel are not acting in their best interests.
#5 – Self-Assessment
A good Board of Directors often meets for self-assessment to review how they as supervisors of the company and representatives of shareholders have performed over the given period of time. They analyze their faults and commit to a better future for the company. It is also advisable for all the independent members to meet separately so that they can analyze everything from a completely external perspective since the non-independent directors could start to favor the management even it goes against the shareholders’ best interests.
Board Members are a very important part of the Corporate Governance system of a company. They are representatives of the shareholders, armed with various responsibilities to ensure that the company acts in the best interests of all stakeholders. There are qualities of good Board Members which are advisable to be followed. The maximum participation of independent Members ensures that the management does not get the chance to control Board decisions. They should be elected annually so that the shareholders can choose to remove from the Board anyone that they feel is not acting in their best interests.
This has been a guide to who are Board Members and its definition. Here we discuss the roles and responsibilities of Board Members along with their qualities. You can learn more from the following articles –