Board of Directors (BOD)

Updated on April 4, 2024
Article byWallstreetmojo Team
Edited byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

Board of Directors Meaning

A Board of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals. The members who fill the board of directors positions take key decisions in the best interest of the company.

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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. The amendments or alterations in terms of the operations and other such decisions are taken in the course of the meetings they hold at regular intervals.

Key Takeaways

  • The board of directors is an elected panel in a company representing the company’s shareholders and includes high-level corporate position holders.
  • The BOD’s composition differs as per organizations. Usually, there is a CEO, board’s chairman, directors, non-executive director, CFO, vice-president, zonal heads, etc.
  • By law, a public company is obligated to have a BOD while it is optional for the non-profit or private entities.
  • BOD aims to stand for the rights and interests of the stakeholders and investors while taking care of their assets invested in the business.
  • A board is the supreme governing authority in an organization that takes strategic corporate decisions by participating in board meetings.

Board of Directors Explained

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 owners.

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 laws to avoid drawing negative attention from the law enforcement agencies. These decisions are taken at a board of directors meeting that is conducted at regular intervals.

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Structure

BOD members hold different positions within the panel. The board of directors positions varies as per the company and state laws. For example, Amazon’s board of directors contains official positions such as chairman, directors, CFOs, segment-wise CEOs, and VPs, etc.  

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.

  1. Chairman: A chairman leads the board and thus heads the committee or board meetings. The BOD votes and elects the chairperson. Usually, the company’s chief executive officer is the chairman.
  2. Managing Director: There are usually no restrictions on the number of directors in a corporation bylaw. For example, in its board of directors panel, Amazon had many directors overlooking a distinct segment. A managing director is an individual elected by the company’s executive directors to manage, guide, and monitor business functioning.
  3. Executive Director: Such an individual takes active participation in the company’s management, business operationsBusiness OperationsBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company's goals like profit generation.read more, sales, and finances. Being a company employee, an executive director is a part of the board and even gets a salary for the company. The director represents the cause of the company.
  4. Non-Executive Director: A non-executive directorNon-executive DirectorThe non-executive director (NED) is an external member of the company’s board of directors appointed through a letter of appointment and they represents the shareholders interest.read more doesn’t belong to the organization but is a part of the board. External directors present an objective and third-person perspective. Such directors provide critical opinions and advice by charging a certain fee. In addition, they give voice to stakeholders outside a firm.
  5. Other designations: Vice Presidents, CFOs, treasurer, zonal head, vigilance chief, audit chief, etc., are some other designations common to a BOD.
  6. Non-Profit and Private Companies: Private companies usually appoint the board membersBoard MembersBoard members comprise the individuals whom the shareholders elect as their representatives. They are responsible for taking crucial corporate decisions regarding the company's policies, dividend payouts, top-level managers' recruitment or layoff and executive compensation.read more from amongst the owner or family members and the executives. For non-profit entities, a trustee board is quite common.

Roles and Responsibilities

The roles and responsibilities of these key decision-makers of a company are wide in nature, ranging from governance over the processes within the company to making key decisions such as debt management and raising capital in pivotal situations. These decisions are made during the board of directors meetings and a decision is finalized based on votes. Let us understand the intricate details of their roles and responsibilities through the discussion below.

Board of Directors

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  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. It ascertains compensation for the organization’s top officials. It even amends and approves the company’s annual budget.
  6. 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.  
  7. One such example where the leadership of higher authority pulled the company out of 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 the 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.

Functions

Despite having personnel at key managerial positions, the necessity of having individuals of immense caliber in the board of directors positions is to fulfill the variety of requirements of taking the company to new heights. Let us understand the functions through the explanation below.

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 is 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 in 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:

Types

Now that we understand the outline of the concept and what goes on in a board of directors meeting, let us discuss the different types of directors on the board through the discussion below.

It is also important to consider the fact that the board almost always comprises a great balance of members external and internal to the company to ensure no director is biased or influenced towards making decisions.

  • Internal Directors: Also referred to as inside directors, they are employees of the company holding key managerial or executive positions which can include the Chief Executive Officer (CEO) of the company. They operate on the board as a representative of the employees, shareholders, and officers. They are not given remuneration for their services on the board as they already would be a major stakeholder in the company.
  • External Directors: Outside or external directors are individuals on the board that do not hold executive positions in the company. They are selected based on their expertise in a particular niche or field of work that could bring growth to the company. Unlike internal directors, they receive monetary compensation for attending meetings and carrying out other board-related obligations.
  • Chairperson: Chairperson or the chair of the board has the highest authority among the members of the board. They facilitate conversations and developments through their regular contact with the key officials of the company, especially, the CEO. In the occurrence of any dispute or confusion, the members of the board contact the chair of the board to resolve them. They are also responsible to delegate tasks and ensure all members of the board are involved in different areas and bring out the best in the interest of the company and its shareholders.

Disqualification

When a member of the board id found making decisions that do not support the best interest of the company policies and its shareholders, they are given a warning; failing to adhere to which they are either disqualified from the board temporarily or banned permanently depending on the seriousness of their actions.

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 for the fraud during a board of directors meeting.

Frequently Asked Questions (FAQs)

What is a board of directors?

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.

What is the role of the board of directors?

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.

Who is the more powerful CEO or board of directors (BOD)?

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.

Who elects the board of directors (BOD)?

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 independent directors).

This has been a guide to what is Board of Directors & its meaning. Here we explain its roles, responsibilities, structure, functions, and disqualification. You can learn more from the following articles –

Reader Interactions

Comments

  1. Lamech Nambajimana says

    The information provided has been very helpful. It helped me to know more about company’s structure, roles and responsibilities

  2. Gary Mhizha says

    Clear and well documented

  3. Kenneth Mazhindu says

    a well articulated article for the business-minded person to follow with ease.

  4. Kenneth Mazhindu says

    Well articulated in terms that can be understood by someone with general business knowledge.

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