Board of Directors Definition
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.
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 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 the board meetings.
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. 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
BOD members hold different positions within the panel. The composition of the board varies as per the company and state laws. For example, Amazon’s board of directors contains official positions such a 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.. Organizations commonly have 3 to 31 directors. Let us look at some designations and positions common to a BOD in public corporations.
- 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.
- 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.
- 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., sales, and finances. Being the 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.
- Non-Executive Director: A non-executive director 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.
- Other designations: Vice Presidents, CFOs, treasurer, zonal head, vigilance chief, audit chief, etc., are some other designations common to a BOD.
- 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. from amongst the owner or family members and the executives. For non-profit entities, a trustee board is quite common.
Roles and Responsibilities of Board of Directors
- 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 dividendsDividendsDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company., 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.. 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 acquisitions, stock splitStock SplitStock split, also known as share split, is the process by which companies divide their existing outstanding shares into multiple shares, such as 3 shares for every 1 owned, 2 shares for every 1 held, and so on. The company's market capitalization remains unchanged during a stock split because, while the number of shares grows, the price per share decreases correspondingly., 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 Certificate 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 misconduct
- Utilized corporate assets or funds for personal gains
- Failure to maintain fair corporate accounts or inability to submit accounting records with the corporate house
- Continued 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.
- Executed trading in circumstances when the company was incapable of meeting debts
- Failure 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.
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 directors).
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 –