The Board of Directors, or BOD, is a governing body comprised of a group of individuals elected to represent a company’s shareholders. Every public company must have one. Many private companies, including most of those with external funding, do as well.
The BOD represents both the management of the company and the shareholders’ interests.
Members of a Board of Directors are referred to as Directors. Directors are fiduciaries. They are trusted advisors of the corporation and are expected to act in good faith when representing the company.
Fiduciary duties
Notwithstanding their trusted advisor roles, Directors owe 2 core duties, of care and of loyalty, to the corporation:
A duty of care
- A Director should always use their best judgment on behalf of the corporation. They should never act with a secondary purpose.
- A Director’s decisions on behalf of the organization must:
- Be legal, regardless of the intended benefit to the corporation,
- Have a rational business purpose,
- Be informed by reasonable research.
A duty of loyalty
- Directors may not be in a position where their interest conflicts with the duties that they owe to the company.
- In carrying their responsibilities, Directors must always act in the best interest of the corporation.
- Directors may not, as part of their duties, enter transactions that benefit them at the expense of the corporation.
Board of Directors roles
There are different types of Directors.
Outside Directors are board members who have no significant connection with the organization, other than serving on the BOD. They bring independence of thought and, typically, expertise pertinent to the company’s goals and objectives. To preserve their independence:
- There should be no relationships between the outside directors and the company, or its executives, lest they affect the Directors’ judgment.
- Outside directors should not be involved in the day-to-day inner workings of the company.
Inside Directors are board members who are also employees, executives, or major stakeholders of the organization. They bring knowledge and understanding of the company’s activities and processes. There are 2 subcategories of Inside Directors:
- Executive Directors are Inside Directors who are executives with the organization.
- Non-Executive Directors are Inside Directors who are not executives with the organization.
Nominee Directors are individuals who are appointed by a company’s external stakeholders and who have a primary loyalty to the appointing party rather than to the company.
Board of Directors Structure
There are no standard board of directors compositions. Structure and composition should be adapted to the companies’ needs and the directors’ skills.
Organization bylaws set the number of board members, how members are elected, and how often the board meets.
While there is no set number of members, most boards range from three to 15 members for most companies and up to 30 members for larger concerns.
Boards should regularly reassess their composition and ensure the skills and experience needed are in place.
Performance and tenure
To perform best, BOD members must know what is expected of them before they join a board. They must know what good performance looks like. And, they must be held to that standard of performance after they join the board.
How directors interact with each other and with management is a valid predictor of Board effectiveness.
A focus on the company’s success in its marketplace and healthy communication dynamics, including candid and constructive exchanges, are required.
Toxicity must be rejected here just as it would in the company and politics should be kept in check.
Board tenure should be adapted to the company, its environment, and to the contribution of each board member.
As companies change, companies must ensure that their BODs evolve and remain relevant.
Some companies have term limits for their directors.
Individual director contributions and board effectiveness evaluations are valuable tools for ongoing performance assessments.
Nomination and onboarding
New board members should receive onboarding training about the company and its BOD, including:
- Company’s history,
- Core opportunities and challenges,
- Board procedures,
- BOD accomplishments and expectations,
- On-going board matters,
- How to best participate in Board’s work.
Publicly traded companies are required to compose a nomination committee with independent directors responsible for election and removal of board members.
Board of Directors Responsibilities
Board of Directors have a duty of care which obligates them to adhere to a standard of reasonable performance while executing their functions and prohibits them to act in a way that could cause harm to the company.
Board of Directors members are generally responsible for many or all the following:
- Help the company set broad goals,
- Evaluate future capital investments,
- Review board composition for freshness and applicability,
- Choose their chairperson,
- Review and approve, or send back for update, management’s recommendations, including about company strategy, direction, and possible investments,
- Challenge management, ask the tough questions and get satisfactory answers,
- Appoint and remove of directors
- Set executive compensation,
- Hire and fire senior executives,
- Support executive responsibilities,
- Set and approve the distribution of dividends,
- Set stock options policies.
Whether physically or via remote access, most board of directors hold quarterly meetings to review and assess the affairs of the company. The BOD conducts its regular meetings according to rules and procedures contained in its bylaws.
Publicly traded companies require separate, formal obligations, including to the Security and Exchange Commission and to its retail and institutional shareholders.
Conclusion
Whether for larger or smaller organizations, effectively structured boards of directors provide vested and experienced guidance into which senior executives can tap.
Directors should be selected for their skillsets, experience, and motivation.
A proper dynamic amongst the group will help the company succeed. A toxic dynamic will do the opposite.
For example, ProtonCG was engaged by an organization where Inside Directors and Outside Directors, although large shareholders, were organized in teams spending their energies destabilizing the other side. Predictably the company had suffered and lost performing senior executives.
We have also worked with companies where the BODs engaged us to ensure that the skillsets that they needed were well represented at the BOD level.
Hiring an independent, experienced business consulting services firm is generally effective in achieving the proper design, structure, and management of BODs, but timing is essential.
As in other areas of your company’s business, when it comes to Board of Directors, preventive attention is most effective.