Purpose, Authority and Responsibility of the Board of Directors
The primary responsibility of the board of directors is to protect the shareholders'assetsandensure they receive a decentreturnon their investment. In some European countries, thesentiment is much different; many directors there feel that it is their primary responsibility to protect the employees of a company first, the shareholders second. In these social and politicalclimates, corporate profitabilitytakes a back seat the needs of workers.The board of directors is the highest governing authority within the management structure at any publicly traded company. It is the board's job to select, evaluate, and approve appropriatecompensation for the company's chief executive officer (CEO), evaluate the attractiveness of and pay dividends, recommendstock splits,overseeshare repurchase programs, approve the
company'sfinancial statements, and recommend or strongly discourageacquisitions and
Structure and Makeup of the Board of Directors
The board is made up of individual men and women (the "directors") who are elected by theshareholders for multiple-year terms. Many companies operate on a rotating system so that onlya fraction of the directors are up for election each year; this makes it much more difficult for acomplete board change to take place due to ahostile takeover .In most cases, directors either, 1.)
have a vested interest in the company, 2.) work in the upper management of the company, or 3.)are independent from the company but are known for their business abilities.The number of directors can vary substantially between companies. Walt Disney, for example,has sixteen directors, each of whom are elected at the same time for one year terms. Tiffany &Company, on the other hand, has only eight directors on its board. In the United States, at leastfifty percent of the directors must meet the requirements of "independence", meaning they arenot associated with or employed by the company. In theory, independent directors will not besubject to pressure, and therefore are more likely to act in the shareholders' interests when thoseinterests run counter to those of entrenched management.In General Electric's 2002 annual report, the issue of director independence was addressed:
"At the core of corporate governance, of course, is the role of the board in overseeing howmanagement serves the long-term interests of share owners and other stakeholders. An active,informed, independent and involved board is essential for ensuring GE’s integrity, transparencyand long-term strength. As a result of the 2002 changes, 11 of GE’s 17 directors are'independent' under a strict definition, with a goal of two-thirds."
Committees on the Board of Directors
The board of directors responsibilities include the establishment of the audit and compensationcommittees. The audit committee is responsible for ensuring that the company'sfinancialstatementsand reports are accurate and use fair and reasonable estimates. The board membersselect, hire, and work with an outside auditing firm. The firm is the entity that actually does theauditing.