11/21/2020 Board of Directors (B of D)

BUSINESS BUSINESS LEADERS

Board of Directors (B of D)
By JAMES CHEN | Reviewed By THOMAS BROCK | Updated Jul 11, 2020

What Is a Board of Directors (B of D)?

A board of directors (B of D) is an elected group of individuals that represent shareholders.
The board is a governing body that typically meets at regular intervals to set policies for
corporate management and oversight. Every public company must have a board of directors.
Some private and nonprofit organizations also have a board of directors. This also applies to
German GMBH companies.

Understanding a Board of Directors (B of D)

In general, the board makes decisions as a fiduciary on behalf of shareholders. Issues that fall
under a board's purview include the hiring and firing of senior executives, dividend policies,
options policies, and executive compensation. In addition to those duties, a board of
directors is responsible for helping a corporation set broad goals, supporting executive
duties, and ensuring the company has adequate, well-managed resources at its disposal.

Important: Every public company must have a board of directors composed of

members who are both internal and external to the organization.

General Board Structure

The structure and powers of a board are determined by an organization’s bylaws. Bylaws can
set the number of board members, the manner in which the board is elected (e.g., by a
shareholder vote at an annual meeting), and how often the board meets. While there is no set
number of members for a board, most range from 3 to 31 members. Some analysts believe
the ideal size is seven.

The board of directors should be a representation of both management and

shareholder interests and include both internal and external members.

An inside director is a member who has the interest of major shareholders, officers, and
employees in mind, and whose experience within the company adds value. An insider
director is not typically compensated for board activity as they are often already a C-level
executive, major shareholder, or another stakeholder, such as a union representative.
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Independent or outside directors are not involved in the day-to-day inner workings of the
company. These board members are reimbursed and usually receive additional pay for
attending meetings. Ideally, an outside director brings an objective, independent view to
goal-setting and settling any company disputes. It is considered critical to strike a balance of
internal and external directors on a board.

Board structure can differ slightly in international settings. In some countries in Europe and
Asia, corporate governance is split into two tiers: an executive board and a supervisory
board. The executive board is composed of insiders elected by employees and shareholders
and is headed by the CEO or managing officer. The executive board is in charge of daily
business operations. The supervisory board is chaired by someone other than the presiding
executive officer and addresses similar concerns as a board of directors in the United States.

KEY TAKEAWAYS
The board of directors is elected to represent shareholders’ interests.
Every public company must have a board of directors composed of members from
both inside and outside the company.
The board makes decisions concerning the hiring and firing of personnel, dividend
policies and payouts, and executive compensation.

Election and Removal Methods of Board Members

While members of the board of directors are elected by shareholders, which individuals are
nominated is decided by a nomination committee. In 2002, the NYSE and NASDAQ required
independent directors to compose a nomination committee. Ideally, directors’ terms are
staggered to ensure only a few directors are elected in a given year.

Removal of a member by resolution in a general meeting can present challenges. Most

bylaws allow a director to review a copy of a removal proposal and then respond to it in an
open meeting, increasing the possibility of a rancorous split. Many directors’ contracts
include a disincentive for firing — a golden parachute clause that requires the corporation to
pay the director a bonus if they are let go.

FAST FACT
A board member is likely to be removed if they break foundational rules; for
example, engaging in a transaction that is a conflict of interest, or striking a
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 example, engaging in a transaction that
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is a conflict of interest, or striking a
Board of Directors (B of D)

deal with a third party to influence a board vote.

Breaking foundational rules can lead to the expulsion of a director. These infractions include
but are not limited to the following:

Using directorial powers for something other than the financial benefit of the corporation.
Using proprietary information for personal profit,
Making deals with third parties to sway a vote at a board meeting.
Engaging in transactions with the corporation that result in a conflict of interest.

In addition, some corporate boards have fitness-to-serve protocols.

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