Board of directors

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"Board room" and "board of trustees" redirect here. For other uses, see supervisory
board, board room (disambiguation), and board of trustees (disambiguation).

A meeting of a board of directors of the Leipzig–Dresden Railway Company in 1852

A board of directors is an executive committee that jointly supervise the activities of

an organization, which can be either a for-profit or a nonprofit organization such as
a business, nonprofit organization, or a government agency.
The powers, duties, and responsibilities of a board of directors are determined by
government regulations (including the jurisdiction's corporate law) and the
organization's own constitution and by-laws. These authorities may specify the number
of members of the board, how they are to be chosen, and how often they are to meet.
In an organization with voting members, the board is accountable to, and may be
subordinate to, the organization's full membership, which usually elect the members of
the board. In a stock corporation, non-executive directors are elected by
the shareholders, and the board has ultimate responsibility for the management of the
corporation. In nations with codetermination (such as Germany and Sweden), the
workers of a corporation elect a set fraction of the board's members.
The board of directors appoints the chief executive officer of the corporation and sets
out the overall strategic direction. In corporations with dispersed ownership, the
identification and nomination of directors (that shareholders vote for or against) are
often done by the board itself, leading to a high degree of self-perpetuation. In a non-
stock corporation with no general voting membership, the board is the supreme
governing body of the institution, and its members are sometimes chosen by the board
itself.[1][2][3]

Contents
 1Terminology
 2Roles
 3Directors
o 3.1Inside director
o 3.2Outside director
o 3.3Terminology
 4Process and structure
o 4.1Board meetings
 5Non-corporate boards
o 5.1Membership organizations
 6Corporations
o 6.1Governance
o 6.2Two-tier system
o 6.3History
o 6.4Election and removal
o 6.5Exercise of powers
o 6.6Duties
 6.6.1"Proper purpose"
 6.6.2"Unfettered discretion"
 6.6.3"Conflict of duty and interest"
 6.6.3.1Transactions with the company
 6.6.3.2Use of corporate property, opportunity, or information
 6.6.3.3Competing with the company
 6.6.4Common law duties of care and skill
 6.6.5Remedies for breach of duty
 6.6.6Current trends
 6.6.7The Board and Society
o 6.7United States
 6.7.1Sarbanes–Oxley Act
 6.7.2Size
 6.7.3Committees
 6.7.4Compensation
o 6.8Criticism
 7See also
 8Notes
 9References
o 9.1Citations
o 9.2Sources
 10External links

Terminology[edit]
Other names include board of directors and advisors, board of governors, board of
managers, board of regents, board of trustees, or board of visitors. It may also be
called "the executive board" and is often simply referred to as "the board". [4]

Roles[edit]
Business administration

Management of a business

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Accounting

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Business entities

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Corporate governance

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Corporate law

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Corporate title

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Economics

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Finance

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Types of management
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Organization

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  Business and economics portal

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Typical duties of boards of directors include: [5][6]

 governing the organization by establishing broad policies and setting out strategic
objectives;
 selecting, appointing, supporting and reviewing the performance of the chief
executive (of which the titles vary from organization to organization; the chief executive may
be titled chief executive officer, president or executive director);
 terminating the chief executive;
 ensuring the availability of adequate financial resources;
 approving annual budgets;
 accounting to the stakeholders for the organization's performance;
 setting the salaries, compensation and benefits of senior management;
The legal responsibilities of boards and board members vary with the nature of the
organization, and between jurisdictions. For companies with publicly trading stock,
these responsibilities are typically much more rigorous and complex than for those of
other types.
Typically, the board chooses one of its members to be the chairman (often now called
the "chair" or "chairperson"), who holds whatever title is specified in the by-
laws or articles of association. However, in membership organizations, the members
elect the president of the organization and the president becomes the board chair,
unless the by-laws say otherwise.[7]

Directors[edit]
The directors of an organization are the persons who are members of its board. Several
specific terms categorize directors by the presence or absence of their other
relationships to the organization.[8]
Inside director[edit]
An inside director is a director who is also an employee, officer, chief executive,
major shareholder, or someone similarly connected to the organization. Inside directors
represent the interests of the entity's stakeholders, and often have special knowledge of
its inner workings, its financial or market position, and so on.
Typical inside directors are:

 A chief executive officer (CEO) who may also be chairman of the board

 Other executives of the organization, such as its chief financial officer (CFO)
or executive vice president
 Large shareholders (who may or may not also be employees or officers)
 Representatives of other stakeholders such as labor unions, major lenders, or members
of the community in which the organization is located
An inside director who is employed as a manager or executive of the organization is
sometimes referred to as an executive director (not to be confused with the
title executive director sometimes used for the CEO position in some organizations).
Executive directors often have a specified area of responsibility in the organization,
such as finance, marketing, human resources, or production. [9]
Outside director[edit]
Main article: Independent director

An outside director is a member of the board who is not otherwise employed by or

engaged with the organization, and does not represent any of its stakeholders. A typical
example is a director who is president of a firm in a different industry.[10] Outside directors
are not employees of the company or affiliated with it in any other way.
Outside directors bring outside experience and perspectives to the board. For example,
for a company that serves a domestic market only, the presence of CEOs from global
multinational corporations as outside directors can help to provide insights on export
and import opportunities and international trade options. One of the arguments for
having outside directors is that they can keep a watchful eye on the inside directors and
on the way the organization is run. Outside directors are unlikely to tolerate "insider
dealing" between inside directors, as outside directors do not benefit from the company
or organization. Outside directors are often useful in handling disputes between inside
directors, or between shareholders and the board. They are thought to be
advantageous because they can be objective and present little risk of conflict of interest.
On the other hand, they might lack familiarity with the specific issues connected to the
organization's governance, and they might not know about the industry or sector in
which the organization is operating.
Terminology [edit]

 Director – a person appointed to serve on the board of an organization, such as an

institution or business.
 Inside director – a director who, in addition to serving on the board, has a meaningful
connection to the organization
 Outside director – a director who, other than serving on the board, has no meaningful
connections to the organization
 Executive director – an inside director who is also an executive with the organization.
The term is also used, in a completely different sense, to refer to a CEO
 Non-executive director – an inside director who is not an executive with the
organization
 Shadow or de facto director – an individual who is not a named director but who
nevertheless directs or controls the organization
 Nominee director – an individual who is appointed by a shareholder, creditor or interest
group (whether contractually or by resolution at a company meeting) and who has a
continuing loyalty to the appointor/s or other interest in the appointing company
Individual directors often serve on more than one board. [11] This practice results in
an interlocking directorate, where a relatively small number of individuals have
significant influence over many important entities. This situation can have important
corporate, social, economic, and legal consequences, and has been the subject of
significant research.[12]

Process and structure[edit]

The examples and perspective in this section deal primarily with the United
States and do not represent a worldwide view of the subject. You
may improve this section, discuss the issue on the talk page, or create a new
section, as appropriate. (May 2018)  (Learn how and when to remove this
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The process for running a board, sometimes called the board process, includes the
selection of board members, the setting of clear board objectives, the dissemination of
documents or board package to the board members, the collaborative creation of
an agenda for the meeting, the creation and follow-up of assigned action items, and the
assessment of the board process through standardized assessments of board
members, owners, and CEOs.[13] The science of this process has been slow to develop
due to the secretive nature of the way most companies run their boards, however some
standardization is beginning to develop. Some who are pushing for this standardization
in the USA are the National Association of Corporate Directors, McKinsey and The
Board Group.
Board meetings[edit]
A board of directors conducts its meetings according to the rules and procedures
contained in its governing documents. These procedures may allow the board to
conduct its business by conference call or other electronic means. They may also
specify how a quorum is to be determined.[14]

Non-corporate boards[edit]
The responsibilities of a board of directors vary depending on the nature and type of
business entity and the laws applying to the entity (see types of business entity). For
example, the nature of the business entity may be one that is traded on a public market
(public company), not traded on a public market (a private, limited or closely held
company), owned by family members (a family business), or exempt from income taxes
(a non-profit, not for profit, or tax-exempt entity). There are numerous types of business
entities available throughout the world such as a corporation, limited liability company,
cooperative, business trust, partnership, private limited company, and public limited
company.
Much of what has been written about boards of directors relates to boards of directors of
business entities actively traded on public markets. [15] More recently, however, material is
becoming available for boards of private and closely held businesses including family
businesses.[16]
A board-only organization is one whose board is self-appointed, rather than being
accountable to a base of members through elections; or in which the powers of the
membership are extremely limited.[citation needed]
Membership organizations[edit]
In membership organizations, such as a society made up of members of a certain
profession or one advocating a certain cause, a board of directors may have the
responsibility of running the organization in between meetings of the membership,
especially if the membership meets infrequently, such as only at an annual general
meeting. The amount of powers and authority delegated to the board depend on the
bylaws and rules of the particular organization. Some organizations place matters
exclusively in the board's control while in others, the general membership retains full
power and the board can only make recommendations. [4]
The setup of a board of directors vary widely across organizations and may include
provisions that are applicable to corporations, in which the "shareholders" are the
members of the organization. A difference may be that the membership elects the
officers of the organization, such as the president and the secretary, and the officers
become members of the board in addition to the directors and retain those duties on the
board.[7] The directors may also be classified as officers in this situation. [17] There may
also be ex-officio members of the board, or persons who are members due to another
position that they hold. These ex-officio members have all the same rights as the other
board members.[18]
Members of the board may be removed before their term is complete. Details on how
they can be removed are usually provided in the bylaws. If the bylaws do not contain
such details, the section on disciplinary procedures in Robert's Rules of Order may be
used.[19]

Corporations[edit]
In a publicly held company, directors are elected to represent and are legally obligated
as fiduciaries to represent owners of the company—the shareholders/stockholders. In
this capacity they establish policies and make decisions on issues such as whether
there is dividend and how much it is, stock options distributed to employees, and the
hiring/firing and compensation of upper management.
Governance[edit]
Theoretically, the control of a company is divided between two bodies: the board of
directors, and the shareholders in general meeting. In practice, the amount of power
exercised by the board varies with the type of company. In small private companies, the
directors and the shareholders are normally the same people, and thus there is no real
division of power. In large public companies, the board tends to exercise more of a
supervisory role, and individual responsibility and management tends to be delegated
downward to individual professional executives (such as a finance director or a
marketing director) who deal with particular areas of the company's affairs. [20]
Another feature of boards of directors in large public companies is that the board tends
to have more de facto power. Most shareholders do not attend shareholder meetings,
but rather cast proxy votes via mail, phone, or internet, thus allowing the board to vote
for them. However, proxy votes are not a total delegation of the voting power, as the
board must vote the proxy shares as directed by their owner even when it contradicts
the board’s views. In addition, many shareholders vote to accept all recommendations
of the board rather than try to get involved in management, since each shareholder's
power, as well as interest and information is so small. Larger institutional investors also
grant the board proxies. The large number of shareholders also makes it hard for them
to organize. However, there have been moves recently to try to increase shareholder
activism among both institutional investors and individuals with small shareholdings. [20]
A contrasting view is that in large public companies it is upper management and not
boards that wield practical power, because boards delegate nearly all of their power to
the top executive employees, adopting their recommendations almost without fail. As a
practical matter, executives even choose the directors, with shareholders normally
following management recommendations and voting for them.
In most cases, serving on a board is not a career unto itself. For major corporations, the
board members are usually professionals or leaders in their field. In the case of outside
directors, they are often senior leaders of other organizations. Nevertheless, board
members often receive remunerations amounting to hundreds of thousands of dollars
per year since they often sit on the boards of several companies. Inside directors are
usually not paid for sitting on a board, but the duty is instead considered part of their
larger job description. Outside directors are usually paid for their services. These
remunerations vary between corporations, but usually consist of a yearly or monthly
salary, additional compensation for each meeting attended, stock options, and various
other benefits. such as travel, hotel and meal expenses for the board meetings. Tiffany
& Co., for example, pays directors an annual retainer of $46,500, an additional annual
retainer of $2,500 if the director is also a chairperson of a committee, a per-meeting-
attended fee of $2,000 for meetings attended in person, a $500 fee for each meeting
attended via telephone, in addition to stock options and retirement benefits. [21]