Board Of Directors Definition
The Board of directors is the group of people who are elected individuals, having the responsibility of representing the objectives of a firm in support of the firm’s stakeholders. This corporate body makes up the top-most layer of hierarchy and puts its concern on ensuring that the firm is proficiently achieving its targets.
The main duty of the board of directors is to hold a company and keep it on its toes even during a tough situation. Other duties of the board of directors are financial decision-making, the company’s complete management, policy establishment, and law compliance.
Structure of Board of Directors
The members of the BOD are placed at different statures in the panel. The framework of the board is based on the state laws and the firm. For instance, the BOD of the famous e-shopping site, Amazon, comprises official statures like chairmen, CFOs, Directors, VPs and segment-wise CEOs, etc.
The size of the board is restricted by a firm by stating the maximum and the minimum capacity in its AOA, Articles of Association. Businesses generally keep 3-31 candidates in the BOD. Let’s study some of the positions and designations found in the BOD of public firms.
1. Managing Director
A company’s bylaws normally include no cap on the types of directors. The e-retail hub, Amazon, for instance, had a lot of directors looking after separate segments in its directorial board. A managing director is a person chosen by the firm’s executive directors to oversee, guide, and supervise the company’s operations.
A chairman is in charge of the panel and, as a result, of the board meetings or committee. The chairman is elected by the BOD. He is typically the firm’s CEO.
3. Executive Director
This type of person is involved in the firm’s operations, business functions, marketing, and financing. He is a company representative who serves the directors of the firm and is paid by the corporation. The firm’s cause is represented by the director.
4. Non-Executive Director
He/she is a board member of directors who does not contribute to the organization. External directors provide a neutral, third-person viewpoint. These directors charge a fee for their dissenting views and counsel. They also provide investors from outside the company a say.
Vice Presidents, CFOs, treasurers, zonal heads, vigilance chiefs, and audit chiefs are some of the other frequent BOD titles.
5. Non-profits and private corporations
Private firms generally select members of the board from the owner or relatives, as well as executives. A fiduciary panel is very frequent in non-profit organizations.
Roles and Responsibilities of Board of Directors
Following are the roles and responsibilities of the Board of Directors:
- It establishes policies for payouts, dividends, and presenting their views to the organization, among other things.
- The BOD monitors that the corporation does not jeopardize the interests of its owners and investors.
- The most important job or obligation of the directorial board is to the organization’s directors.
- The yearly stakeholders’ meeting is another critical role of the BOD. Yearly dividends are announced, recruits and high-level administrators are elected and appointed, and corporate policies are changed at such meetings of the board.
- The board of directors also appoints and agrees on the firm’s CEO. It also can fire a CEO who is causing the company to suffer.
- The board often makes important strategic choices and initiatives, such as acquisitions and mergers, stock splits, and other matters.
- Among the most important duties performed by a firm’s board of directors is crisis management. Whenever a corporation is in trouble, the BOD acts as a bulwark, representing the firm and holding it responsible for its activities. In the occurrence of a crisis, executives seek advice from the board of directors.
- It determines how much the firm’s senior executives are paid. It even adjusts and authorizes the yearly budget of the firm.
The Board of Directors lays the basis for a firm by defining its goal, mission, and purpose. The board guarantees that the firm’s executive board is functioning under the company’s objectives and strategies. Executives report to the board of directors and must operate for the benefit of the organization and its shareholders.
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Aspects of Board of Directors
Tenure – A director’s duration on the panel might range from 5 to 10 years, depending on the company. A personalized resolution may be required to grant tenure expansions on a BOD.
Board members are often compensated with a yearly wage and stock grants. According to a survey, in 2017, 50% of large US corporations paid members of the board more than $300,000. Participants are occasionally compensated in addition to their regular dues for attending meetings.
Liability – Because a corporation is a distinct legal body, its directors can’t be found personally accountable for its obligations. They are, nonetheless, liable for the losses suffered.
Details for Directors – The following sources can be used to gather data on the directors of the company:
- Directors of public companies are also listed on official websites.
- A firm’s Incumbency Certificate lists its organizational roles.
- A firm’s site’s “About Us” section
- Writings on corporate boards can be found in business journals, news sections, and newspapers.
- In the directories and yellow pages, there is a list of corporate directors
Disqualification of a Board of director
For the aforementioned purposes, a member of the board may be expelled from the board for a certain amount of time or banned indefinitely:
- Misuse of company resources or funding sources for personal benefit
- Deception or misbehavior
- Continuation of trading after the company went insolvent or bankrupt
- Inability to maintain honest business accounts or incapability to publish financial records to the company house
- Inability to submit the firm’s taxes
- Execution of trading once the business was unable to meet loans
International Structure of a Board of Directors
Beyond the USA, the structure of a BOD is more diverse. The organization is often broken into 2 principal boards:
Workers and stockholders select the members of the executive board, which is composed of firm insiders. The board of executives is usually chaired by the firm’s CEO or a senior officer. The panel is usually in charge of managing the day-to-day processes of the firm.
Whenever working with the corporation, the advisory board is concerned with a wider spectrum of problems and functions similarly to a conventional U.S. board. The panel’s chair changes from time to time, but it is always somebody other than the CEO.
More on BOD
There is a principal-representative type of relationship between a board of directors and stakeholders. The owners or principals are the stakeholders, and the board of directors is the representatives who make sure that the investments made by the stakeholders are safe. So, the board requires to ensure business efficiency to let the profit maximize, all leading to the benefit of the stakeholder.
During the process, apart from the shareholders, the board of directors as a legal body also requires operating in support of other stakeholders. The reason is that a corporation should be able to serve them for prolonged existence. For example, the board of directors should certify that the firm operates by the laws to prevent dragging any adverse attention through the legal enforcement organizations.
A BOD is a team of senior professionals who are elected by a company’s shareholders. The laws of the state obligate public firms to hire a board of directors. When talking about private firms or non-profit firms, the recruitment of a BOD is optional. The mindset behind appointing a BOD is to have a unit that secures stakeholders’ investments.
Points to Note
Here are some important points to keep in mind regarding the Board of Directors:
- It is a panel that is elected by the firm’s stakeholders, and it does a job of representing them. The board of directors comprises skilled professional position bearers.
- The structure of the board of directors varies from firm to firm. Generally, the BOD has a chairman, CEO, non-executive director, directors, VP, CFO, and zonal heads.
- As per law, for a public firm, it is mandatory to have a board of directors, but for private firms or non-profit entities, it’s optional.
- The board of directors sees it as their goal to work in the interests and rights of the investors and shareholders while securing their properties put in the firm.
- A BOD is the ultimate governing body in a firm that commences strategic business judgments by being a part of the board meetups.
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So, incorporated with elected people who work as agents for a firm, a BOD acts like a substitute for stakeholders. The non-profit firms, profit entities, and also some government organizations have a group of BODs.
The board of directors can differ from firm to firm, and from the nation in which the firm is operating. Every corporation sends out provisions for the board as per the state corporation commission rules. Usually, the boards can have up to 30 members, but huge complex public firms may have more than 30 members.
The two main principal boards in which this organization is broken down are:
A BOD can get disqualified due to several reasons such as misuse of the firm’s property, misbehavior, inability to pay taxes, not maintaining honest corporate accounts, etc.
The BOD is made up of directors, CEOs, CFOs, vice presidents, executive directors, zonal heads, etc.