Board of directors definition
/What is a Board of Directors?
A board of directors governs a corporation. It is a group of people who are elected by a company's shareholders to meet periodically to oversee the company's management and represent the interests of the shareholders. The board has overall authority for decisions made by the company, but usually confines itself to the issuance of stock and dividends, naming members to various committees, adopting and revising bylaws, hiring or firing senior managers and setting their compensation, and setting the company’s overall direction.
Structure of a Board of Directors
The structure of a board of directors is set by a company’s bylaws, which specify the number of members, how they are elected, and how frequently this group should meet. Ideally, the group should represent the interests of both shareholders and the management team. Also, to gain a broader perspective on relevant issues, board members should come from both within and outside of the organization. The board may be chaired by the chief executive officer, or by a senior member of the board.
Examples of Board Committees
The committees within a board of directors vary depending on the organization, its size, industry, and governance needs. However, the most common board committees include the following:
Audit committee. Oversees financial reporting and disclosures, works with external auditors, and monitors internal controls.
Compensation committee. Develops and reviews executive compensation plans, evaluates performance, and sets salary, bonuses, and stock options for executives. It also oversees broader employee compensation policies.
Nominating committee. Identifies and nominates qualified individuals for board membership.
Risk management committee. Oversees the identification, assessment, and mitigation of risks. It also reviews policies and procedures to manage operational, financial, and strategic risks.
Finance committee. Reviews and approves budgets, financial strategies, and capital expenditures.
Executive committee. Acts on behalf of the full board in urgent matters. It is composed of key directors and officers for quick decision-making.
Strategy committee. Focuses on long-term goals and strategic direction.
Corporate social responsibility committee. Monitors environmental, social, and governance (ESG) practices. It also oversees sustainability initiatives and community engagement efforts.
Ethics committee. Ensures adherence to ethical standards and legal regulations.
While smaller organizations may have fewer committees, larger corporations and institutions often establish these committees to address specialized areas of governance.
Advantages of a Board of Directors
There are multiple advantages to having a board of directors. They include the following items:
Accountability. The Board holds the management team accountable for its actions, which can include replacing the chief executive officer. The Board investigates the management team through its perusal of financial statements and operating reports, as well as by discussing issues with the internal audit manager.
Governance. The main advantage of having a Board is that an independent body is engaged in overseeing the activities of a corporation on behalf of its shareholders. This provides a brake on the activities of the management team, and tends to promote more careful decision-making.
Risk management. A central role of the Board is to review the risk profile of a business, and discuss whether there are any risk mitigation strategies that could be used to reduce the overall risk of the organization.
Strategic oversight. The Board reviews the strategic planning of the management team, and offers guidance regarding the plans being devised. This can result in more prudent strategies that are more likely to take advantage of a firm’s core competitive advantages.
Succession planning. The Board can be involved in succession planning for the more senior management positions, so that a business has incoming talent that can take over from the existing management team as needed.