Lexicon
What is a board of directors?
In a private company, a board of directors is a group of elected individuals representing the shareholders.
In a non-profit organisation, a board of directors is the governing body.
The members of a non-profit board focus on the organisation’s high-level strategy, oversight, and accountability.
Remember, the employees or managers oversee the day-to-day operations of an organisation, not the board.
The primary job of a public company’s board of directors is to look out for the shareholders’ interests.
Legally, directors must put shareholders’ interests ahead of their own.
Board members are there to supervise the company’s activities and evaluate its performance.
What does a board of directors do?
For the most part, the board is a trusted advisor (fiduciary) on behalf of shareholders.
The hiring and firing of senior executives, dividend policies, options policies, and executive compensation are the main issues under a board’s remit.
The board of directors also ensures the company has sufficient, well-managed resources at its disposal while also helping it set broad goals and supporting the executive team’s responsibilities.
Watch David W Duffy in the video below, explain what makes a great board director and how to become one.
Who sits on a board of directors?
A good board of directors should represent both shareholder and management interests and have internal and external non-executive directors.
Internal directors have the interests of significant shareholders, executive managers, and employees in mind, and their expertise within the organisation should add value.
The average internal director does not typically receive compensation for board activity since they are often already C-level executives, large shareholders, or union representatives.
The role of the non-executive director
Outside directors, or non-executive directors, do not take part in any of the company’s daily operations.
Non-executive board members are reimbursed and are often paid extra for attending committee meetings.
In ideal circumstances, an independent, non-executive, outside director will bring a fresh perspective to goal-setting and dispute resolution.
Choosing both internal and external board members is often vital to the success of a board and the organisation.
What powers does a board of directors have?
Usually, an organisation’s bylaws define the structure and powers of the board.
Bylaws should specify how many board members are elected and how they are elected (by shareholder vote at an annual meeting, for example) and how often the board meets.
A board can have any number of members; however, most have between three and fifteen members. Some believe the optimal size is nine.
The election and removal of board members
While shareholders elect directors, the nominating committee decides which candidates are put forward for nomination.
Directors’ terms should be staggered to ensure only a few are elected each year. Nine years is considered the most time a director should sit on a particular board.
Removing a board member
It can be challenging to remove a member by resolution at a general meeting.
A director can be expelled for breaking foundational rules. There are several types of infractions, including, but not limited to:
- Using directorial power for purposes other than the corporation’s financial well-being
- Profiting from proprietary information
- Negotiating with third parties to influence a board vote
- Conflict of interest situations involving financial reward
Many corporate boards also have protocols regarding fitness to serve.
In some countries, a board of directors is split into two tiers
Board structure can differ slightly from country to country.
Some European and Asian countries divide corporate governance into two tiers – executive boards and supervisory boards.
The executive board is headed by the CEO or managing director, who employees and shareholders elect. The executive board is responsible for the day-to-day operations of the business.
The supervisory board is chaired by an independent outside director (the chair) and consists of non-executive directors. These directors are not involved in the day-to-day running of the business but are there to advise on strategy and the organisation’s overall direction.
Are board directors paid?
Typically, insider directors aren’t compensated for their board activity since they are often C-level executives or significant shareholders.
Directors outside the company (NEDs) are paid. NEDs are usually selected based on their expertise in related fields that will benefit the company’s strategy and growth.
Pay varies according to the organisation’s size. In the UK, a non-executive director in the boardrooms of non-quoted firms typically earns between £15,000 and £20,000 a year.
Most non-executive directors of Listed PLCs receive pay of between £25,000 and £40,000 per year.
FTSE 100 NED positions usually pay between £40,000 and £100,000.
On Irish boards, the average non-executive director’s remuneration is €63,000.
Also of note is the fact that many high-profile non-executive directors hold multiple directorships in addition to their full-time executive positions.
How do you become a board director?
You can work for an organisation, rise through the ranks and become a c-suite executive elected to the board by the shareholders.
To become a non-executive director, you must first know how to be a director and gaining a formal qualification always helps.
The titles and job descriptions of typical board members
Usually, the number of positions on a board of directors depends on a company’s country, industry, shareholders and bylaws.
Five specific board positions include the following:
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Chair of the board
On a board, the highest rank is held by the chair. They are responsible for governing teams of people, so they must have strong leadership abilities.
Besides running board meetings and appointing committees, they also perform other tasks as outlined by the bylaws.
Chairs also collaborate with CEOs and executive directors to shape the culture of an organisation.
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Vice-chair
Vice-chairs act as the support to the chair, whom they help with the performance of their duties and responsibilities.
Because the vice-chair assumes the role of the chair during absences, they must have the ability to perform the duties of the chair.
In addition to overseeing formal assessments of the board of directors, they work closely with the CEO and chair to carry out board policies.
Occasionally, they are asked to handle conflicts of interest among board members.
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Secretary
In addition to ensuring compliance with regulations and laws, the board secretary will be responsible for several administrative and communication-related tasks.
A board secretary’s primary duty is to record, document, and distribute meeting minutes, which are records of discussion and votes. They’re responsible for keeping these records safe and accurate.
In addition, the board secretary tries to ensure all activities take place under the organisation’s bylaws.
It is also their job to provide notice of meetings.
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Treasurer
Treasurers should have solid accounting skills.
For each meeting, they prepare financial reports that include information about the viability and stability of the company.
These reports must be legible and concise to help inform any decisions made by the board.
Their role is also to obtain draft versions of the company’s annual budget for approval by the board of directors.
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Board members and non-executive directors
Directors who do not hold one of the mentioned positions often volunteer to serve as heads of committees.
They attend meetings, participate in discussions, and vote on board matters.
Following their service on the board of directors, they may be elected to more advanced roles.
Some examples of board committees
In addition to the board of directors, there are several committees that handle all of the work assigned by the board.
In most boards, there is a governance committee for recruiting and onboarding new members and a finance committee for reviewing accounting policies.
Other examples of committees include:
- Audit committee
- Bylaws committee
- Communications
- Cybersecurity
- ESG committee
- Remuneration committee
Committee number and size
In general, larger boards have more committees, but boards should avoid forming too many committees. For board members to be effective, they should generally serve on no more than two committees at a time.
Ad hoc committees
Ad hoc committees are formed when necessary and dissolved when their work is done. Below are some examples of ad hoc committees.
- Budget
- Insurance
- Litigation
Key takeaways
- Directors are elected to represent shareholders’ interests.
- In most organisations, internal board members are not paid for their work, but outside board members (non-executive directors or NEDs) are.
- Board members determine board policies, dividend payouts, executive compensation and executive recruitment.
- An individual is likely to be removed from a board if they violate foundational rules, for instance, if they engage in a conflict of interest transaction or strike a deal with a third party to influence board decisions.
- Directors are elected by shareholders but nominated by the nominations committee.