What is a board of directors?

What is a board of directors? It’s a body that supervises or oversees the running of a business.

Boards come in different sizes and makeups and serve different stakeholders depending on the company, but their core job remains the same: to provide top-level oversight, set strategic direction and ensure the interests of the business stakeholders are paramount in any discussion.

The board provides the top level of oversight in a business. It’s the board’s job to critically analyse, question, and ultimately vote on core business decisions as part of an effort to set and maintain strategic direction.

Practically, that usually translates to periodic meetings that follow set agendas, discuss important issues, and produce key decisions.

Boards do NOT manage a company day-to-day, nor do they have a hands-on role in seeing their decisions put into action; that’s the job of employees.

Some board members may also be senior employees (like the CEO), because this gives essential insights and connects the board with management. However, most board members are not employees; their roles don’t require a 40-hour week or anything close. Instead, their input is periodic and laser-focused on top-level judgement calls and oversight.

Fiduciary duty means being legally entrusted to act in someone else’s best interests. It’s an essential element of corporate governance, where boards are legally entrusted to make decisions on behalf of the company’s primary stakeholders. 

If the company is publicly traded, as many are, boards are bound by fiduciary duty to act in the best interests of the shareholders. In other types of companies, the board acts in the best interests of other groups like owners/investors (private company), the family (family-run company), or the state (state-run company). However, the core fiduciary duty never changes.

Fiduciary duty means the board always puts stakeholders’ interests above their own when making a decision. Failure to do so, on purpose or through negligence, can often mean serious repercussions.

It’s important to know what the board can and cannot do in regular operations. However, keep in mind that the following is just a general summary. Your company’s bylaws and codes of conduct will give final and specific details.

The group of directors will generally be a mix of:

• Executive directors (EDs) – who are senior full-time employees like the CEO. EDs will often represent management interests.
• Non-executive directors (NEDs) – who do not hold full-time roles and only attend periodic board meetings. NEDs offer essential “zoomed out” perspectives based on their career-built insights.
• Independent non-executive directors (INEDs) – who do not hold full-time roles, only attend periodic meetings, and have no other material connection to the company. Other NEDs with such connections might include investors, former employees or people with friend or family connections to executives. INEDs don’t have any of these links. Their perspectives are often the most honest, refreshing, and ultimately helpful for strategy.

Younger companies tend to have small boards with just executive directors. Larger companies tend to have far more NEDs/INEDs. In fact, in most economies and regions of the world, the total number of NEDs/INEDs is far greater than the number of EDs. If you join a board, you’ll likely be a NED.

The fundamental principle is that the business owners decide who’s on the board. In publicly-owned companies, the shareholders usually decide. In privately-owned companies, it’s effectively the owners (if the owners consists of multiple investors, each investor will often have the right to one board seat). In government-run companies, a minister will usually decide.

Elections are the most prominent in publicly-owned companies, where all shareholders get a vote on a director’s appointment following their nomination by a specialised committee. There are often elections in private companies as well, but these can regularly serve as a formality, rubber-stamping what is otherwise an appointment.

Removals in public companies involve a vote as well, although there are strict legal processes to follow in these cases, as they’re often fed by conflict. In private companies, removals are often more straightforward, but they should still follow the established processes set out in investor agreements and articles of association.

This is mainly a way of separating executive from non-executive directors.

In some countries – including most English-speaking countries – there will be just one board with both EDs and NEDs. In other countries – like Germany, the Netherlands and China – there will be two boards:

• One has just EDs and is often called the “management board”
• The other has just NEDs and is often called the “supervisory board”

In companies with two-tier board systems, the management board will run the company while answering to the supervisory board, and the supervisory board will answer to the company’s primary owners/shareholders etc.

Although every board will be different, here are three very common positions that you’ll find on almost all of them:

• Chair – the highest rank. They run board meetings, appoint board committees, have team-leadership responsibilities, and follow other tasks as outlined in the company’s bylaws.
• Company secretary (CoSec) – Their primary duty is to record, document, and distribute meeting minutes, which are records of discussion and votes. In addition to ensuring compliance with regulations and laws, the company secretary will be responsible for several administrative and communication-related tasks.
• Treasurer – Treasurers prepare financial reports that include information about the viability and stability of the company. Their role is also to obtain draft versions of the company’s annual budget for approval by the board of directors.

Most boards, especially bigger ones, will delegate many of their core tasks to smaller teams made up of select directors. These are known as board committees.

In general, the board will give each committee a set of tasks; the committee will do them and bring recommendations to the wider board for next steps, which the board will debate and vote on.

Common types of board committees include:

• Audit committee – to provide independent oversight of the company’s financial reporting.
• Remuneration committee – to decide on the salary and bonus package for the CEO and other top executives.
• Nominations committee – to identify candidates for board vacancies and recommend them to the shareholders for a vote.

Other committees might reflect urgent and long-lasting business challenges and opportunities. For example, a company might have a committee dedicated to ESG or AI governance, since they are topical issues taking so much corporate attention. Other committees might be formed on an ad hoc basis, just to address one issue like insurance or litigation against the company. When the issues are resolved, these committees usually disband.

• Board of directors responsibilities: Key roles, duties and examples
• What does fiduciary duty mean?
• Executive director(s) definition
• What is the role of a Non-Executive Director?
• Independent non-executive director (Independent NED) meaning
• The Structure of the Board of Directors: Boards and Governance Strategies in the US, the UK and Germany
• What is the role of the chair?