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: 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.

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.

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.

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.

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.

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.

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:

• 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.

• 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.

• 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.

• 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.

• 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.

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

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

• 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.