The board of directors of companies is considered one of the most important regulatory and decision-making bodies in companies, as it is responsible for protecting shareholders’ assets and ensuring they receive a good return on their investments. If you are considering investing your money in a company by purchasing stocks or bonds, you should know details about what the board of directors does.
Purpose of the Board of Directors
The board of directors is the highest authority in the structure of a company or publicly traded business. It is committed to the highest financial duty towards shareholders under corporate law in the United States, known as the “duty of care”.
Among the board’s responsibilities is to select and approve an appropriate level of compensation for the chief executive officer (CEO). It also assesses the attractiveness of dividends and pays them out. It may recommend stock splits. The board oversees stock repurchase programs and approves financial statements. It may even recommend or strongly oppose acquisitions and mergers.
Structure and Composition of the Board
The board is composed of individuals (directors) who are elected by shareholders for multiple-year terms. Many companies operate on a staggered basis so that only a portion of these individuals is elected each year. This is done because it is difficult to change the entire board due to hostile takeovers.
Some directors have a direct interest in the company, as they work in senior management. They are referred to as “inside directors.” Outside independent directors may have no direct ties with the company, but they are often well-known for their business acumen, and they may be compensated for their services, sometimes through stock options.
Directors often have ties to key suppliers to enhance valuable relationships. You might expect to see a senior executive from Coca Cola on the board of McDonald’s Corporation, or vice versa. They have a mutually beneficial relationship.
How Committees Work
Establishing audit and compensation committees is also a duty of the board. The audit committee ensures the accuracy of all financial statements and reports. They use fair estimates. Board members select and work with an outside auditing firm.
The compensation committee determines base salaries and bonus options for executives in the company, including the CEO. Many boards faced criticism in 2020 for allowing these salaries to reach excessively high levels.
How Board Members are Paid
Members are paid an annual salary. They receive additional pay for each meeting they attend and for stock options, along with other benefits for their services. The total amounts due can vary.
Compensation, along with any other benefits, can be found in a special document known as the “proxy statement.” This statement includes a short biography, their age, and their level of ownership in the company.
Having board members with significant ownership stakes is often a good sign. It means they truly walk in the shoes of external shareholders.
Structure and Its Impact
The company’s ownership structure significantly affects the board’s effectiveness. An entity or investor can control the company largely if there is only one large shareholder. In this case, directors may appeal to that controlling shareholder.
Directors often act as if there is a controlling shareholder when, in reality, there isn’t. They try to protect this imaginary entity at all times, even if it means firing the CEO, making changes in the structure, or rejecting acquisition opportunities.
The controlling shareholder may sometimes hold the position of CEO and/or chairman of the board. In this case, the director works at the owner’s discretion and has no real way to override their decisions.
Frequently Asked Questions (FAQ)
Who elects the board members?
The process for electing the board of directors is defined in the company’s bylaws. However, publicly traded companies typically must allow shareholders to vote in the election of board members.
How much…
When does the board of directors meet?
The board of directors typically holds a regular meeting coinciding with the annual shareholders’ meeting, and usually holds intermittent special meetings. The company’s bylaws specify the notice of the meeting, quorum, location, and other requirements for meetings.
When does a company need a board of directors?
The first directors of the company are either named in the articles of incorporation or at the first organizational meeting, depending on state law. Shareholders subsequently elect directors at their annual meetings.
Source: https://www.thebalancemoney.com/corporate-board-of-directors-3960038
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