A BOARD OF DIRECTORS is a recognized group of people who jointly oversee the activities of an organization , which can be either a for-profit business , nonprofit organization , or a government agency . A board of directors' powers, duties and responsibilities are determined by government regulations (including the jurisdiction's corporations law ) and the organization's own constitution and bylaws . These authorities may specify the number of members of the board, how they are to be chosen, and how often they are to meet.
In an organization with voting members, the board is accountable to, and might be subordinate to, the organization's full membership, which usually vote for the members of the board. In a stock corporation , non-executive directors are voted for by the shareholders and the board is the highest authority in the management of the corporation. The board of directors appoints the chief executive officer of the corporation and sets out the overall strategic direction. In corporations with dispersed ownership, the identification and nomination of directors (that shareholders vote for or against) are often done by the board itself, leading to a high degree of self-perpetuation. In a non-stock corporation with no general voting membership, the board is the supreme governing body of the institution; its members are sometimes chosen by the board itself.
* 1 Terminology * 2 Roles
* 3 Directors
* 4 Process and structure
* 4.1 Board meetings * 4.2 Size
* 5 Non-corporate boards
* 5.1 Membership organizations
* 6 Corporations
* 6.6 Duties
* 6.6.1 "Proper purpose" * 6.6.2 "Unfettered discretion"
* 6.6.3 "Conflict of duty and interest"
* 188.8.131.52 Transactions with the company * 184.108.40.206 Use of corporate property, opportunity, or information * 220.127.116.11 Competing with the company
* 6.7 United States
* 6.8 Criticism
* 7 See also * 8 Notes * 9 References * 10 External links
Other names include BOARD OF DIRECTORS AND ADVISORS, BOARD OF GOVERNORS , BOARD OF MANAGERS, BOARD OF REGENTS , BOARD OF TRUSTEES , or BOARD OF VISITORS. It may also be called "the executive board" and is often simply referred to as "the board".
Typical duties of boards of directors include:
* governing the organization by establishing broad policies and setting out strategic objectives; * selecting, appointing, supporting and reviewing the performance of the chief executive (of which the titles vary from organization to organization; the chief executive may be titled chief executive officer , president or executive director ); * terminating the chief executive; * ensuring the availability of adequate financial resources; * approving annual budgets; * accounting to the stakeholders for the organization's performance; * setting the salaries, compensation and benefits of senior management;
The legal responsibilities of boards and board members vary with the nature of the organization, and between jurisdictions. For companies with publicly trading stock , these responsibilities are typically much more rigorous and complex than for those of other types.
Typically, the board chooses one of its members to be the _chairman _ (more usually now called the "chair" or "chairperson"), who holds whatever title is specified in the bylaws or articles of association . However, in membership organizations, the members elect the president of the organization and the president becomes the chair of the board, unless the bylaws say otherwise.
The directors of an organization are the persons who are members of its board. Several specific terms categorize directors by the presence or absence of their other relationships to the organization.
An inside director is a director who is also an employee, officer, chief executive, major shareholder , or someone similarly connected to the organization. Inside directors represent the interests of the entity's stakeholders , and often have special knowledge of its inner workings, its financial or market position, and so on.
Typical inside directors are:
* A chief executive officer (CEO) who may also be chairman of the board * Other executives of the organization, such as its chief financial officer (CFO) or executive vice president * Large shareholders (who may or may not also be employees or officers) * Representatives of other stakeholders such as labor unions, major lenders, or members of the community in which the organization is located
An inside director who is employed as a manager or executive of the organization is sometimes referred to as an executive director (not to be confused with the title executive director sometimes used for the CEO position in some organizations). Executive directors often have a specified area of responsibility in the organization, such as finance, marketing, human resources, or production.
Main article: Independent director
An outside director is a member of the board who is not otherwise employed by or engaged with the organization, and does not represent any of its stakeholders. A typical example is a director who is president of a firm in a different industry. Outside directors are not employees of the company or affiliated with it in any other way.
Outside directors bring outside experience and perspectives to the board. For example, for a company that only serves a domestic market, the presence of CEOs from global multinational corporations as outside directors can help to provide insights on export and import opportunities and international trade options. One of the arguments for having outside directors is that they can keep a watchful eye on the inside directors and on the way the organization is run. Outside directors are unlikely to tolerate "insider dealing" between insider directors, as outside directors do not benefit from the company or organization. Outside directors are often useful in handling disputes between inside directors, or between shareholders and the board. They are thought to be advantageous because they can be objective and present little risk of conflict of interest. On the other hand, they might lack familiarity with the specific issues connected to the organization's governance and they might not know about the industry or sector in which the organization is operating.
* DIRECTOR – a person appointed to serve on the board of an organization, such as an institution or business. * INSIDE DIRECTOR – a director who, in addition to serving on the board, has a meaningful connection to the organization * OUTSIDE DIRECTOR – a director who, other than serving on the board, has no meaningful connections to the organization * EXECUTIVE DIRECTOR – an inside director who is also an executive with the organization. The term is also used, in a completely different sense, to refer to a CEO * NON-EXECUTIVE DIRECTOR – a director who is not an executive with the organization * SHADOW OR _DE FACTO_ DIRECTOR – an individual who is not a named director but who nevertheless directs or controls the organization * NOMINEE DIRECTOR – an individual who is appointed by a shareholder, creditor or interest group (whether contractually or by resolution at a company meeting) and who has a continuing loyalty to the appointor/s or other interest in the appointing company
Individual directors often serve on more than one board. This practice results in an interlocking directorate , where a relatively small number of individuals have significant influence over a large number of important entities. This situation can have important corporate, social, economic, and legal consequences, and has been the subject of significant research.
PROCESS AND STRUCTURE
The process for running a board, sometimes called the board process , includes the selection of board members, the setting of clear board objectives, the dissemination of documents or board package to the board members, the collaborative creation of an agenda for the meeting, the creation and follow-up of assigned action items , and the assessment of the board process through standardized assessments of board members, owners, and CEOs. The science of this process has been slow to develop due to the secretive nature of the way most companies run their boards, however some standardization is beginning to develop. Some who are pushing for this standardization in the USA are the National Association of Corporate Directors , McKinsey Consulting and The Board Group .
A board of directors conducts its meetings according to the rules and procedures contained in its governing documents. These procedures may allow the board to conduct its business by conference call or other electronic means. They may also specify how a quorum is to be determined.
Most organizations have adopted _Robert\'s Rules of Order _ as its guide to supplement its own rules. In this book, the rules for conducting board meetings may be less formal if there is no more than about a dozen board members present. An example of the informality is that motions are not required if it's clear what is being discussed.
Historically, nonprofit boards have not uncommonly had large boards with up to twenty-four members, but a modern trend is to have smaller boards as small as six or seven people. Studies suggest that after seven people, each additional person reduces the effectiveness of group-decision-making.
The role and responsibilities of a board of directors vary depending on the nature and type of business entity and the laws applying to the entity (see types of business entity ). For example, the nature of the business entity may be one that is traded on a public market (public company), not traded on a public market (a private, limited or closely held company), owned by family members (a family business), or exempt from income taxes (a non-profit, not for profit, or tax-exempt entity). There are numerous types of business entities available throughout the world such as a corporation, limited liability company, cooperative, business trust, partnership, private limited company, and public limited company.
Much of what has been written about boards of directors relates to boards of directors of business entities actively traded on public markets. More recently, however, material is becoming available for boards of private and closely held businesses including family businesses.
A board-only organization is one whose board is self-appointed, rather than being accountable to a base of members through elections; or in which the powers of the membership are extremely limited.
In membership organizations , such as a society made up of members of a certain profession or one advocating a certain cause, a board of directors may have the responsibility of running the organization in between meetings of the membership, especially if the membership meets infrequently, such as only at an annual general meeting . The amount of powers and authority delegated to the board depend on the bylaws and rules of the particular organization. Some organizations place matters exclusively in the board's control while in others, the general membership retains full power and the board can only make recommendations.
The setup of a board of directors vary widely across organizations and may include provisions that are applicable to corporations, in which the "shareholders" are the members of the organization. A difference may be that the membership elects the officers of the organization, such as the president and the secretary, and the officers become members of the board in addition to the directors and retain those duties on the board. The directors may also be classified as officers in this situation. There may also be ex-officio members of the board, or persons who are members due to another position that they hold. These ex-officio members have all the same rights as the other board members.
Members of the board may be removed before their term is complete. Details on how they can be removed are usually provided in the bylaws. If the bylaws do not contain such details, the section on disciplinary procedures in _Robert\'s Rules of Order _ may be used.
In a publicly held company , directors are elected to represent and are legally obligated as fiduciaries to represent owners of the company—the shareholders /stockholders. In this capacity they establish policies and make decisions on issues such as whether there is dividend and how much it is, stock options distributed to employees, and the hiring/firing and compensation of upper management .
Theoretically, the control of a company is divided between two bodies: the board of directors, and the shareholders in general meeting . In practice, the amount of power exercised by the board varies with the type of company. In small private companies, the directors and the shareholders are normally the same people, and thus there is no real division of power. In large public companies , the board tends to exercise more of a supervisory role, and individual responsibility and management tends to be delegated downward to individual professional executives (such as a finance director or a marketing director) who deal with particular areas of the company's affairs.
Another feature of boards of directors in large public companies is that the board tends to have more de facto power. Many shareholders grant proxies to the directors to vote their shares at general meetings and accept all recommendations of the board rather than try to get involved in management, since each shareholder's power, as well as interest and information is so small. Larger institutional investors also grant the board proxies. The large number of shareholders also makes it hard for them to organize. However, there have been moves recently to try to increase shareholder activism among both institutional investors and individuals with small shareholdings.
A contrasting view is that in large public companies it is upper management and not boards that wield practical power, because boards delegate nearly all of their power to the top executive employees, adopting their recommendations almost without fail. As a practical matter, executives even choose the directors, with shareholders normally following management recommendations and voting for them.
In most cases, serving on a board is not a career unto itself. For
major corporations, the board members are usually professionals or
leaders in their field. In the case of outside directors, they are
often senior leaders of other organizations. Nevertheless, board
members often receive remunerations amounting to hundreds of thousands
of dollars per year since they often sit on the boards of several
companies. Inside directors are usually not paid for sitting on a
board, but the duty is instead considered part of their larger job
description. Outside directors are usually paid for their services.
These remunerations vary between corporations, but usually consist of
a yearly or monthly salary, additional compensation for each meeting
attended, stock options, and various other benefits. such as travel,
hotel and meal expenses for the board meetings.
Tiffany & Co.
In some European and Asian countries, there are two separate boards, an executive board for day-to-day business and a supervisory board (elected by the shareholders and employees) for supervising the executive board. In these countries, the CEO (chief executive or managing director) presides over the executive board and the chairman presides over the supervisory board, and these two roles will always be held by different people. This ensures a distinction between management by the executive board and governance by the supervisory board and allows for clear lines of authority. The aim is to prevent a conflict of interest and too much power being concentrated in the hands of one person. There is a strong parallel here with the structure of government, which tends to separate the political cabinet from the management civil service . In the United States, the board of directors (elected by the shareholders) is often equivalent to the supervisory board, while the executive board may often be known as the executive committee (operating committee or executive council), composed of the CEO and their direct reports (other C-level officers, division/subsidiary heads).
_ The examples and perspective in this section DEAL PRIMARILY WITH THE UNITED KINGDOM AND DO NOT REPRESENT A WORLDWIDE VIEW OF THE SUBJECT. You may improve this article , discuss the issue on the talk page , or create a new article , as appropriate. (April 2016)_ _(Learn how and when to remove this template message )_
The development of a separate board of directors to manage/govern/oversee a company has occurred incrementally and indefinitely over legal history. Until the end of the 19th century, it seems to have been generally assumed that the general meeting (of all shareholders) was the supreme organ of a company, and that the board of directors merely acted as an agent of the company subject to the control of the shareholders in general meeting.
However, by 1906, the English Court of Appeal had made it clear in the decision of _Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame _ 2 Ch 34 that the division of powers between the board and the shareholders in general meaning depended on the construction of the articles of association and that, where the powers of management were vested in the board, the general meeting could not interfere with their lawful exercise. The articles were held to constitute a contract by which the members had agreed that "the directors and the directors alone shall manage."
The new approach did not secure immediate approval, but it was endorsed by the House of Lords in _Quin & Axtens v Salmon_ AC 442 and has since received general acceptance. Under English law, successive versions of Table A have reinforced the norm that, unless the directors are acting contrary to the law or the provisions of the Articles, the powers of conducting the management and affairs of the company are vested in them.
The modern doctrine was expressed in _John Shaw "> that this development in the law was somewhat surprising at the time, as the relevant provisions in Table A (as it was then) seemed to contradict this approach rather than to endorse it.
ELECTION AND REMOVAL
In most legal systems, the appointment and removal of directors is
voted upon by the shareholders in general meeting or through a proxy
statement . For publicly traded companies in the U.S., the directors
which are available to vote on are largely selected by either the
board as a whole or a nominating committee . Although in 2002 the New
Directors may also leave office by resignation or death. In some legal systems, directors may also be removed by a resolution of the remaining directors (in some countries they may only do so "with cause"; in others the power is unrestricted).
Some jurisdictions also permit the board of directors to appoint directors, either to fill a vacancy which arises on resignation or death, or as an addition to the existing directors.(_needs citation_)
In practice, it can be quite difficult to remove a director by a resolution in general meeting. In many legal systems, the director has a right to receive special notice of any resolution to remove him or her; the company must often supply a copy of the proposal to the director, who is usually entitled to be heard by the meeting. The director may require the company to circulate any representations that he wishes to make. Furthermore, the director's contract of service will usually entitle him to compensation if he is removed, and may often include a generous "golden parachute " which also acts as a deterrent to removal.
A recent study examines how corporate shareholders voted in director elections in the United States. It found that directors received fewer votes from shareholders when their companies performed poorly, had excess CEO compensation, or had poor shareholder protection. Also, directors received fewer votes when they did not regularly attend board meetings or received negative recommendations from a proxy advisory firm. The study also shows that companies often improve their corporate governance by removing poison pills or classified boards and by reducing excessive CEO pay after their directors receive low shareholder support.
Board accountability to shareholders is a recurring issue. In 2010, the _New York Times_ noted that several directors who had overseen companies which had failed in the financial crisis of 2007–2010 had found new positions as directors. The SEC sometimes imposes a ban (a "D they may well have such a duty in certain circumstances.
Directors must exercise their powers for a proper purpose. While in many instances an improper purpose is readily evident, such as a director looking to feather his or her own nest or divert an investment opportunity to a relative, such breaches usually involve a breach of the director's duty to act in good faith. Greater difficulties arise where the director, while acting in good faith, is serving a purpose that is not regarded by the law as proper.
The seminal authority in relation to what amounts to a proper purpose is the Supreme Court decision in _Eclairs Group Ltd v JKX Oil and will not allow directors to escape liability by asserting that his decision was in fact well founded. Traditionally, the law has divided conflicts of duty and interest into three sub-categories.
Transactions With The Company
By definition, where a director enters into a transaction with a company, there is a conflict between the director's interest (to do well for himself out of the transaction) and his duty to the company (to ensure that the company gets as much as it can out of the transaction). This rule is so strictly enforced that, even where the conflict of interest or conflict of duty is purely hypothetical, the directors can be forced to disgorge all personal gains arising from it. In _Aberdeen Ry v Blaikie_ (1854) 1 Macq HL 461 Lord Cranworth stated in his judgment that: "A corporate body can only act by agents, and it is, of course, the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal. And it is a rule of universal application that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, _or can have_, a personal interest conflicting _or which possibly may conflict_, with the interests of those whom he is bound to protect... So strictly is this principle adhered to that no question is allowed to be raised as to the fairness or unfairness of the contract entered into..." (_emphasis_ added)
However, in many jurisdictions the members of the company are permitted to ratify transactions which would otherwise fall foul of this principle. It is also largely accepted in most jurisdictions that this principle can be overridden in the company's constitution.
In many countries, there is also a statutory duty to declare interests in relation to any transactions, and the director can be fined for failing to make disclosure.
Use Of Corporate Property, Opportunity, Or Information
Directors must not, without the informed consent of the company, use for their own profit the company's assets, opportunities , or information. This prohibition is much less flexible than the prohibition against the transactions with the company, and attempts to circumvent it using provisions in the articles have met with limited success.
In _Regal (Hastings) Ltd v Gulliver _ All ER 378 the House of Lords, in upholding what was regarded as a wholly unmeritorious claim by the shareholders, held that: "(i) that what the directors did was so related to the affairs of the company that it can properly be said to have been done in the course of their management and in the utilisation of their opportunities and special knowledge as directors; and (ii) that what they did resulted in profit to themselves."
And accordingly, the directors were required to disgorge the profits that they made, and the shareholders received their windfall.
The decision has been followed in several subsequent cases, and is now regarded as settled law.
Competing With The Company
Directors cannot compete directly with the company without a conflict of interest arising. Similarly, they should not act as directors of competing companies, as their duties to each company would then conflict with each other.
Common Law Duties Of Care And Skill
Traditionally, the level of care and skill which has to be
demonstrated by a director has been framed largely with reference to
the non-executive director. In _Re City Equitable Fire
However, this decision was based firmly in the older notions (see above) that prevailed at the time as to the mode of corporate decision making, and effective control residing in the shareholders; if they elected and put up with an incompetent decision maker, they should not have recourse to complain.
However, a more modern approach has since developed, and in
This was a dual subjective and objective test, and one deliberately pitched at a higher level.
More recently, it has been suggested that both the tests of skill and
diligence should be assessed objectively and subjectively; in the
United Kingdom, the statutory provisions relating to directors' duties
in the new
Companies Act 2006
Remedies For Breach Of Duty
In most jurisdictions, the law provides for a variety of remedies in the event of a breach by the directors of their duties:
* injunction or declaration * damages or compensation * restoration of the company's property * rescission of the relevant contract * account of profits * summary dismissal
Historically, directors' duties have been owed almost exclusively to the company and its members, and the board was expected to exercise its powers for the financial benefit of the company. However, more recently there have been attempts to "soften" the position, and provide for more scope for directors to act as good corporate citizens. For example, in the United Kingdom, the Companies Act 2006 requires directors of companies "to promote the success of the company for the benefit of its members as a whole" and sets out the following six factors regarding a director's duty to promote success:
* the likely consequences of any decision in the long term * the interests of the company's employees * the need to foster the company's business relationships with suppliers, customers and others * the impact of the company's operations on the community and the environment * the desirability of the company maintaining a reputation for high standards of business conduct, and * the need to act fairly as between members of a company
This represents a considerable departure from the traditional notion that directors' duties are owed only to the company. Previously in the United Kingdom, under the Companies Act 1985 , protections for non-member stakeholders were considerably more limited (see for example, s.309 which permitted directors to take into account the interests of employees but which could only be enforced by the shareholders and not by the employees themselves). The changes have therefore been the subject of some criticism.
The law requires companies listed on the major stock exchanges (NYSE, NASDAQ) to have a majority of independent directors—directors who are not otherwise employed by the firm or in a business relationship with it.
According to the Corporate Library's study, the average size of publicly traded company's board is 9.2 members, and most boards range from 3 to 31 members. According to Investopedia, some analysts think the ideal size is seven. State law may specify a minimum number of directors, maximum number of directors, and qualifications for directors (e.g. whether board members must be individuals or may be business entities).
While a board may have several committees, two—the compensation committee and audit committee—are critical and must be made up of at least three independent directors and no inside directors. Other common committees in boards are nominating and governance.
According to John Gillespie, a former investment banker and co-author of a book critical of boards, "Far too much of their time has been for check-the-box and cover-your-behind activities rather than real monitoring of executives and providing strategic advice on behalf of shareholders". At the same time, scholars have found that individual directors have a large effect on major corporate initiatives such as mergers and acquisitions and cross-border investments.
The issue of gender representation on corporate boards of directors has been the subject of much criticism in recent years. Governments and corporations have responded with measures such as legislation mandating gender quotas and comply or explain systems to address the disproportionality of gender representation on corporate boards. A study of the French corporate elite has found that certain social classes are also disproportionately represented on boards, with those from the upper and, especially, upper-middle classes tending to dominate.
Board of governors
* ^ Robert 2011 , p. 9.
* ^ "How are the directors selected?". _Commonwealth of Virginia,