Takeaways
- Board of directors are elected members have a fiduciary duty to shareholders.
- Board members of publicly traded companies are elected by shareholders.
- Active investors like institutional and venture funds lobby for specific members.
- The Nasdaq and NYSE require the majority of board members to be independent.
- Board members oversee company management, strategic direction, legal requirements, and executive compensation packages.
What Is a Board of Directors?
A board of directors, often shortened to BOD, is a group of professionals called “members” who are elected by shareholders to oversee management, implement governance, and steer a company's strategy. A board of directors is typically used in publicly traded C corporations or nonprofit organizations, where it protects the interests of shareholders and stakeholders, respectively.
The Board is a governing body that helps make critical decisions about a company’s strategic direction, general operating policies, public market compliance, capital raising efforts, and day-to-day operations.
Board members are elected by shareholders or appointed by stakeholders to ensure the company or organization spends its resources in complete alignment with its strategy, keeps management in check, and remains diligent about its financial reporting and legal obligations.
The structure of a board of directors can vary wildly depending on a company's size, stage, and funding. In many cases, it is comprised of a mix of company executives, such as a Chief Executive Officer (CEO), external industry experts, or members who bring a unique skill set like fundraising or transaction expertise to the Board.
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How a Board of Directors Works
The governance power and structure of the board of directors is first established in the company's articles of incorporation, which are filed with the state of incorporation. When a founder starts a C Corporation, it has a set of corporate bylaws that dictate the number of members on the Board, the frequency of board meetings, and how board members are elected.
Publicly traded companies have well-worn procedures for electing board members with proxy statements at annual shareholder meetings. However, in the early days of a startup, board members are selected by founders or early venture capital investors to help them build the skillsets they need to guide the management team toward the company's strategic objectives.
Here's how the Board of Directors assists with overseeing the company:
- Fiduciary Responsibility: Board members are fiduciaries, which means they are legally and ethically obligated to make decisions that benefit the company. Fiduciary responsibility keeps board members legally aligned to protect the interests of the shareholders who elect them.
- Voting Power: Shareholders can also vote out board members, or, depending on the corporate bylaws, other board members have the power to vote for removing other members and underperforming executives.
- Company Strategy: A board of directors is the final internal authority that governs an organization. It provides oversight and guidance and ensures that the company or nonprofit is managed effectively to achieve its goals and fulfill its mission.
- Financial Performance: The Board meets regularly to discuss business operations, usually quarterly. During this recurring meeting, the Board reviews the company’s overall performance, reviews and approves annual budgets, sets or alters policies, manages risk, protects shareholders’ interests, and makes wide-reaching strategic decisions.
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Board of Directors Composition
The board of directors is composed of members from both inside and outside the company. Public companies are required to have a board of directors. For companies with stock listed on the NYSE or Nasdaq, these stock exchanges require a majority of members to be independent directors.[1]
Independent directors act on behalf of investors to help maximize shareholder value, guard against conflicts of interest, and effectively carry out their responsibilities. Public company boards usually have between seven and nine members.
Internal board members often include the CEO or senior executives, who help guide board meetings. External members frequently include industry experts, seasoned business leaders, or members with a specific skill set needed by the company.
What Does a Board of Directors Do?
A board of directors directs a company and management to act in the best interest of its shareholders to help generate the highest return on investment. While the board of directors works closely with company management, it is technically independent of the company’s daily activities.
- Compliance Management: A board of directors is responsible for ensuring that the company operates legally and ethically and by its financial and other reporting duties with the Securities and Exchange Commission.
- Strategic Guidance: Practically speaking, the Board provides critical strategic guidance, approves significant corporate policies and policy changes, and ensures the organization operates within legal and ethical guidelines. Members advise and guide executive management on strategic direction and assist in making high-return investments.
- Budget Approval: The BOD also has a critical role in financial oversight, which includes cash management, annual budget approvals, and monitoring of economic performance and forecasts. The Board oversees resources for both companies and nonprofit organizations to ensure they are used and leveraged responsibly and ethically.
- Management Review: The Board is also responsible for hiring and assessing the CEO or executive’s performance to provide guidance and support while ultimately holding them accountable for the organization’s performance.
- Fiduciary Oversite: The BOD’s actions aim to protect the interests of shareholders and stakeholders and help guide the organization to long-term success. Companies are continuously threatened by activist investors who want them to take a new direction, hire a different CEO, or disagree with business transactions.
- Other Corporate Matters: Here are some everyday company decisions that a board of directors routinely make:
- Declaring dividends payments
- Setting executive compensation packages
- Approving stock option policies
- Hiring and firing C-suite members
- Approving major investments
- Overseeing the budgeting process
- Approving acquisitions and mergers
- Advising company management
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What Companies Have a Board?
A board of directors can be found in various organizations, including nonprofits, private corporations, publicly traded companies, and even some government bodies.
- Publicly traded companies are legally bound to have a board of directors representing shareholders' interests. These shareholders consist of institutional investors, hedge funds, pensions, and endowment funds (and others that own common stock) who elect the Board through annual or special shareholder votes.
- Private companies, while not required by law to have one, frequently create a board of directors to guide strategic decisions, boost credibility, and attract high-impact investors. This is particularly true when companies want to do an Initial Public Offering (IPO) or take a significant investment from a venture capital fund.
- Nonprofit Organizations also rely on boards to ensure their activities are aligned directly with the organization’s mission. The Board assists in steering organizational resources - donations, funds, and gifts - toward high-impact activities.
A board of directors plays a direct role in strategy, compliance, financial reporting, and organizational governance in all these settings.
4 Board Member Roles
Board titles and roles can vary depending on the company’s stage, lifecycle, and acute needs. Most boards have a majority of independent directors who give an objective view of company performance and management.
Other directors are internal company executives who translate board decisions into formal action and manage employees to execute a company’s strategic direction.
Here are four common Board of director roles:
1. Chairman or President
The Chairman, also known as the President, leads the Board and is responsible for setting meeting agendas, facilitating discussions, and ensuring that the Board operates smoothly. The Chairman often acts as the primary liaison between the Board, the CEO, and company management.
2. Vice-chairman
The Vice-chairman supports the Chairman and steps in to lead meetings or fulfill other duties when the Chairman is unavailable. The Vice-chairman often takes on special projects and helps ensure continuity in leadership.
3. Secretary
The Secretary ensures that the Board’s actions are well documented, and that the organization complies with the necessary legal, regulatory, and compliance requirements.
4. Treasurer
The Treasurer oversees the organization’s financial matters, including financing, budgeting, accounting, company investments (usually money market accounts, corporate bonds, U.S. T-Bills, etc.), SEC financial reporting, and ensuring that resources are used effectively.
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4 Types of Boards
Not all boards are created for the same purpose. Depending on the company and type of board needed, here are four common structures:
1. Executive Board
When a company doesn’t have a CEO, it can form an Executive Board. An Executive Board comprises senior executives, such as the Chief Financial Offers, Chief Operating Officer, Chief Technology officer, and other top leaders. This Board focuses on day-to-day management and operational decisions until a CEO is hired.
2. Governing Board
A Governing Board is responsible for the organization's overall governance and strategic direction. This type of Board typically includes a mix of internal and external members who oversee major decisions.
3. Advisory Board
An Advisory Board provides non-binding advice and expertise to the organization. Members are often chosen for their specialized knowledge, industry experience, branding expertise, or transaction history (with mergers and acquisitions).
4. Fundraising Board
A fundraising board often comprises individuals with strong networks, investor connections, and corporate fundraising expertise. The Board can help attract family and friends, angel investors, venture capitalists, or institutional investors to help the company meet its financial objectives.
Nonprofits work to secure donations and financial support for the organization’s initiatives.
Smart Summary
A board of directors is a group of members elected by shareholders who help a business navigate strategy, compliance, financial decisions, and legal issues. Members have a fiduciary obligation to investors and help provide governance over company management to ensure alignment with executives and shareholders. Board members focus on high-level business decisions that guide a company to success.
Frequently Asked Questions
The board of directors receives compensation for their oversights through cash payments and stock. These could be options, restricted stock units (RSUs), or other equity structures depending on the company’s stage. Publicly traded companies list board compensation in their annual proxy statements.
The board of directors has a fiduciary responsibility to shareholders, including outside investors like hedge funds, institutional inventors, and venture capitalists. With these investors in mind, the Board ensures that the company complies with laws, files accurate financial statements, and adheres to company strategy and the law.
No. The Chairman of the Board is the highest-ranking board member. While the CEO usually sits on the Board, the Chairman directs the Board’s actions. The Board monitors the CEO’s performance and can remove poor-performing CEOs from the company.
No. Board members leave the day-to-day activities to company management and employees. A board member’s job is to remain high-level in its evaluation and concentrate on strategic direction and shareholder value.
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(1) Nasdaq. Corporate Governance Requirements. Last Accessed January 14, 2025.
