Board of directors – definition and meaning

Every public company, i.e. one whose shares are listed on the stock market, must have a Board of Directors. In a stock corporation, the Board members are elected by the shareholders.

It is a group of people who are elected as representatives of the shareholders to establish much of company policy as well as making decisions on key issues. It should also represent the interests of the management.

The Board of Directors is often referred to as simply The Board, and less commonly as the Board of Trustees, the Board of Managers or the Board of Regents.

The Board of Directors (The Board) usually decides on the hiring and firing of executives, executive pay, and dividend policies.

Board of DirectorsThe Board of Directors has many different responsibilities. defines the Board of Directors as:

“The group of people who have been elected to manage a company by those holding shares in the company.”

Origin of the term: In the 16th century, a ‘board’ was a table around which people gathered for important meetings. The word then changed in meaning from the piece of furniture to the important people sitting around it. According to Management Today, the term ‘Board of Directors’ was first recorded in 1712. The word ‘board’, which in Old English meant a plank, table and a shield, dates much further back in history.

The Board represents shareholders & management

The Board represents the shareholders of the company, who collectively own it. Ideally, it should be a fair representation of both the shareholders’ and management’s interests.

If too many members are also executive directors (working in the company), the Board will tend to slant its decisions towards the interests of the management. That is why it should have some ‘independent’ directors, i.e. members who do not have a material or financial relationship with the company or people related to the business, except sitting fees.

However, too many independent Board members can also frustrate management, who may be left out of key decision-making.

The Board’s and its members’ responsibilities vary, depending on the nature of the organization and how it was initially set up. Companies with publicly trading shares have comprehensive rules and regulations regarding their Board.

The Board of a public company spends much more time communicating with shareholders and making forecasts for the next quarters than that of a private company.

The Board will typically choose one of its members to be chairman. His or her duties will be stipulated in the organization’s bylaws.

Several types of directors

A director is a person who is appointed to serve on the Board. There are several types.

Inside Director: this Board member has a meaningful connection to the company or organization, such as being an employee or shareholder.

Outside Director: this has the same meaning as an independent director.

Executive Director: this person works in the company. The term ‘Executive Director’ sometimes is used to mean CEO (Chief Executive Officer), which is something else.

Non-executive Director: this person does not have an executive position within the organization.

Shadow Director: this person is not a named director, however, he or she controls or directs the organization.

Some individuals are members of Boards of several different companies.

Board of Directors in Spanish is junta directiva, French conseil d’administration, German vorstand, Russian совет директоров, Chinese 董事会, Japanese 取締役会, and Portuguese conselho administrativo.

According to Iowa State University: “Essentially it is the role of the Board of Directors to hire the CEO or general manager of the business and assess the overall direction and strategy of the business.”

Video – What makes a great Board of Directors?

Fortune’s Geoff Colvin talks about how the success of a business depends on the relationship between the CEO and The Board of Directors.