Board of directors – definition and meaning
The Board of Directors or the Board is a group of people who jointly oversee the activities of a company. For-profit businesses, non-profit organizations, and government agencies have a board of directors. The shareholders of a public company choose the members of the Board. Every **public company must have a Board of Directors.
** Public companies list their shares on a formal stock exchange. For example, you can buy and sell General Motors shares on the New York Stock Exchange.
The Board of Directors is a group of people who the shareholders elect to establish company policy. Board members must also make decisions on key issues. Additionally, they should represent the interests of the management.
The terms Board of Trustees, Board of Managers, or Board of Regents mean the same as the Board of Directors. However, we seldom use those terms today.
The Board usually decides on the hiring and firing of executives, executive pay, as well as dividend policies.
The Financial Times’ Lexicon of business terms 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.”
Board of Directors – origin
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’, dates much further back in history.
Who does the Board represent?
The Board represents the shareholders of the company. The shareholders collectively own the company. Ideally, the Board should be a fair representation of both the business’ major stakeholders.
In other words, Board members should represent the interests of both the shareholders and management.
If too many members are also executive directors, the Board may favor the management’s interests. An executive director is somebody who is actively working in the company.
Therefore, the Board should have some ‘independent directors.’ In other words, some members should not have a relationship with the company or people related to the business. ‘Relationship with the company’ in this context means a business or financial relationship.
However, too many independent Board members can also frustrate management. The management may subsequently feel that the Board is ignoring its interests.
The Board members’ responsibilities vary, depending on the nature of the organization. What they do also depends on how the founders originally set up the business. Companies with publicly trading shares have comprehensive rules and regulations regarding their Board.
The Board of a public company spends much of its time communicating with shareholders. Board members also spend more time making forecasts for the next quarters than those of a private company.
The Board will typically choose one of its members to be Chairman. The organizations’ bylaws will stipulate what the Chairman’s duties are.
Several types of directors
In a public company, the shareholders appoint ‘directors’ to serve on the Board. There are several types of directors.
The Inside Director has a meaningful connection to the company or organization. This person is either an employee or shareholder.
The Outside Director is an independent director.
If they work in the company; we call them Executive Directors. In some cases, the Executive Director may be the CEO, which is something else. CEO stands for Chief Executive Officer.
The Non-Executive Director does not have an executive position within the organization. In other words, they do not work in the company.
A Shadow Director is not a named director. However, they control or direct the organization.
Some individuals are members of Boards of several different companies. In fact, members of parliament typically become members of many different boards.
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 – Board of Directors compensation
This Wall Street Journal video talks about non-executive directors. Approximately 4,300 non-executive directors fill the boards of large American companies. They are not among the millions of America’s part-time workers on the minimum wage. In fact, non-executive directors earn about $250,000 per year for very few hours’ work.