Board of Directors Ultimate Guide: What is it and Roles & Responsibilities

The Board of Directors (BOD) is such a vital part of a company as it is tasked with advancing the interests of the company and stakeholders. The board also oversees and manages the top management, which may comprise the Chief Executive Officer (CEO) and Chief Operating Officer (COO). 

While not all private companies have a Board of Directors, it’s mandatory for public companies. Note, however, that members of the board may come from within the company, otherwise known as inside or executive directors, or they may come from outside the company, otherwise known as outside or non-executive directors. 

Overall, the BOD shapes the organization’s vision and corporate culture, adopts policies that promote the highest form of corporate governance, and improves the company’s strategic focus, among other duties. This guide will walk you through everything you ought to know about the Board of Directors, starting with who they are and their responsibilities. 

What Is a Board of Directors

Key Takeaway 

  • The Board of Directors is an organization’s governing body tasked with protecting stakeholders’ interests and providing general oversight of its operations. 
  • A Board of Directors comprises inside or executive directors and outside or non-executive directors.
  • Board of Directors members may be voted in by the shareholders or appointed.
  • Executive boards, fundraising boards, policy boards, corporate boards, and governing boards are common types of boards of directors.
  • The structure of a Board of Directors comprises the board chair or president, board vice chair, board secretary, board treasurer, executive director, and nominee director.
  • Non-executive Board of Directors members may receive compensation for attending board meetings, but executive directors don’t. 
  • A successful Board of Directors is built on these principles of sound corporate governance: transparency, accountability, responsibility, and fairness.
  • A Board of Directors differs from a board of trustees, board of governance, advisory board, CEO, and shareholders. 

What’s a Board of Directors? 

A Board of Directors (BOD) is a governing body of an organization tasked with setting strategies, overseeing top management (including the CEO and COO), and safeguarding stakeholders’ interests. 

Every entity in a public company setting should have a Board of Directors, and while this doesn’t apply to all private companies, a good number of them also have a BOD.

How the Board of Directors Work? 

Every Board of Directors is governed by principles or laws that dictate how many members should make the board, how they should be selected, and their key responsibilities. 

Overall, the BOD decides on important matters for the organization and stakeholders. It offers advice and insights on attaining vital objectives, especially the ones touching on the following: 

  • Shareholders’ interests: The BOD advocates for efforts and practices that ensure shareholders get a return on their investments. 
  • Stakeholder engagements: The BOD is also tasked with communicating issues that touch on stakeholders’ interests so that they can understand them and, more importantly, understand why the board has to make certain decisions. 
  • Risk management: The board oversees the establishment and implementation of policies that help to identify, assess, and respond to legal, corporate, and security risks. 

Who Makes Up a Board of Directors? 

Ideally, a Board of Directors comprises inside directors (also known as executive directors) and outside directors (also known as non-executive directors). Inside directors are usually company employees or direct shareholders. They can be key stakeholders or part of the company’s management, such as CEOs and CFOs.

On the other hand, outside directors are not company employees or key stakeholders. Instead, they are external parties with little to no conflict of interest, such as union representatives. 

Outside directors are often compensated for attending board meetings and contributing. Inside directors aren’t, as attending board meetings is part of their job. So, it doesn’t necessarily warrant extra compensation as they are already on the payroll as company employees. 

Types of board of directors

Board of Directors Structure 

A typical Board of Directors comprises the following structure: 

1. Board Chair 

The board chair, sometimes known as the board president, heads the Board of Directors. They chair the meetings and provide leadership to the top executives, especially the CEO and COO. That means the board chair is the supreme decision-making entity within the BOD. 

The board chair also sets the tone for the company’s culture. In some cases, the CEO plays the role of the board chair or company president and thus becomes the highest-ranked member of the BOD.

2. Board Vice Chair 

The board vice chair, sometimes known as the board vice president, supports the board chair on corporate matters. They assume the board chair’s role when the chair is unavailable, especially during board meetings. As a result, they are the second-highest-ranked board members. 

3. Board Secretary

The BOD secretary handles the board’s administrative duties, which include taking minutes during board meetings and maintaining correct records. 

4. Board Treasurer

The board treasurer concentrates on the company’s financial health. They focus on monetary policies, budgeting, accounting, and investments. 

5. Executive Director 

Most boards also feature at least one inside director with an executive position, such as the CEO or COO, who sits at board meetings with other directors. The member, in this case, is an executive director. 

6. Nominee Director 

A nominee director is appointed by shareholders, interest groups, or creditors to sit at the BOD meetings. 

Top Management Structure 

Under the Board of Directors is the top management, which majorly comprises the following parties: 

a) Chief Executive Officer (CEO)

The CEO is the top-ranked executive overseeing the company’s entire operations. The CEO reports to the board chair (unless they chair the board) and the Board of Directors (which they are often a part of). 

b) Chief Operating Officer (COO)

The COO focuses on production, sales and marketing, and personnel issues. They report to the CEO, and in cases where the CEO is the board chair, the COO assumes the role of a senior vice president and second in command. 

c) Chief Financial Officer (CFO)

The CFO also reports to the CEO and focuses on financial issues such as expenditure monitoring, Budget preparation, and financial data analysis. In a situation where the CEO is the board chair, the CFO may also assume the role of senior vice president. 

Note:

When the company has a CEO and president, the CEO is the highest-ranked executive, while the president takes second. In most cases, however, one person holds both dockets and may chair the BOD meetings.

Board of directors structure

Board of Directors Roles and Responsibilities

Generally, here are the key roles and responsibilities of the Board of Directors: 

  • Define primary company objectives and oversee their implementation
  • Establish dividend policies for the company
  • Declare dividends and respective payouts
  • Shape the company’s vision and corporate culture
  • Institute effective policies on stocks
  • Build and uphold a strong brand identity 
  • Determine compensation for executives
  • Oversees Budget planning and execution 
  • Orient new members into the board 
  • Act as an alternative spokesperson for the company on corporate matters
  • Monitor and make needed changes to the accounting and financial operations of a company to protect its assets

How a Board of Directors is Chosen?

While nothing is carved in stone, most Board of Directors have a membership size of 8-12. However, other boards prefer an uneven number to help split a tie in case of a voting exercise. 

Overall, there are two ways a board selects its directors, and they are as follows: 

a) Election

In the case of publicly listed companies, members of the BOD are elected by shareholders during an annual meeting. But before that happens, the members must first be nominated by the nomination committee or investors advocating for a change of guard. The shareholders then go into an election to decide if the nominated member should join the board. 

b) Direct Nomination or Consensus

This mainly applies to private entities. In this case, the shareholders may choose to unanimously appoint specific members to the board as per the company’s bylaws. They don’t have to go into an organized election to decide who should join the board. Sometimes, the company founder decides who should sit in the boardroom. 

Types of Board of Directors

Depending on the company, we’ve different categories of BODs. The most notable ones are: 

  1. Executive Board: The executive board assumes the role of the CEO in a situation where the CEO is absent. As the ‘acting CEO,’ the executive board runs the company’s operations. It ensures it focuses on attaining its objective and mission. 
  2. Fundraising Board: A fundraising board focuses on raising funds to facilitate the company’s operations and expansion. The board does that through organized campaigns, galas, auctions, tournaments, and other special events. The fundraising board members use their prestigious status and societal influence to raise funds for the company. 
  3. Policy Board: A policy board focuses on establishing policies to guide the company and its workforce towards its objectives. Overall, it’s the duty of the company CEO or any other top executive to facilitate the implementation of the guidelines. 
  4. Governing Board: As the name suggests, the governing board offers specific guidance to company owners regarding the company’s business obligations. The board’s mandate is to help the company run smoothly and attain its future goals. 
  5. Corporate Board: A corporate Board of Directors is tasked with governance and strategic decision-making on corporate matters. It sets the company’s overall direction and oversees executive management. 
  6. Corporate board: A cooperative or corporate Board of Directors applies to small and medium-sized nonprofits whose members share a common interest. 
Board of directors salary

Board of Directors Salary 

Ordinarily, inside directors aren’t compensated for executing board duties and responsibilities as they are company employees. So, they earn a regular salary, which envelopes their contribution to board meetings. 

On the other hand, outside directors are compensated for sitting at the board meeting. On average, these members take home about $78,336 per year. The overall amount, however, depends on several factors, such as the type and size of the company, whether it’s private or public, the number of board sittings the director attends, and the industry. You can expect more established companies to compensate their outside directors better than small companies. 

What Makes a Successful Board of Directors? 

Ideally, the Board of Directors will succeed in carrying its mandate when the members are qualified to sit around the boardroom table. These members must observe exemplary corporate governance practices based on four critical pillars: transparency, accountability, responsibility, and fairness. 

Concerning transparency, the Board of Directors should offer accurate, timely information when reporting on financial performance and risks that companies face at a particular time. The BOD should be able to explain the reasons for taking specific actions and own up to the results even if they aren’t up to expectations. That’s where accountability comes in. 

Also, the Board of Directors should do everything in the company’s and stakeholders’ best interest, including hiring the right executives. That brings us to responsibility. Lastly, it’s paramount for the Board of Directors to observe fairness in all its dealings with stakeholders. 

How Do You Become A Member Of A Board Of Directors?

It generally takes these straightforward steps to become a member of a Board of Directors: 

Step 1 (Board Selection & Self-Evaluation): Identify the company you would want to serve as a member of the BOD. It should resonate with your academic qualifications, expertise, skillset, personal interest, and career goals. 

Step 2 (Self-Promotion): After picking a company you qualify to join as a board member, it’s time to put yourself out there so they notice you. That may mean volunteering at public seminars and conferences and building a professional portfolio website highlighting your accomplishments and capability. 

Step 3 (Networking): Take advantage of conferences and professionally-coordinated events to try and establish meaningful networks with industry leaders. 

Step 4 (Resume Building): Now, create a resume that showcases your skills, past board accomplishments, and experiences, as well as any other relevant information you want to include. 

Step 5 (Application): The last step is to apply for the board position you are targeting. You’ll need to do your homework to identify open positions. 

Also Read:

Board of Directors Compared to Other Boards 

Board of Directors Vs. Board of Trustees

Several differences exist between a Board of Directors and a board of trustees. For one, the Board of Directors administers over a public company, a nonprofit, or a private business. On the other hand, a board of trustees oversees a nonprofit, private business, or charity organization but not a public company. 

The other difference is that members of a board of trustees are volunteers. In contrast, members of the Board of Directors may be compensated, especially non-executive directors. Moreover, unlike a Board of Directors, which may own stocks or receive a salary, the Board of Trustees has no financial interests. 

Board of Directors Vs. Board of Governance 

In higher education institutions, government divisions, and nonprofits, we have a board of governance instead of a Board of Directors. The two play the same roles. However, in a situation where both exist, the board of governance is the supreme decision maker.

board of directors for nonprofit organization

Board of Directors Vs. Advisory Board

The Board of Directors and the Board of Advisors are two different things. For one, the Board of Directors enjoys legal power, while the advisory board doesn’t. Secondly, the BOD can make binding decisions on behalf of the company. However, the advisory board can only suggest non-binding recommendations that the organization’s leadership may follow or overlook. 

Also, while a Board of Directors controls the organization’s major decisions, such as executive appointments and financial oversight, the advisory board only offers advisory insights. It is not in charge of decision-making or execution. 

For instance, members of the Board of Directors can vote on vital decisions. However, those on the advisory board don’t have voting rights. 

Board of Directors Vs CEO

The Chief Executive Officer (CEO), sometimes identified as the company president, is often the face of a corporate organization. They bear the load of public opinion concerning the success and failure of the company. They, however, don’t call all the shots. 

Behind the scenes is a Board of Directors whose influence is more powerful than the CEO’s. They make the most critical decisions, including who should be the CEO and how much they should earn. So, ideally, the CEO doesn’t outrank the Board of Directors. They may be on the board and sometimes chair it, but they do not outrank the BOD. 

Board of Directors Vs. Shareholders

Shareholders and the Board of Directors are two different entities. Shareholders are the people who own the company in the form of shares. At the same time, the Board of Directors is the governing body that manages it (the company).

While directors can be shareholders and vice versa, job descriptions are different. As far as superiority goes, the shareholders are the bigger boss. After all, they vote on who should join the Board of Directors. 

Board of Directors for Nonprofit Organizations 

A nonprofit board comprises individuals who can immensely contribute to the organization’s decision-making. The board focuses on high-level strategic planning, accountability, and oversight. It champions the organization’s identity and focuses on its governance aspects while leaving the day-to-day management to the executive director. 

Their responsibilities include the following: 

  • Develop the organization’s mission statement 
  • Make high-stake strategic decisions 
  • Ensure legal compliance 
  • Review and approve company budgets
  • Appoint CEOs and executive directors
  • Organizational planning 

Also, note that nonprofit board members are expected to observe Duty of Care (where they’re responsible for advocating the organization’s mission), Duty of Loyalty (where they put the organization’s interests before their own), and Duty of Obedience (where they oblige to the organization’s guidelines).

Structure-wise, a nonprofit BOD also includes the board chair or president, the board vice chair, the board secretary, and the board treasurer. 

The Wrap!

The role of a Board of Directors can’t be stressed enough, especially for public companies. However, it’s not enough to constitute a board; it’s more important for the board to be operational and result-driven. All board members should understand their corporate and governance responsibilities, and that’s where we come in as the Center for Corporate Governance.

We are the bridge between your company and corporate excellence. Our focus is on helping board members and top executives unlock their full potential in corporate governance and leadership. We run a monthly flagship training program on corporate governance, addressing changes in the field and sharing the best practices to adopt. You can check out more details about the corporate governance mastery course on our website. 

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