Board of Directors: Definition, Types and Guidelines

By Indeed Editorial Team

Published 3 April 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

The board of directors, or B of D, is responsible for the hiring process of those in executive and management roles. Their decisions play a crucial role in the success of a company. Learning about the duties and roles of the board can help you design a plan to achieve a board member job. In this article, we discuss what a board of directors is, discuss types of B of D members, list the members of a board and outline the duties of a board in a publicly-traded company.

What is a board of directors?

A board of directors, also called a board, is an elected group of individuals that represents a company's shareholders and acts as the governing body for the company. The primary goal of the board is to protect the assets of the shareholders by ensuring that the management acts on their behalf and generates a good return on investment (ROI). Public companies often have a board that includes members from inside and outside the organisation, but many nonprofit and private organisations elect to run their business this way as well.

Related: What is a Chief Executive Officer? Plus How to Become One

What is a shareholder?

A shareholder is a person, company or organisation that owns at least one share of a company. In other words, a shareholder owns a part of a company. The more shares they have of the company, the bigger their ownership is.

Shareholders enjoy the benefits of a company's success through increased stock values or quarterly or yearly dividends. When a company makes a loss, though, share prices drop and this can hurt the shareholders financially. That's why shareholders have a vested interest in who the company's board members are and their actions.

What does a company's board do?

A company board primarily functions as a fiduciary. This means they act in the best interests of the shareholders or clients. A fiduciary is bound legally and ethically to act in their best interests. Other responsibilities of the members of a board include:

  • shaping and monitoring the company's culture

  • leading, directing and supervising the strategic direction of the company

  • setting long-term objectives and policies

  • holding regular meetings with members of the board to discuss and vote for strategies and policies

  • determining the structure of management and appointing management personnel

  • supervising the management team and taking corrective actions if necessary

  • ensuring adequate and proper reporting in annual reports such as financial statements, corporate governance, policies and disclosures of the board's practices

  • reporting to shareholders truthfully and regularly about the company's activities and financial standing

  • setting policies on stocks and paying dividends to shareholders promptly

  • leading acquisitions and mergers

  • assuring that there are adequate resources and manpower for the proper functioning of the company

Related: 6 Key CEO Responsibilities and Important Skills for CEOs

Types of board members

An effective board represents both management and shareholder interests and includes members from within and outside the business. They include:

  • Outside directors: These members bring an independent view to company issues, and they're not involved in the company's daily operations. They're often chosen for their expertise in associated business fields and they receive reimbursement or pay to attend meetings.

  • Inside directors: Inside directors are company employees whose experience brings value to the board. They're not compensated because they're often already a C-level executive, major shareholder or a union representative.

Board officers and other members

Within the board, there are specific roles members can have, including:

  • Chairman: Sometimes referred to as chairperson or president, the chairman is the acting head of the board. The chairman presides over the board and normally takes the lead at general meetings of the company.

  • Vice-chairman: Sometimes referred to as vice president, the vice-chairman serves in the absence of the president or chairman. They also may be referred to as chairman-elect if plans call for the member to serve as the next chairman or president.

  • Managing director: The chairman and other board members appoint a managing director who is responsible for the success of the company's operations and strategies. The managing direction usually earns a remuneration for their services.

  • Treasurer: The treasurer is responsible for the company's financial health but doesn't take responsibility for day-to-day operations. They typically manage the annual budget, financial policies, investments and financial audits.

  • Executive directors: Executive directors are usually employees who are working at the company. They serve as board members in addition to their normal work duties and earn extra remuneration as a result.

Related: What is an Executive Director and How to Become One

Duties of a board in a publicly-traded company

A public limited company refers to a company registered as a limited company that sells its shares to the general public on the stock market. There are a set of guidelines on the activities of the board in public limited companies that are under the Hong Kong Companies Ordinance. Below is a summary of the guidelines, as of 2021:

Make decisions

There's a general assumption that all members of the board have collective responsibility for the decisions the board makes. Even if one disagrees with a decision and votes against it, if the majority agrees with it, everyone is accountable for the outcomes of the decision. Therefore, it's important that the board holds regular meetings to reach decisions by discussion and general consensus.

All board members are also subject to the same legal duties under the law and to the rules of corporate governance. Although the roles and functions of board members can be different, the underlying principles remain the same for everyone. These principles include acting on behalf of shareholders' interests, avoiding a potential conflict of interest and disclosing the activities and financial standing of the company honestly.

Keep all board members updated

It's important that all members of the board keep up-to-date with the latest developments and trends in different areas, such as the state of the industry, industry-specific innovations and local and international laws and regulations. Keeping up with these issues ensures that the directors are making profitable decisions for shareholders. Certain members, such as the managing director, are responsible for providing training to new directors so that they're aware of their responsibilities and can perform them effectively.

Related: Employee Training and Development: Benefits, Types and Tips

Organise meetings

Usually, every member of a board has the power to call a board meeting. But the meeting can only begin if the caller has issued a notice for the meeting beforehand and if there's a quorum present. A quorum is the minimum number of members of the board that are present in the meeting for it to proceed. The board usually set the quorum number and it's often more than half of the total number of board members.

Once these conditions are met, the board members can have a meeting to discuss crises, financial health or strategic direction. The Corporate Governance Code for publicly traded companies requires that the meeting caller send an agenda and board papers at least three days beforehand. Board papers include minutes of the previous meeting where the board members have agreed that the events have taken place and has been signed by the chairman.

Obtain information

All board directors may ask for any information and documentation from the management team. The management has an obligation to provide accurate, reliable and timely information to the board directors, including board papers, disclosure documents, forecasts, monthly financial updates and budgets and supporting information for business proposals. The board then analyses the information and makes recommendations and suggestions to ensure the company meets its goals. They can assess the quality of the information and ask for more information or clarification if necessary.

Delegate tasks

The board focuses primarily on the strategic direction and objectives of the company. They delegate other intricate but equally important tasks to management or committees as they see fit. There are three types of committees that board directors can form in a publicly-traded company:

  • Remuneration Committee: This committee includes independent non-executive directors who support the chairperson in setting the remuneration of executive directors.

  • Audit Committee: This committee liaises between the board and financial auditors. It's responsible for oversight of the financial reporting process, selection of the independent auditor and receipt of audit results, both internal and external.

  • Nomination Committee: This committee mostly includes independent non-executive directors that regularly analyse the structure, size and composition of the board and make recommendations for appointing other directors.

Disclose information

The board also ensures that the information they disclose to the public concerning the organisation is accurate and not deceitful. This includes annual financial reports, forecasts, budgets, a list of products and services, company policies and information on any structural changes in the board. If they don't exercise care in the information they publish, they can become personally liable for any losses incurred by individuals who relied on the information to make business decisions.

Evaluate the board

Not only the board is responsible for assessing the performance and health of a company, it's important that they also conduct a regular evaluation of their own performance. This evaluation is necessary to ensure that the board members are carrying out their duties effectively and that they are making fair decisions in the best interest of the shareholders. Board directors usually conduct this evaluation before the next general election of members.

Please note that none of the companies mentioned in this article are affiliated with Indeed.

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