What is a Board of Directors?

A board of directors governs a corporation. It is a group of people who are elected by a company's shareholders to meet periodically to oversee the company's management and represent the interests of the shareholders. The board has overall authority for decisions made by the company, but usually confines itself to the issuance of stock and dividends, naming members to various committees, adopting and revising bylaws, hiring or firing senior managers and setting their compensation, and setting the company’s overall direction.

Structure of a Board of Directors

The structure of a board of directors is set by a company’s bylaws, which specify the number of members, how they are elected, and how frequently this group should meet. Ideally, the group should represent the interests of both shareholders and the management team. Also, to gain a broader perspective on relevant issues, board members should come from both within and outside of the organization. The board may be chaired by the chief executive officer, or by a senior member of the board.

Examples of Board Committees

A board may have several committees that deal with specialized areas of concern. For example, there may be an audit committee, compensation committee, governance committee, and risk management committee.

Advantages of a Board of Directors

There are multiple advantages to having a board of directors. They include the following items:

Accountability. The Board holds the management team accountable for its actions, which can include replacing the chief executive officer. The Board investigates the management team through its perusal of financial statements and operating reports, as well as by discussing issues with the internal audit manager.
Governance. The main advantage of having a Board is that an independent body is engaged in overseeing the activities of a corporation on behalf of its shareholders. This provides a brake on the activities of the management team, and tends to promote more careful decision-making.
Risk management. A central role of the Board is to review the risk profile of a business, and discuss whether there are any risk mitigation strategies that could be used to reduce the overall risk of the organization.
Strategic oversight. The Board reviews the strategic planning of the management team, and offers guidance regarding the plans being devised. This can result in more prudent strategies that are more likely to take advantage of a firm’s core competitive advantages.
Succession planning. The Board can be involved in succession planning for the more senior management positions, so that a business has incoming talent that can take over from the existing management team as needed.