Powers of a Board of Directors
A board of directors is a group of individuals elected by a company’s shareholders to provide expertise and experience to ensure a company’s profitability and sustainability. Often, the board oversees the performance of the chief executive officer and has the power to remove him or her if it is deemed necessary by the board. The board also sets strategic objectives and major policies for the company, and ensures that a company operates lawfully and in the interests of its shareholders and other stakeholders.
Many large publicly held companies have board of directors, which operate independently of management and focus on a company’s major issues rather than day-to-day operations. Although a company’s articles may vest substantial powers in the board, its charter and bylaws often limit the scope of those powers. In addition, a board can delegate some of its powers to committees. In the United States, a corporation can also restrict the powers of its board of directors and committees through a company’s charter, articles or bylaws.
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Establishing a company’s objectives and strategies requires significant and time-consuming study of the business environment, the business’s strengths and weaknesses, and the ability of the business to meet and serve changing market needs. This kind of analysis is normally not a primary function of a board of directors.
What Are the Powers of a Board of Directors?
Most presidents understand and accept that their board members have considerable de facto powers of control, although most of them exercise those powers in a manner acceptable to the board and their peers. They communicate to their board members that they do indeed control the enterprise, but they do not impose that understanding as an assumption of the board’s role or use it as a basis for dictating terms to their directors.
Able presidents exploit the sources of advice represented by their board members, both inside and outside of board meetings. They usually select new directors who have specific qualities and areas of expertise that they believe will make their management decisions more effective.
A well-functioning board of directors should determine which tasks are vested in it by law, and those that can legitimately be devolved to senior management. Many larger companies devise a schedule of reserved powers that is published in the company’s charter and articles.
Historically, the majority of the directors on corporate boards have been white male businessmen, but increasing consumer, environmental and public interest consciousness, coupled with the embarrassment of revelations in the wake of Watergate, have prompted a trend toward more diversity in boardrooms. Women and members of minority groups are being appointed to corporate boards in ever-increasing numbers. However, in some companies, these members still represent a small percentage of the total number of directors. Even so, these nonexecutive directors — sometimes called “non-management” directors — are a powerful force on the board. They are generally not paid for their work, but they are often compensated if their services require traveling expenses. In some cases, a director’s compensation is tied to the amount of stock owned by the company and its subsidiaries.