20 Questions About Boards

1. What is a board of directors?

A corporation, whether for-profit or nonprofit, is required to have a governing board of directors. A board of directors is made up of a group of senior advisors who oversee the activities of a company and represent its shareholders. Every public company must have a board of directors. Private companies are not required to have boards, although many of them do.

 

2. What is the difference between a for-profit “corporate” board and a nonprofit board?

For-profit board members often are paid; nonprofit board members usually are not. For-profit board members uniquely attend to decisions about dispersing profits to owners (stockholders) oftentimes in the form of stock equity and dividends. Nonprofit board members do not seek to maximize and disperse profits to the owners — the owners of nonprofits are members of the community. They serve in the interest of public stakeholders.

 

3. What does a board of directors do?

Corporate boards select, appoint, and review the performance of the chief executive and other key executives. They determine the direct compensation and incentive plan for these executives; ensure the availability of financial resources; review and approve annual budgets and company financials; and approve strategic decisions.

 

4. What is the role of the board’s Chairman?

The Chairman of the board manages the board’s business and acts as its facilitator and guide. Chairmen determine board composition and organization, clarify board and management responsibilities, plan and manage board committee meetings, and develop the effectiveness of the board. In many companies, CEOs serve as Chairmen; in other companies the role is separated.

 

5. What is the difference between the CEO and the Chairman?

A CEO is a company’s top decision maker - all other executives answer to him or her. CEOs are accountable to the board of directors for company performance. The Chairman of a company is the head of its board of directors. The board is elected by shareholders and is responsible for protecting investors' interests, such as the company's profitability and stability. The board selects the Chairman.

 

6. How many people are typically on corporate boards?

Boards typically have between 7 and 15 members, although some boards have as many as 31 members. According to a Corporate Library study the average board size is 9.2 members. Some analysts think boards should have at least seven members to satisfy the board roles and committees.

 

7. How do I find out how many women are on a company’s board of directors?

Companies usually list their directors in the corporate governance section of their website. You can often identify the women by their names, but if not, you can go to the company’s 10K document and read their bios. 

 

8. What are corporate board committees?

There are four primary board committees: executive, audit, compensation, and nominating, although there may be others, depending on corporate philosophy and special circumstances relating to a company's line of business. It’s usually recommended that the compensation and audit committees be made up of independent directors. The executive committee is a smaller group that might meet when the full board is not available. The audit committee reviews the financial statements with internal auditors and outside audit companies. The compensation committee determines the salaries and bonuses of top executives, including the board itself. The nominating committee decides the slate of directors for the shareholders to vote their approval.

 

9. Why are some board members considered independent and others are not?

An independent director, or outside director, is a member of a board of directors who does not work for the company. Independent directors are important because they bring diverse backgrounds to decision making and are unbiased regarding company decisions. Independent directors are paid a standard fee for each board meeting. Inside directors are members of the corporation, usually part of the corporation's management team.

 

10. What are corporate bylaws and why are they important?

Corporate bylaws are rules that govern how a company operates. They state the rights and powers of shareholders, directors, and officers. If the board wishes to change bylaws, they often need to have shareholders vote for these changes.

 

11. What is conflict of interest?

Conflict of interest occurs when the personal or professional interests of a board member or senior executive are potentially at odds with the best interests of the corporation. Conflicts of interest often result in loss of public confidence and a damaged reputation. A conflict of interest might occur if two CEOs sit on each other’s boards.

 

12. What are the qualifications to be on a corporate board of directors?

Individuals who are asked to serve on a board of directors have several years of executive experience or other equivalent professional experience in key areas that are beneficial to the company. Directors must be able to read, understand, and offer suggestions and comments on financial statements. Board members should be representative of the constituents that a company serves, including ethnic diversity, gender, and age.

 

13. How are new board members chosen?

In a public company, directors are selected based on criteria set by the nominating committee. Most new directors are chosen for their expertise in key areas that are useful to the corporation. Sometimes, CEOs and board chairs select directors they already know. Or, they will turn to executive search firms to find qualified candidates that meet their search criteria.

 

14. How has the role of the board of directors evolved over the years?

Many boards used to be comprised of employees, family members, and friends. But shareholder influence and government regulation now require boards to have independent directors not associated with the company or its executive team. Today there are many shareholder resolutions requiring companies to diversify their boards, and appoint directors of different backgrounds, gender, and race.

 

15. What is the time commitment of a board member?

Board directors must be able to commit the time necessary to responsibly fulfill their commitment to the organization. This includes board training, analyzing financial statements, reviewing board documents before board meetings, attending board meetings, serving on committees to which they are assigned, attending meetings, and doing whatever else the company requires. Most boards meet at least four times a year and some meet monthly.

 

16. What are the personal and professional benefits of being on a corporate board?

Being asked to serve on a corporate board is flattering. It shows that your skills are valued outside of your own organization. Directors meet interesting people and grapple with interesting issues. Independent director are often well paid.

 

17. How much do board members get paid?

Corporate directors are well compensated, and compensation is often determined by the size of the company. It’s not unusual for corporate directors of large companies to be paid $100,000 or more each year they serve. They often are also granted stock options, which could become very valuable.

 

18. Do boards have term or age limits?

Some boards have term limits and age limits and others do not. The National Association of Corporate Directors recommends term limits of 10 to 15 years to promote turnover and obtain fresh ideas. Age limits range from 70 to 80 years old, and many companies have no limit at all. Without term or age limits it is often difficult for companies to suggest to board members that they retire or leave.

 

19. How do boards of directors affect people and communities?

Boards of directors guide corporate behavior. Decisions made by the boards of public companies can directly impact our daily lives. For example, a board might approve decisions to close or relocate factories or merge with other companies, which could result in loss of jobs in a community. Good companies often provide financial support to non-profit organizations in their communities.

 

20. Are boards required to consider diversity when electing directors?

There are no rules about board composition. But it is well recognized that diversity on boards contributes to better decision making. Last year, the Securities and Exchange Commission adopted the ruling known as “The Governance Disclosure Rule” which requires companies to consider diversity when nominating director candidates. There is no standard, however, as to what constitutes a diverse board.

 

Sources:

  • Daniel L. Kurtz and Sarah E. Paul, Managing Conflicts of Interest: A Primer for Nonprofit Boards (BoardSource 2006). Accessed on October 23, 2010.
  • McNamara, Carter. Overview of Roles and Responsibilities of Corporate Board of Directors. (Free Management Library). Accessed on October 23, 2010.
  • Investopedia Staff. Evaluating The Board Of Directors. (Investopedia). Accessed on October 23, 2010.
  • What are corporate bylaws and why are they important? (AllBusiness) Accessed on October 23, 2010.
  • Brush, Michael. Pay soars in the boardroom. (MSN Money, 2005). Accessed on October 23, 2010.