Board Of Directors: Definition, Structure and Types

A board of directors is referred to as a group of individuals that represent the interest of the shareholders. They are elected by the shareholders to oversee the activities of the organization, ensure that the assets are protected, and the shareholders receive a return on their investment.

The board of directors’ compensation includes a salary every year as well as stock options and additional benefits. The entire board of director’s salary varies from company to company and person to person.

Board of director’s structure

It is mandatory to appoint the board of directors for every type of organization, be it governmental, non-profit, or profit.  It is the board that is accountable for the policies, overall direction, and objectives of the organization and is held responsible for the consequences of those actions.

The board of director’s structure includes various individuals who are known as directors. It is the shareholders who elect them.  Sometimes some of the directors also work in a managerial capacity or as executive directors in the organization.

The role, responsibilities, duties, and power of the board of directors are predetermined as per the regulations of the government as well as the by-laws and constitutional framework of the organization itself. It is the by-laws that determine the number of board members that should be elected and how they should be elected.  The duration of their stay can be single or multiple-year terms depending upon the organizational structure.

In some of the firms, only a specific percentage or number of the directors are up for the election process. Most companies do not make a complete change of all its board members at one go to avoid any bid of a hostile takeover.

Characteristics of a board member

Look for the following characteristics in a board member

1. The board member must be an expert in a specific field, and his expertise should prove beneficial for the organization
2. Look for a board member who can raise money for the organization he is working for. It is an important ability and can prove a tremendous help to the organization in its initial days.
3. The board members must have the time to undertake the board duties. He will have to attend various meetings, and he must have the time to do so.
4. The individuals who are elected as a board of directors must have both management and leadership qualities. They should understand the nuances of business operations, and their expertise, as well as experience, must work in favor of the company.
5. One of the essential characteristics of a board member is that he should show his commitment to the organization and work for its well-being at all costs.
6. There should not be any conflict of interest in discharging his duties. Look for a board member who does not make a profit from serving the organization; otherwise, he will put the company in harm’s way.

Types of the board of directors

The various types of the board of directors are as follows

1. Non-executive director 

The non-executive director is often an expert in the industry who is hired for his expert services. He does not hold an executive position nor is involved in the daily activities of the company.

He offers expert advice in numerous aspects of the business.

2. Executive director 

An executive director, as the name suggests, holds an executive position in the company. He is involved with the decision-making process related to daily activities.

3. The managing director

The board of directors appoints the managing director of a firm. He has full control over the daily operations of the organization. He is an executive director and is also referred to as the CEO of the company.

4. De facto director 

The De facto director is an individual who does not hold the position of the director but shares similar responsibilities as well as liabilities as those of the official director

5. Shadow director –

The shadow director also does not hold any official title, but he can influence the decisions of the board of directors.

Board of director’s responsibilities

The board of director’s responsibilities is defined below

1. The board of director’s responsibilities includes providing direction to the company. Its strategic function includes setting the vision, goals, and mission of the company. The first thing that the board of directors does after its formation is to create the mission statement of the organization with help from the CEO of the company. It ensures that all the actions of the company adhere to its mission. The board of directors has the power to change the organization’s mission, but only after careful deliberation and proper procedure.
2. It is the board of directors who have the authority to terminate the services of its chief executive officer or CEO
3. The board of directors is not responsible for the daily activities of a company, nor is it involved in the day-to-day decision-making process. It is handled by the various managers and executives of the organization. Only the overall responsibility lies with the board of directors. They are entrusted with reviewing all the actions of the executives and officers.
4. The board of directors ensures that the organization has an adequate number of financial resources for running business activities smoothly.
5. It is the one assigned with the power to approve the annual budget in an organization
6. One of the significant board of director’s responsibilities is regarding the General Manager or the CEO of the organization. It is entrusted with hiring the perfect candidate for the job. Identifying the person who is capable of upholding his position admirably is no mean feat. The board has to look at various aspects like his qualification, experience, modus operandi, and past results before determining whether he will be a perfect fit in the company or not. The responsibility of the board of director extends to retaining the services of the CEO, supervising his work, evaluating his work at regular intervals as well as for deciding on his compensation package.
7. The board of director’s responsibilities comprises fulfilling a fiduciary duty in the organization. It takes care of legal requirements and finances and acts in good faith. It is there for protecting the interest of the investors and hence makes sure that all the assets are in order. The assets include human capital, equipment, and facilities, as well as plant and machinery. The board members mustn’t have any conflict of interest, and all organizational matters should take precedence over the individual interests of all the board of directors.
8. The board of directors is entrusted with evaluation and paying of dividends as well as the recommendation of stock splits. It also oversees work related to share-repurchase.
9. The board of director’s responsibilities also includes discouraging or recommending matters related to mergers and acquisitions.
10. One of the other significant boards of director’s responsibilities is establishing a governance system that is based on a series of policies. It creates policies that will act as a guiding force for all the board members as well as the action of the General Manager or the CEO. The policies are often broad so that the board and the manager have some leeway in achieving the goals and objectives of the organization.
11. Another responsibility of the board of directors is to create a governance system where it clearly states how the board of directors is going to interact and communicate with the CEO or the General Manager of the company. In some cases, the meetings are held once a month, and sometimes it varies from four to eight meetings on an annual basis. The board is, however, informed about all the important decisions through phone or emails / postal mails.
12. The board of director’s responsibilities also includes taking charge of the auditing process. It ensures that the audit is conducted promptly every year. It is the board of directors who hire an outside company and work with it. It is the one who approves the financial statements of the company.
13. The board of directors oversees the appointment or election of key officers and executives at annual meetings.

Conclusion

The board of directors is a governing body that is created for the help and benefit of all the stakeholders in an organization.

A board has a clear idea of its responsibilities and expectations, and this is why it offers qualitative value so that the company can work in the best possible manner.