What does the Board of Directors do
The Board of Directors is a group of people elected by the stockholders (the owners) to represent their interest.
The primary responsibility of the board of directors is to protect the shareholders’ assets and ensure they receive a decent return on their investment.
The board is responsible for hiring the CEO, setting compensation policies, determining dividends, and evaluating performance.
The board of directors is the highest governing authority within the management structure at any publicly traded company.
It is the board’s job to select, evaluate, and approve appropriate compensation for the company’s chief executive officer (CEO), evaluate the attractiveness of and pay dividends, recommend stock splits, oversee share repurchase programs, approve the company’s financial statements, and recommend or strongly discourage acquisitions and mergers.
Structure and Makeup of the Board of Directors
The board is made up of individual men and women (the “directors”) who are elected by the shareholders for multiple-year terms.
Many companies operate on a rotating system so that only a fraction of the directors are up for election each year; this makes it much more difficult for a complete board change to take place due to a hostile takeover.
In most cases, directors either,
(i) have a vested interest in the company,
(ii) work in the upper management of the company, or
(iii) are independent from the company but are known for their business abilities.
Committees on the Board of Directors
The board of directors responsibilities include the establishment of the audit and compensation committees.
The audit committee is responsible for ensuring that the company’s financial statements and reports are accurate and use fair and reasonable estimates.
The board members select, hire and work with an outside auditing firm. The firm is the entity that actually does the auditing.
The compensation committee sets base compensation, stock option awards, and incentive bonuses for the company’s executives, including the CEO.
In recent years, many boards of directors have come under fire for allowing executives salaries to reach unjustifiably absurd levels.
In exchange for providing their services, corporate directors are paid a yearly salary, additional compensation for each meeting they attend, stock options, and various other benefits. The total amount of directorship fees varies from company to company.
Ownership Structure and Its Impact on the Board of Directors
The particular ownership structure of a corporation has a huge impact on the effectiveness of the board of directors to govern.
In a company where a large, single shareholder exists, that entity or individual investor can effectively control the corporation.
If the director has a problem, he or she can appeal to the controlling shareholder.
In a company where no controlling shareholder exists, the directors should act as if one did exist and attempt to protect this imaginary entity at all times (even if it means firing the CEO, making changes to the structure that are unpopular with management, or turning down acquisitions because they are too pricey).
In a relatively few numbers of companies, the controlling shareholder also serves as the CEO and/or Chairman of the Board.
In this case, a director is completely at the will of the owner and has no effective way to override his or her decisions.
0 Comments