Board of Directors Role: Everything You Need to Know
The board of director's role is clearly defined by a company’s charter. This group hires the CEO, president, or general manager of the company.10 min read
What Is the Role of the Board of Directors?
The board of director's role is clearly defined by a company's charter. This group hires the CEO, president, or general manager of the company. The board also decides the strategy and thereby the future of the corporation.
What Else Does the Board of Directors Do?
The board of directors has several primary responsibilities. Those include:
- Recruit and oversee the CEO and other high-level positions in the company: The position of CEO or president is crucial to the success of a business. The board must find the right person to lead the company. Sometimes, that employee will work elsewhere. The board must entice the worker to leave a job to become the leader of the board's corporation.
- Choose the direction of the business: The board hires corporate leaders, but the directors maintain control over the company's future. Should a corporate officer fail to lead the business to the right outcome, the board has the right to replace the employee. The mission statement for a business comes from the board of directors.
- Writing and maintaining the charter rules for the business: The board creates policies that everyone must follow. Those policies are applicable to the CEO and members of the board, not just workers at lower levels of the company. The charter is a set of rules that have the intent of building a better business over time.
- Maintain a healthy relationship with the CEO of the company: The board's leadership is indirect. While the members plot the course of the company, the CEO has direct control over daily operations. The board must keep up a good working relationship with the CEO.
This alliance is crucial to the company's success. A CEO will need guidance on occasion. A meddling board that has a toxic relationship with the CEO, however, is a terrible situation for all involved.
The corporation usually struggles when the CEO and board of directors are at odds. The board holds meetings each year to receive updates on the company's status. The CEO attends these meetings, which the board usually holds between four and 12 times per year.
- Protect the financial assets of the corporation: Members of the board of directors are most likely to have an investment interest in the company. Protecting the assets is a way to assure that the investments are safe. The board receives regular updates on the status of expensive equipment, cash on hand, and employee talent. The board refers to its skilled workers as human capital.
- Marketing: The board is responsible for advertising the company's interests. The standard practice is to hire a marketing staff, a job duty that falls to the CEO. Still, the board has a vested interest in the company's marketing and must study the process.
- Monitor finances: The solvency of a business is what matters the most. The board must make sure that the company has enough money on hand to support and grow the business. The board also must study expenses and loans. A lack of capital in combination with too much debt will lead to bankruptcy. It's the board's duty to avoid this situation at all costs.
- Handle all audits: A business maintains control of the company's future through an auditing process. Each year, the board hires an auditor. That person's job is to judge the status of the company and suggest ways to improve the business. The board takes full responsibility for the decisions of the auditor. As such, this job is one of the most important hires after the company's officers.
- Evaluate itself: Poor performance from the board of directors will cripple a business. The board must have the willingness and professionalism to check its own performance. The auditor can help with this issue. A truly independent evaluator will point out mistakes that the board has made, too. These tips are extremely valuable in positioning the company for a better tomorrow.
What Is the CEO's Role?
The leader of the company generally has the title of CEO. Sometimes, this person receives the title of president or general manager, though. Whatever the job title, the CEO is the big boss of the company.
This leader oversees daily business operations. The CEO also has ultimate responsibility for the employment of everyone else in the company.
Other CEO duties are:
- Keep the board informed: While some boards need more updates than others, the leader of the company always has a primary job duty. It's to tell the board of any issues, good or bad, that will impact the company in a significant way.
- Present documents to the board: Paperwork is crucial to the board of directors.
- Create operational policies: While the board writes the charter, the CEO has the responsibility of writing and/or maintaining the employee handbook. This leader must also build a management strategy that syncs with the board's vision for the company. These operational policies often determine the overall success or failure of the business.
Which Situations Cause Problems for a CEO?
The worst problems a CEO faces are:
- A meddling board of directors: A CEO needs the ability to act as an independent thought leader. A board that interferes with daily operations causes problems on two levels. The board causes confusion about who is ultimately in charge. It also sends a mixed message to employees. They don't know whose direction they should follow, the board's or the CEO's.
- Poor policy decisions: Since the CEO handles all daily business operations, a series of mistakes can ruin the company. A CEO who makes a few policy mistakes also faces a cloudy future in the job. The board has the ability to remove any CEO who isn't doing the job well.
What Other Positions Does the Board of Directors Hire?
The CEO isn't the only job that the board hires. This group also chooses officers for the company. A few of the primary positions are:
- COO: The Chief Operating Officer manages daily affairs and reports directly to either the CEO or board of directors.
- CFO: The Chief Financial Officer handles all financial matters. Usually, these tasks involve accounting, treasury, revenue, and solvency. The CFO is the chief money person at the company.
- CTO: The Chief Technology Officer has become more important in recent years. The CTO is the point person for a company's technological development. Areas such as network security, cloud access, and online communication affect most major companies in the 21st century. The CTO position has grown in importance in tandem with the expansion of the internet.
- Secretary: This employee has the important task of maintaining all the important paperwork for a company.
What Is the Board's Responsibility in Technology?
The selection of the CTO is so important in the business world today due to the potential cost of a data breach. A single hacker could cost the company millions of dollars in lost earnings and negative headlines. The board's technology responsibilities are:
- Increasing security: A modern business must use secure methods, especially online. The board must spend all the money needed to protect its data from potential hackers. Security is one of the biggest priorities today.
- Preventing data breaches: This concept follows an increase in security. Data breaches can destroy a company, ruining its finances while causing embarrassing headlines. One of the first steps is to limit access to crucial information. Only skilled technology experts should have the ability to interact with that data.
- Employee education: The prevention of breaches involves more than great security. Teaching employees about potential breaches is important, too. Social engineering hacks can breach a company's system just as easily as programming hacks. The board must train employees about how to avoid getting tricked into letting a hacker into the system.
- Communicating with peers: The board will interact with experts from other companies. Many of these people have their own experiences with technology, security, and data breaches. Members of the board should try to learn as much as possible about data security and vulnerability from people outside the business. Then, they should take that information and apply it internally.
What Are the Primary Governance Models that a Board Can Employ?
The most popular models of directorial governance are:
- Community representation: The board represents an entire community and not an organization. This style of representation is best for situations like school boards or other areas of governance.
- Geographic representation: This sort of representation has an unusual board composition. Each member speaks for a certain geographic area or special interest group. The best-known version of this model is the United States Congress. Geographic representation requires a larger board than most other styles. A group of 24-50 members is standard. The flaw with this kind of representation is that each person focuses more on their region than the company as a whole. It's not the most practical governance style for this reason.
- Manager focus: CEOs prefer this style of board governance. The reason why is obvious. The leader of the company has ultimate authority on all matters. Manager focus has a reputation as a board of directors that agrees with everything the CEO suggests. That's a practice known as rubber stamping. The board has little power but instead, operates in more of an advisory role.
- Proactive board: A board that wants to have the best relationship with its CEO chooses this style. A proactive board speaks as one voice.
The CEO knows exactly what the board wants and expects in terms of job duties. The board knows that the CEO believes in these goals and has a solid awareness of job expectations. It's a transparent model that builds harmony at the top of the corporation. That harmony tends to spread throughout the rest of the company.
When Should a Board Take Action?
One of the roles of the board is to decide when to take action as opposed to when to stand aside. The guidelines are:
- Big issues matter more: The board shouldn't involve itself in the daily operations of the business. Some issues have a larger impact on the company's future, though. These matters are ones that the board should take an active interest in influencing. The board doesn't need to get involved with these issues. It simply needs to gather information so that the members of the board understand the company's status.
- Think about tomorrow: While the daily actions of the company aren't as important, its future is. The board of directors should always focus on long-term strategies. They should expect that the business will survive for decades to come. Their decisions should and governing style should reflect this longer timeframe. The board should also develop indicators to learn how carefully the business is following the plan for a better tomorrow.
- Remain true to the mission statement: The board defined the original rules for the company in the charter. The board bears the responsibility of making sure that the company is following those rules. A company must stay true to its initial vision to have the best chance to succeed.
- Support the CEO: Nothing sends the wrong message to the employees like infighting between the CEO and the board of directors. From the board's perspective, they chose the CEO. The members should trust their own judgment and believe in their hire.
How Are Nonprofit Boards Different?
A nonprofit organization has different goals and responsibilities from a for-profit business. In addition to the regular responsibilities of a board of directors, a nonprofit's members must:
- Fundraise: The most important task of a nonprofit is fundraising. Board members must do it, too. They must use all network connections to find the money needed to meet the company's mission statement.
- Oversee programs and handle outreach: A nonprofit must have a commitment to the community. Without that relationship, it will struggle to stay viable. The community will give many of the funds that a nonprofit needs to survive. No one will give unless the nonprofit has a strong outreach program.
- Act ethically: Whenever someone asks for money, people are naturally suspicious. Scammers have violated the trust of decent folks who donated out of kindness. A nonprofit must show that it's ethical and responsible with the donations it receives. Otherwise, people will stop contributing to fundraising campaigns.
All of these tasks are challenging. Most members of the boards of nonprofits don't receive any money for their efforts. The board members donate their time as a way to give back to the community. Still, the board has different duties than a for-profit board. These include:
- Act without self-interest: The board members of a nonprofit must work toward the best interest of the charity. They cannot perform any actions based in self-interest. Every decision must better the charity, not the board member.
- Follow strict laws: Local, state, and federal laws all have strong rules about what a charity can and cannot do. Members of the board must follow all laws, no matter how strange or frustrating they are. A nonprofit will suffer and possibly collapse if it gets into any legal troubles.
- Demonstrate that you care: The board must protect all assets of the nonprofit. Its members must also oversee the activities that make sure the charity has a great future. One of the ways the board makes this happen is by proving its passion to the community. Members must build goodwill with the locals.
What Is the Role of the Executive Director?
The members of the board of a nonprofit organization may not have the time or willingness to oversee all aspects of the company. In these situations, many companies hire an executive director.
This position functions as an entire board of members in one job title. Potential job duties include:
- Staff hirings: The executive director chooses the other people who will work for the nonprofit. These decisions are crucial to the success of the business. Unmotivated workers won't fundraise effectively. Motivation is also a key part of this job.
- Communicate with the board of directors: While the board may not choose to interact daily or even weekly with the charity, the members still want to stay informed. It's up to the executive director to relay the details of charity's progress to them.
- Create policies: The executive director has to create the rules and tactics that will help the nonprofit to meet its goals.
The executive director will also share some duties with the board of directors. Those include:
- Create a main purpose: The board and the executive director will define the ultimate goals of the nonprofit. The parties will also identify future strategies to help them meet the ultimate goal.
- Evaluate performance: This job is basically quality control. The board and executive director will have honest, straightforward conversations about the company's direction. They will decide whether the nonprofit is meeting its goals. They'll also grade the staff to see if anyone isn't living up to their job duties.
- Fundraising goals: A nonprofit will succeed or fail based on its fundraising ability. The board and the executive director share the onus in making sure that the fundraising strategies are working. If they're not, the two parties must change the rules to increase fundraising success.
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