Corporate Board of Directors: Everything You Need to Know
A corporate board of directors are a group of people that are elected to represent the shareholders in a corporation. 3 min read
Corporate Board of Directors
A corporate board of directors are a group of people that are elected to represent the shareholders in a corporation. Specifically, when a corporation is formed, an Articles of Incorporation will be drafted and filed with the Secretary of State. This document will include information regarding the company’s name, address, board of directors, officers, shareholders, etc. After the board of directors are hired, they will operate as the controlling body of the corporation with full oversight over the significant business decisions. Furthermore, the board of directors will hire officers who will oversee the daily operations of the corporation.
How They Work with ShareholdersWhat Does the Board Do?
The board is required to create policies and procedures regarding the company and those major decisions that need to be made for every business. They are there to work for the interest of the shareholders/owners. It is important to stress that the board of directors have entirely different responsibilities than the officers. The officers will have daily oversight of the company. Such officers could include the following:
- Chief Executive Officer (CEO)
- Chief Compliance Officer (CCO)
- Chief Financial Officer (CFO)
- Chief Operating Officer (COO)
There are several other titles for officers; in fact, there could be hundreds of officers for a company, depending on the size of the corporation. Regardless, the officers are hired by the board of directors to help the company run smoothly. The board will have oversight into the major business decisions, i.e., new contracts with vendors, issuing additional shares, merging or acquiring another company, etc.
While some corporations can have many officers, other smaller corporations might have only one officer. In fact, smaller corporations might have one board member who is also an officer of the company. Some corporations might choose to have a board of directors who also all operate as officers of the business. Generally, the more complex and larger the corporation, the more people on the board. When a business has more people on the board, they might hire additional officers who each have oversight of a specific department.
How They Work with Shareholders
The board of directors has a fiduciary responsibility to the shareholders, including a duty of care and loyalty. Therefore, the board must ensure that they make decisions that won’t cause the shareholders to lose money. While this might in fact occur, a shareholder can’t bring a lawsuit due to the mere fact that their shares went down in price. Only if the board members, either as a whole or individually, breached their duty of care and/or loyalty, can they bring a lawsuit against the board member(s).
When determining if the board breached their duties, the shareholders should look to the corporate bylaws, which will identify all duties and responsibilities of the board, along with the officers of the corporation. The bylaws will also identify procedures for certain occurrences. Such procedures could include voting procedures, moving the headquarter offices to a new state, changes in products or services offered, etc.
The board of directors generally don’t have much liability. Their scope of duties vary and can be so complex that a court of law will likely give the board great autonomy in determining the major business decisions as they see fit. Since the board is instructed to act in the interest of the shareholders, they will need to make significant decisions with their interests in mind to ensure that the company operates at its best and continues to make a profit. However, there is always going to be an inherent risk when making such decisions. Therefore, courts are less likely to interrupt the flow of decision-making unless the board has significantly breached their fiduciary duty of loyalty and care.
Most corporations include liability insurance for officers and the board of directors; however, this might not necessarily protect certain board members or officers in a lawsuit regarding fraudulent or illegal acts. Furthermore, keep in mind that such officers and board members can be sued individually for acts conducted on behalf of the business. If the court finds in favor of a shareholder, then the defendant’s personal assets could be used to pay the damages.
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