What Decisions Are Made by a Corporation Board of Directors?
What decisions are made by a corporation board of directors include those that guide the direction and oversee the activities of the business.3 min read
2. Board Committees Types and Functions
3. The Board of Directors' Role
4. Board of Director Benchmarks
5. When Are Board of Director Approvals Required?
Updated November 3, 2020:
What decisions are made by a corporation board of directors include those that guide the direction of the company, represent its shareholders, and oversee the activities of a for-profit or nonprofit entity.
A board of directors is established to protect the interests of both the investors and the corporation itself. Shareholders elect board members. These individuals are expected to maintain the company's stability and profitability. Public companies are required to have a board of directors. Private companies often have boards but they are not required to do so.
What Makes Up a Board of Directors
Boards of directors usually have between seven and 15 members, but can have up to 31 members. While there are no set rules when determining board composition, it has been shown that increased board diversity results in better decision-making for the corporation. The Securities and Exchange Commission established "The Governance Disclosure Rule," which requires companies to take diversity into consideration when selecting candidates for nomination.
Board Committees Types and Functions
When establishing a board, there are four types of primary board committees: executive, audit, compensation, and nominating. Other types are possible and can be chosen based on the overall corporate philosophy and the line of business the company is in.
- Executive committees are a smaller subset that meets if the full board is not available to attend.
- Audit committees review necessary financial statements with internal and outside audit companies.
- Compensation committees oversee decisions related to salaries and bonuses of the board and top-level executives.
- Nominating committees take the lead in selecting candidates for available board of director openings.
In addition to establishing committees, there are differences in requirements and overall decision-making if the board is for-profit or nonprofit. These include:
- Nonprofit members are not paid, while for-profit members are.
- For-profit board members focus on how to maximize profits for shareholders, while nonprofit board members seek to further the overall positive effect on their community.
The Board of Directors' Role
A board of directors is put in place for specific purposes and roles:
- The first, and arguably the most important, role is the task of recruiting, supervising, retaining, evaluating, and compensating the CEO or general manager.
- Determining the organization's direction and strategy. This is completed with the CEO or general business manager to establish the vision, mission, and overall goals.
- Establishing rules that govern how the board interacts with the general manager or CEO and having a fiduciary responsibility to protect the organization's assets and the members' investments in the company.
- Making sure any audit is managed properly and completed in a timely manner.
Board of Director Benchmarks
A board of directors is designed to discuss and direct top-level topics that affect the company's future. In some instances, the board must take a more detailed approach to their involvement. This might occur if they get indications that management is off-course and negatively impacting the organization's goals and profits.
Benchmarks that should be used by a board of directors include:
- Large matters that affect the company's financial status.
- Long-term vision in relation to quality, growth, finances, and people.
- Maintaining the company's initial and continued mission.
- Focusing on high-level policy decisions while leaving lower-tiered matters to management.
- Conducting performance reviews to monitor trends that impact the company positively or negatively.
- Verifying management is keeping the board informed of any legal and media matters that can be brought by Congress, the IRS, the state attorney general, or media.
- Establishing and maintaining an open working relationship with the CEO in an effort to benefit the organization by removing any possible conflicts.
When Are Board of Director Approvals Required?
While the reasons for a board of director approval vary, examples include:
- Amendments to the certificate of incorporation or bylaws.
- Equity grants or transfers (stock options or warrants).
- Distributions to stockholders.
- Borrowing or lending money.
- Adopting an annual budget.
- Hiring, terminating or amending contracts of senior management.
- Adopting employee benefit plans.
- Sale or other distribution of assets of the company.
- A dissolution or winding up of the company.
- Entering into agreements that could be of material importance to the company.
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