Why Do Corporations Need a Board of Directors?
Why do corporations need a board of directors? Corporations need a board of directors because while conducting business, companies can make costly errors. 3 min read
2. Five Benefits a Board of Directors Provides a Corporation
3. Further Questions About Why Corporations Need a Board of Directors
Updated November 3, 2020:
Why do corporations need a board of directors? Corporations need a board of directors because while conducting business, companies can make costly errors. Having a board of directors can prevent the company from making those mistakes; therefore, the absence of a board of directors is, in itself, a mistake. Entrepreneurs, Chief Executive Officers, and company founders tend to be single-minded in their pursuit to establish a business, and that is obvious because they had the diligence to take it upon themselves to strike out on their own and accomplish their goal.
Even though that is a strength of character, there is a downside to that trait, and that is stubbornness and short-sightedness that can cause bad decision making which can have a negative effect on the business. Having a trusted board of directors in place to help the entrepreneurs, CEOs, and company founders make objective decisions for the sake of the company will go a long way in preventing damaging consequences in the future.
What Is a Board of Directors?
A board of directors is a composition of people appointed as the representatives of a company's shareholders so they can make decisions on their behalf. The purpose of the board of directors is to create and implement policies to be upheld by company management and resolve major company problems. Some matters that the board of directors oversees include:
- Select, appoint, and review the chief executive's performance
- Terminate the chief executive
- Approve annual operational budgets
- Supply the company with competent financial resources
- Establish salaries, benefits, and compensation for upper management
- Creating and implementing policies and business strategies
Five Benefits a Board of Directors Provides a Corporation
1. Skills and Knowledge
Skills and knowledge are needed to operate effectively in a dynamic environment are available by a well-rounded board of directors, which allows the executive management to focus strategically on its business. Members of the board can also supply the corporation with valuable business contacts and networks.
2. Corporate Authority
Corporate authority is supported by governance, which is a set of rules, principles, and procedures that directs and controls a company as to how it can operate efficiently and increase its value. It constitutes a plan for balancing the expectations and concerns of those who have an interest in the company like shareholders, the board of directors, all levels of management, employees, clients, suppliers/vendors, financial institutions, government, and the community.
3. Independence and Culpability
Ideally, the board of directors is independent so they can act objectively in the best interest of the company, and they would have no conflicting interests that can adversely affect their judgment. The board of directors has a responsibility of advisory and oversight that's influenced by their legal obligations. Depending on the situation, the board of directors is responsible, either collectively or individually, for the corporation's performance, compliance, and risk alleviation strategies.
4. Strategic Management
The business strategy is a joint responsibility of the board of directors and the top management, with the degree of involvement of the board determined by the size of the company. The board of directors may have a more involved position in the strategies of the corporate business making sure that there is alignment with the whole of the company concerning the strategic goals and monitoring the implementation of the strategic procedure.
5. Credibility and Trustworthiness
A successful board of directors offers reliable and ethical decision making for the purpose of giving objective advice that reduces the probability of risk. Investors and financial institutions see that as an advantage which will contribute to the lowering of capital cost financing for a company. Employees, clients, and suppliers/vendors view it as a safeguard of their interests.
Further Questions About Why Corporations Need a Board of Directors
Having a board of directors is a necessity for the corporation to help them function at an optimum level because they can prevent costly mistakes from occurring in the future.
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