A board of directors is a group of people who jointly supervise the activities of an organization, which can be either for a profit business, nonprofit organization, or a government agency. The board of directors appoints the chief executive officer of the corporation and sets out the overall strategic direction.
A board of directors is a team of people elected by a corporation’s shareholders to represent the shareholders’ interests and ensure that the company’s management acts on their behalf. The head of the board of directors is the chairman or chairperson of the board.
Key Takeaways
- The board of directors is elected to represent shareholders’ interests.
- Every public company must have a board of directors composed of members from both inside and outside the company.
- The board makes decisions concerning the hiring and firing of personnel, dividend policies and payouts, and executive compensation.
Composition of Board of Directors
The board of directors is called the brain of the company. They are responsible for taking all the big decisions and making policy changes. These decisions are taken in special meetings, members of the board hold together, called ‘Board Meetings’.
Section 149 of the Companies Act, states that every company’s board of directors must necessarily have a minimum of three directors if it is a public company, two directors if it is a private company, and one director in a one person company.
The maximum number of members a company can assign as directors is fifteen. However, the company can pass a special resolution in a general meeting to allow for assigning more than fifteen members to the board of directors.
The maximum number of companies that an individual can become a director of, is 20 companies.
At least one director, who has lived in India for a minimum of 182 calendar days of the previous year, shall be appointed by every company’s board. It is a mandatory rule.
At least, one woman director must be appointed by the company.
All listed companies must have at least one-third proportion of their board of directors as independent directors.
The board of directors’ key purpose is to ensure the company’s prosperity by collectively directing the company’s affairs, whilst meeting the appropriate interests of its shareholders and stakeholders. The chairman of the board is often seen as the spokesperson for the board and the company.
Directors have a duty to attend meetings where they are reasonably able to do so. Often the Articles will provide that Directors can be removed if they do not attend meetings for a certain period. Normally, a Board meeting can be called by the company secretary, or any Director.
A directorship is an office, not necessarily an employment. If, however, the company enters into a service contract with the director, the terms of which make the director an employee under the usual common law test, then the director becomes an employee. Many company directors are in this position.
The bylaws typically state who can call a board meeting; this is usually the board chairperson or board president. About a week before the meeting, the board secretary should ask board members for any items that they want added to the agenda.
The CEO cannot fire the Board; in fact the Board hires and fires the CEO. If the CEO is unhappy with a Board member, he can approach the Chairman and ask him/her to review the Director’s performance. If lacking, then the Director need not be nominated to stand for election at the next Annual General Meeting.
Typical inside directors are: A chief executive officer (CEO) who may also be chairman of the board, other executives of the organization such as its chief financial officer (CFO) or executive vice president and Large shareholders (who may or may not also be employees or officers).
The board of directors has more power than the CEO because the board can fire the CEO. However, there is one more group that has more power than the CEO or the board of directors. That’s right… The investors have the most power, more than the CEO and more than the board of directors, in any company.
Main function of the board of directors
The board of directors’ key purpose is to ensure the company’s prosperity by collectively directing the company’s affairs, whilst meeting the appropriate interests of its shareholders and stakeholders. The Roles of the Board of Directors are below:
- Recruit, supervise, retain, evaluate and compensate the manager. …
- Provide direction for the organization. …
- Establish a policy based governance system. …
- Govern the organization and the relationship with the CEO. …
- Fiduciary duty to protect the organization’s assets and member’s investment.
Election and Removal Methods of Board Members
While members of the board of directors are elected by shareholders, which individuals are nominated is decided by a nomination committee. In 2002, the NYSE and NASDAQ required independent directors to compose a nomination committee. Ideally, directors’ terms are staggered to ensure only a few directors are elected in a given year.
Removal of a member by resolution in a general meeting can present challenges. Most bylaws allow a director to review a copy of a removal proposal and then respond to it in an open meeting, increasing the possibility of a rancorous split. Many directors’ contracts include a disincentive for firing — a golden parachute clause that requires the corporation to pay the director a bonus if they are let go.
A board member is likely to be removed if they break foundational rules; for example, engaging in a transaction that is a conflict of interest, or striking a deal with a third party to influence a board vote.
Breaking foundational rules can lead to the expulsion of a director. These infractions include but are not limited to the following:
- Using directorial powers for something other than the financial benefit of the corporation.
- Using proprietary information for personal profit,
- Making deals with third parties to sway a vote at a board meeting.
- Engaging in transactions with the corporation that result in a conflict of interest.
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