Business, Legal & Accounting Glossary
Board of directors refers to a group of people that are elected by shareholders of a company who make decisions affecting the company’s business on behalf of the shareholders. The board of directors meets regularly to discuss governance issues, compensation packages and general business activities. The board of directors can make decisions that directly affect a stockholder, such as when or if to pay out a dividend. The board of directors carries out these tasks according to the company charter. The board of directors can also hold emergency meeting sessions and vote on an issue that may need immediate attention. Every publicly-traded company must have a board of directors. Shareholders usually vote for their board of directors through a proxy statement that is sent to them in the mail each year. The shareholder can also attend this annual board of directors meeting usually held at the company’s headquarters to vote in person.
A board of directors is a group of individuals chosen by the stockholders of a company to promote their interests, or in the case of a not-for-profit corporation by its members, by the previous Board or through some other mechanism in its by-laws or by statute in the case of a public corporation. In the United States and most other industrialized countries, the board hires a CEO, President, and other professional managers to run the day-to-day operations of the company, while the board retains a high-level form of oversight. Typically corporate boards are involved in issues of ownership, strategy, financing, and mergers and acquisitions.
The actual power held by the board of directors varies widely from company to company. In some companies, the board of directors form a powerful body to which senior management is subservient. Other times, the board is a formality which merely rubber-stamps decisions of the CEO and senior management.
The board is run by the chairman of the board who may or may not be an employee of the company. In larger companies, the board is partitioned into several committees with specific tasks. For example, a compensation committee is commonly formed to make decisions regarding salary and stock allocations for top management (and sometimes for the entire employee pool). Others might include a legal affairs committee, and a mergers and acquisitions committee.
It is widely considered good management practice to create a board of directors with persons with expertise from diverse backgrounds and to have outside directors who can provide a perspective on a situation which is independent of management. For example, it is extremely common for a good percentage of the boards of most large corporations to be from academia, especially business schools. Sometimes relatives of powerful politicians are selected to serve on boards, such as when Hillary Clinton served on the board at Arkansas-based Wal-Mart while her husband, Bill, was Governor of Arkansas.
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This glossary post was last updated: 20th February, 2020