A board of directors is the highest governing authority for an organization, and as such, each of the directors should have a vested interest in the company. The board is appointed by the shareholders with the expectation that board directors will act within the best interests of the shareholders. In fact, board directors have a fiduciary duty to the shareholders under US law and the board is directly accountable to the shareholders.
Corporations hold an annual general meeting every year, the purpose of which is for the board to provide a report to the shareholders on various issues. At this meeting, the board and shareholders discuss various important issues, such as the performance of the company, future plans and strategies. This is also the time of year to elect or appoint new board directors where there are vacant seats.
The key purpose of the board is to ensure the company’s prosperity and sustainability by overseeing the company’s affairs and strategizing for success while meeting the interests of all shareholders and stakeholders to ensure that their interests are protected. Their duties entail dealing with business and financial issues, as well as other challenges and duties that are related to corporate governance, corporate social responsibility and corporate ethics.
In most cases, board directors will have individual areas of expertise, and the board expects them to share their knowledge and expertise as it applies to board discussions and debates. Board directors should also have the characteristic of being able to work well collectively with the other board directors and fit in well with the board’s dynamics.
The Role of Board Directors as it Relates to Board Structure
Board directors don’t get involved in the daily management of operations. Their role is to select and hire the most qualified individual or individuals to manage the company. Once the board has hired a chief executive officer or an executive director, they are responsible for monitoring and evaluating their performance, setting up a competitive compensation plan and firing them if necessary.
In addition to overseeing management, the board makes major decisions, such as recommending or rejecting mergers and acquisitions, with valuable input from the management team. The board is also responsible for monitoring the company’s financial position and approving financial statements.
Best Practices for Board Composition
Board terms are usually staggered to prevent a complete board changeover due to a hostile takeover. Candidates for board directors usually have some experience in upper management. That is one characteristic of board governance that has been changing in recent years. Today’s boards are more interested in composing the board they need. Sometimes, that means considering a board director candidate who doesn’t have any board experience at all, but who offers a high degree of expertise in an area in which the board is otherwise lacking, such as IT.
Having some number of independent board directors in the boardroom is considered a good thing regardless of what type of company or organization is under the board’s direction. The Securities and Exchange Commission (SEC) requires public companies to have the majority of their directors independent. Independent board directors put the shareholders’ interests first and they foster independent thinking and decision-making.
The reasons for having independent board directors are clear. In a perfect world, independent board directors won’t give in to pressure or groupthink. They’re more inclined to vote in the best interests of the shareholders, rather than with members of management or those who are entrenched with them.
By appointing independent board directors, boards will reduce the influence of board directors who are executive or financial officers of other companies who might be naturally inclined to support management’s perspectives.
Independent board directors also bring additional qualities into the boardroom. They should have a level of business expertise that ensures that their fellow board directors can understand the many complicated financial transactions and activities. Having a strong level of independence on the board also ensures that the company’s activities are presented accurately and transparently in the financial statements. Independent board directors are usually more diligent in seeing that share owner and investor views are being considered along with the perspectives of the accountants.
While all board directors should be bringing at least one area of expertise into the boardroom, in recent years it’s become more common for boards to expect board nominees to have multiple areas of expertise. Board structure best practices encourage actively recruiting college graduates who have a major in business and a minor in a related field like marketing, communications or cybersecurity.
One of the hottest topics on the issue of board structure is diversity. Shareholders and regulators have been increasing the pressure on boards to include more women, more people of color and a variety of individuals who come from varying ethnicities, cultures and backgrounds. The more diverse the board, the more diversity they get in expertise and perspectives.
Another issue that is changing board structure is related to board terms. Most boards are establishing term limits, so it gives them better opportunities to refresh the board as needed. Unlike boards of past decades, newly appointed board directors can’t expect to get automatically reappointed. Best practices for board tenure indicate that board directors should serve no longer than 12 years. As board retirement ages have been creeping up, some boards are now setting a maximum retirement age. The idea behind this is to open up vacancies for forward-thinking board members and board members who are younger and who may be better acquainted with digital technology, virtual entities and other contemporary issues.
Today’s boards are also looking at board candidate resumes for board directors who serve on too many boards. Technology has
made it possible to identify and recruit board directors who are highly qualified and are not serving on more than a few boards. This is important because board directors who are stretched too thinly cannot give each of their responsibilities the time and diligence that these positions require.
Today’s boards are approaching board refreshment in the same manner that they approach board succession. Good board member candidates are adaptable and can easily respond to the velocity of change that’s occurring in the corporate world.
With board structure best practices in mind, Diligent Corporation and the National Association of Corporate Directors (NACD)developed the Nom Gov tool in the United States to help modernize the boardroom and improve the level of board performance The tool gives nominating committees access to a global database of board and executive profiles, which allows them to maximize the board’s strengths. Nominating committees have many things to consider as they pursue composing the best-qualified board. Nom Gov is a valuable tool that makes their job efficient and productive.