What a Board of Directors Actually Does
Boards are often misunderstood as either rubber stamps or micromanagers. Here is what directors are responsible for, how boards work and when a small company might want one.
For many people, a board of directors is a vague idea: a group of important people who meet a few times a year somewhere with a long table. In practice, the board has a specific and essential role. It oversees the company on behalf of its owners. It does not run the business day to day, but it is responsible for making sure the business is run well.
Oversight, not operations
In a corporation, shareholders elect directors, directors appoint officers such as the CEO, and officers manage daily operations. The board sits in the middle. Its job is to set direction, monitor performance and hold management accountable. A useful shorthand: management runs the company, and the board makes sure the company is well run.
Core responsibilities
- Hiring and evaluating the chief executive. This is often described as the board’s most important decision, including planning for succession.
- Approving strategy. Management usually proposes the strategy, and the board questions, refines and approves it.
- Approving major transactions. Large financings, acquisitions, the sale of the company and the issuance of stock typically require board approval.
- Financial oversight. Reviewing financial statements, budgets and, in larger companies, working with auditors.
- Risk oversight. Understanding the significant risks the business faces and how management is addressing them.
- Compensation. Setting pay for senior executives and approving equity plans.
Fiduciary duties in plain terms
Directors owe fiduciary duties to the corporation and its shareholders. The two most commonly discussed are the duty of care, which means making informed decisions after reasonable diligence, and the duty of loyalty, which means putting the company’s interests ahead of personal ones and handling conflicts of interest openly. The precise rules vary by state and situation, so directors should get guidance from counsel when questions arise.
How boards do their work
Boards act as a group, usually by voting at meetings or by unanimous written consent. Individual directors generally do not have authority to bind the company on their own. Larger boards often form committees, such as audit, compensation and nominating or governance committees, to dig deeper into specific areas and report back to the full board.
Good boards receive materials in advance, ask probing questions and keep accurate minutes that record what was decided and why.
Does a small company need one?
Corporations are generally required to have a board, even if it is a single founder at first. LLCs are not, though some create a board of managers by agreement. Many private companies also build an advisory board, an informal group that offers expertise without the legal authority or duties of directors.
Whatever you choose, the value comes from honest outside perspective. If you are considering adding directors or advisors, talk with a corporate attorney about the right structure and the documents you will need.
