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Board of directors

From Academic Kids

A board of directors is a group of individuals chosen by the stockholders of a company to promote their interests through the governance of the company. Board members in most legal jurisdictions have specific fiduciary duties, whereby they act for the benefit of others.

In the United States and most other industrialized countries the board hires a chief executive officer (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. Often the CEO serves as the chairman. Some hold that this is inappropriate in a publicly-held company, for, they contend, it gives management too much power over the board, which is supposed to provide oversight of management.

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 from 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.

Scandals

While the primary responsibility of boards is to ensure that the company's management is performing its job correctly, actually achieving this in practice can be difficult. In a number of "corporate scandals" of the 1990s, one notable feature revealed in subsequent investigations is that boards were not aware of the activities of the managers that they hired, and the true financial state of the company. A number of factors may be involved in this tendency:

  • most boards largely rely on management to report information to them, thus allowing management to place the desired 'spin' on information, or even conceal or lie about the true state of a company.
  • Boards of directors are part-time bodies, whose members meet only occasionally and may not know each other particularly well. This unfamiliarity can make it difficult for board members to question management.
  • CEOs tend to be rather forceful personalities. In some cases, CEOs are accused of exercising too much influence over the company's board.
  • Directors may not have the time or the skills required to understand the details of company business, allowing management to obscure problems.
  • The same directors who appointed the present CEO oversee their performance. This makes it difficult for some directors to dispassionately evaluate the CEO's performance.
  • Directors often feel that a judgement of a manager, particularly one who has performed well in the past, should be respected. This can be quite legitimate, but poses problems if the manager's judgement is indeed flawed.
  • All of the above may contribute to a culture of "not rocking the boat" at board meetings.

Because of this, the role of boards in corporate governance, and how to improve their oversight capability, has been examined carefully in recent years, and new legislation in a number of jurisdictions, and an increased focus on the topic by boards themselves, has seen changes implemented to try and improve their performance.

See also

nl:Raad van Bestuur

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