The Roles, Structures, and Duties of a Board of Directors

There are certain ideas in business that take on an air of mythology. The boardroom is one of them. Conversations surrounding boards of directors aren’t always productive or useful. From the TV show Succession to drama-laden news headlines,  board construction and processes are often discussed in sensational rather than informative ways.

Regardless of their popular image, boards serve a very important purpose in business. They deserve conversations that clearly outline their function and benefits. That starts with laying out some very basic definitions.

Why Do Companies Form Boards?

One of the first acts of a new corporation is to set up a board of directors. A board is an elected group of individuals that represents shareholders, who are the owners of the company.

The role of the board is to oversee the corporation through its mission to the shareholders. Their mandate is to protect the value of the company today and tomorrow for those shareholders. As a governing body, they typically meet at regular intervals to set policies for corporate management and oversight.

Issues and responsibilities that fall under a board’s control usually include:

• Hiring and firing of senior executives
• Dividend policies
• Options policies
• Executive compensation
• Setting broad goals
• Supporting executive duties
• Ensuring the company has adequate, well-managed resources

The individuals selected to be on the board have an overall responsibility for the activities of the corporation, but they do not participate in day-to-day decision-making. The corporation’s executives and managers make those choices.

General Board Structure

The structure and powers of a board are determined by an organization’s bylaws. The bylaws establish the specific duties and rules of procedure for the board.

Bylaws typically set certain kinds of rules. This may include:

• The number of board members
• The manner in which the board is elected (e.g., by a shareholder vote at an annual meeting)
• How often the board meets
• What to expect from those meetings

While the law does not prescribe a specific number of board members, most private company boards range in size from 1 to 11 members. They often include an odd number of individuals to avoid ties in voting.

State law, however, often ‘fills the gaps’ by providing certain provisions that the bylaws must not or cannot dictate.

Size Matters

Startups or small corporations typically build a small board, which may include as few as one to three people. Such boards are usually a legal formality since the shareholder(s) and the board member(s) are often one and the same.

This dynamic quickly changes when the company has enough owners such that economic ownership and managerial control are no longer identical. This invites both legal and operational changes to the board.

In this context, the shareholders or a subset of shareholders may have appointed or elected individuals to the board who are directed to act on their behalf. Acting ‘on their behalf’ refers to all shareholders, and not necessarily the majority shareholder or one that elected them. Board members make decisions based on their own experience and viewpoints, which may not align with the beliefs of any particular shareholder.

For mature corporations, the typical size of a board is between 5 and 9 individuals. That structure may grow larger if several committees (e.g. compensation or audit) become necessary.

A mature board is usually a representation of both management and shareholder interests. It includes both internal and external members.

Let’s Talk Directors

The title of ‘director’ is literally baked into the term Board of Directors. However, not all directors are cut from the same cloth, serve the same role, or hold the same responsibilities. Their differences matter.

Internal Director

An internal or inside director has the interest of major shareholders, officers, and employees in mind. Their experience within the company arguably adds value. An insider director typically does not receive compensation for board activity, as they are often already a C-level executive, major shareholder, or other stakeholder, such as a union representative.

Independent Director

Independent or outside directors do not involve themselves in the day-to-day inner workings of the company. These board members are reimbursed for costs and often receive additional compensation in the form of cash and/or equity for serving on the board.

Ideally, an outside director brings an objective, independent view to goal-setting and settling company disputes. The most successful boards typically strike a balance between internal and external directors.

Who Gets a Seat? Selecting a Board of Directors

Building a board requires balancing business interests, relationship politics, and more. Some inclusions are inevitable. Others require strategic consideration.

When selecting independent or outside directors, most corporations seek expertise in a specific area they might otherwise lack. These qualities may include:

• Professional expertise in an important area (a lawyer, accountant, etc.)
• Leadership and management experience, especially in related businesses
• Commitment to the business
• Time and energy to devote to board duties
• Integrity and lack of conflict of interest
• Ability to raise money for the corporation

Other factors may also play a role in board seat allocations, but these get top billing. Decisions about board seats outside this scope may invite scrutiny.

The Job: Expectations of Directors

Being a board member often gets characterized as a ‘resume booster’ – and for good reason! In theory, you receive a seat because you bring something exceptional to the table.

However, that seat does not come without strings attached. The company expects you to deliver on several important fronts.

Fiduciary Responsibility

Corporate board members have a fiduciary responsibility to care for the finances and legal requirements of the corporation. They must act in good faith and with a reasonable degree of care.

Crucially, they must not have any conflicts of interest. The company’s interests must take precedence over the personal interests of individual board members.

Mission and Vision

Board members set the mission of the company. That means they must affirm that all actions are related to and align with that mission. Board members are thus in the difficult position of having to gauge large-scale decisions according to the agreed-upon direction.

The board can change the mission, but this should only occur after careful deliberation. Such choices tend to be rare and for very good reasons. They are complex in nature, and this speaks to the gravity of responsibility shouldered by board members.

Annual Meeting

Big brands often draw huge audiences with their annual meetings. Organizations like Berkshire Hathaway livestream their annual meetings to huge audiences because their speakers represent the financial clout of the organization.

However, annual meetings are more than a function of PR. They hold serious significance beyond the spectacle.

The board should hold meetings at least annually. At the annual meeting of the corporation, the board will typically:

• Discuss overall company performance
• Discuss the issuance of a dividend
• Oversee an election of corporate board members
• Elect or appoint officers and key executives
• Amend the bylaws

Liability of Board Members

Corporate board members have a good deal of latitude within the scope of their duties. After all, they must be free to act in the interest of the shareholders, run the corporation in the best way they see fit, and take appropriate risks to help the company grow.

That does not mean that their choices are beyond scrutiny. Directors can be sued individually for acts or errors committed while attempting to fulfill their fiduciary duties on the board.

Many corporations include officer and director liability insurance in their insurance packages for this exact reason. Such insurance does not cover all acts. Willful misconduct, for instance, typically gets excluded. In certain instances, directors may be held personally liable. If a director or officer is found liable for a wrongful act, their personal assets may be used to pay damages to the plaintiff.

Advisory Boards

Fiduciary mandates do not form the foundation of all boards of directors. Corporations and other business entities will sometimes utilize a non-fiduciary advisory board.

Advisory boards often have the same considerations as fiduciary boards as to duties, makeup, compensation, etc. The main distinction is that advisory board decisions merely serve as recommendations rather than binding decisions. Fiduciary boards will often defer to the recommendations of the advisory board in making decisions. However, they must affirmatively take the step of approving or implementing those proposals.

Advisory board tasks are usually project-based. This can include everything from what new product or service the company should develop, to acquisition targets, to what priorities the company should focus on for the next 12-18 months, and beyond. Members should and often work with C-level executives on their projects and usually report directly to the fiduciary board.

It is important to note that corporations sometimes will simply utilize committees of the main fiduciary board for a function similar to that of an advisory board. This often depends on the available time and expertise of the board members themselves. In addition, how formally an advisory board functions will vary greatly depending on the size, sophistication and personality of the company itself.

A Note About Boards During Insolvency

The role and independence of the board expands even further when the company is insolvent or nearly so.

A detailed discussion of this issue is beyond the scope of this article, however in general terms, the fiduciary duties of the board shift from representing the shareholders to preserving the company’s assets for the benefit of creditors.

The shift in duties is an effort to protect creditors when a corporation enters the zone of insolvency. This is because the creditors replace the shareholders as residual claimants on a corporation’s cash flow.

Board Definitions Matter

None of the above commentary should be taken as gospel. In any company, the board of directors will ultimately be shaped by its founders and organizational direction. The discussions here serve as guidance for parsing the board structures of companies that are being considered by investors.

However, they can also offer instruction. If you are in the process of preparing a company for acquisition, then it is important for you to make sense of the variables highlighted in this article.

The concept of a board did not come out of nowhere. Boards of directors offer significant benefits when they are structured properly. That starts with understanding the language involved in their design.

We think you’ll also like:

1. C-Suite to Boardroom: The Traits an Experienced Executive Needs to Be an Effective Director
2. Psychology of a Private Company Board Part 2: Family-Owned Businesses
3. Non-Executive Directors Provide Leadership When It is Needed Most

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Board Of Directors Boot Camp / Roles & Responsibilities: a Primer
2. Bare Bones Board Basics: Episode 16: Protecting the Director- The Basics of Indemnification and D&O Insurance
3. Bare Bones Board Basics: Episode 14: Boards in Bankruptcy

This article was originally published on June 5, 2023.]

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