20 FAQ’S About Corporate Boards

 

1) What is a board of directors?
A board of directors is an elected group of individuals that represent shareholders. The board is a governing body that sets policies and oversees corporate management. The board is responsible for protecting investors’ interests. Every public company must have a board of directors. Many private companies and nonprofit organizations also have board of directors. (Investopedia)

2) What is the difference between corporate boards and non-profit boards?
In general, corporate directors of public companies focus on growth strategies and generating profits to return to shareholders in the form of stock equity and dividends. Nonprofit board members do not seek to maximize and disperse profits but are focused on raising funds for programs and services to constituents. For-profit board members are often paid; non-profit board members usually are not.

3) What does a board of directors do?
Corporate boards hire, manage, and terminate the Chief Executive Officer. Boards are responsible for the compensation and incentive plans for senior executives, ensuring that financial resources are available. Boards review and approve annual budgets and company financials, and guide the CEO and senior management regarding strategic decisions.

4) What is the role of the board’s Chairman?
The chairman of the board (or chair) directs and facilitates the meetings of the board. The chair determines board composition and organization, oversees board and management responsibilities, plans and manages committee meetings, and develops the effectiveness of the board. In some corporations, the CEO also serves as chairman; in other companies the role is separated.

5) What is the difference between the CEO and the Chairman?
A CEO is the company’s top decision maker. All other executives answer to him or her. The CEO is accountable to the board of directors for company performance. The chairman of the company is the head of the board of directors. Chairmen are usually elected by the board. Board members are selected by the Nominating/Governance Committee, and then approved by shareholders at the annual meeting.

6) How many members does a board of directors usually have?
Boards usually have between 7 and 12 members; some boards have as few as 4 members and some have as many as 30. The average board size of the Russell 3000 companies is 8.9 members. Some analysts think boards should have at least 7 members to satisfy board roles and committees requirements.

7) How do I find out how many women are on a board of directors?
To find the number of women serving on the boards of Russell 3000 companies, check our Gender Diversity Directory on this website. Or, check the company’s website under the investor relations or corporate governance tab. You can often identify the women by their names, but if not, you can find the company’s 10K document online and read their bios.

8) What do corporate board committees do?
There are four primary board committees: executive, audit, compensation, and nominating/governance. The executive committee is a small group of directors who can implement the board’s fiduciary and strategic policies when the full board is not available. The audit committee reviews the financial statements with internal auditors and outside audit companies. The compensation committee determines the salaries and bonuses of top executives and the board itself. The nominating committee decides the slate of directors for shareholders to vote their approval. There may be additional committees created depending on corporate philosophy and special circumstances relating to a company’s line of business.

9) What’s the difference between independent directors and inside directors?
An independent director, or outside director, is a member of a board of directors who does not work for the company. Independent directors are important because they bring diverse and backgrounds to decision making and are unbiased. Independent directors are paid a standard fee for each board meeting. Inside directors are often members of the corporation, usually part of the corporation’s management team. There may also be familial connections with the CEO which would suggest that the director is not “independent,” or free of influence or potential conflicts.

10) What are corporate bylaws and why are they important?
Corporate bylaws are rules that govern how a company operates. Bylaws state the rights and powers of shareholders, directors, and officers. If a board wishes to change its bylaws, it is often necessary for shareholders to vote to approve the change.

11) When might a conflict of interest arise?
Conflicts of interest occur when the personal or professional interests of a board member or senior executive are potentially at odds with the best interests of the corporation. Conflicts of interest often result in loss of public confidence and a damaged reputation.

12) What are the qualifications to serve on a corporate board?
Board members must bring senior level executive or other equivalent professional experience in key areas that are beneficial to the company. Directors must be able to read, understand, and offer suggestions and comments on financial statements. Although not required, board members should reflect the constituents that a company serves, including ethnic diversity, gender, and age.

13) How are new board members chosen?
Public company directors are selected based on criteria set by the nominating committee. Most new directors are chosen for their expertise in key areas that are useful to the corporation. Very often, CEOs and board chairs select directors they know. Sometimes they turn to executive search firms to find qualified candidates that meet their search criteria. There is increasing pressure to have gender representation on boards, so directors are expanding their search and are now looking outside their personal networks to find qualified women.

14) How has the role of the board of directors evolved over the years?
Many years ago, boards were comprised of employees, family members, and friends. But shareholder influence and government regulation now require boards to have independent directors not associated with the company or its executive team. Today, there are many shareholder resolutions requiring companies to diversify their boards and appoint directors of different backgrounds, gender, and race.

15) What is the time commitment expected of a corporate board director?
Board directors must be able to dedicate the time necessary to responsibly fulfill their commitment to the company. This includes board training, analyzing financial statements, reviewing board documents before board meetings, attending board meetings, serving on committees, participating in special meetings or phone calls, and doing whatever else the company requires. Most boards meet at least four times a year and some meet monthly.

16) Are there personal and professional benefits to serving on a corporate board?
Serving on a corporate board signals that you are at the top of your career. Board service can provide you with valuable career recognition. Being elected to serve on a board demonstrates that your skills are valued outside your own organization. Directors meet interesting people and grapple with interesting issues.

17) Are corporate board directors compensated?
Corporate board directors are well compensated, and compensation is often determined by the size of the company. It’s not unusual for corporate directors of large companies to be paid $100,000 or more for each year they serve. They are often granted stock options, which can become very valuable.

18) Do boards have term or age limits?
Some boards have term limits and age limits and others do not. The National Association of Corporate Directors recommends term limits of 10 to 15 years to promote turnover and obtain fresh ideas. Age limits range from 70 to 80 years old, and many companies have no limit. Without term or age limits, it is often difficult for companies to suggest that current board members should retire or step down making it more difficult for women to enter the boardroom.

19) How do boards of directors affect people and communities?
Boards of directors guide corporate behavior. Decisions made by the boards of public companies can directly impact our daily lives. For example, a board might approve decisions to close or relocate factories or merge with other companies, which could result in loss of jobs in a community. Good companies often provide financial support to non-profit organizations in their communities.

20) Are boards required to consider diversity when electing directors?
With a few exceptions, there are no rules about board composition, but it is well recognized that diversity on boards contributes to better decision making. In 2018, California became the first state in the nation to mandate that companies headquartered there have gender diverse boards or pay a penalty. Other states are considering similar legislation.