20 FAQ’S About Corporate Boards

 

1) What is a board of directors?
Every public corporation is required to have a governing board of directors comprised of a group of senior advisors to the CEO, who represent the shareholders. Private companies are not required to have boards, although many of them do.

2) What is the difference between a for-profit “corporate” board and a nonprofit board
For-profit board members often are paid; nonprofit board members generally are not. 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 to provide grants, programs and services to their constituents.

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 (or Chair) of the board is the leader of the board, and facilitates and directs the board meetings. 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 a company is the head of its board of directors. Board members are selected by the Nominating/Governance committee, and then approved by shareholders at the annual meeting. The Board is responsible for protecting investors’ interests. The board selects the Chairman.

6) How many people are typically on corporate boards?
Boards typically have between 7 and 12 members, although some boards have as few as 4 and as many as 30 members. The average board size of the Russell 3000 companies is 8.9 members. Some analysts think boards should have at least seven members to satisfy the board roles and committees.

7) How do I find out how many women are on a company’s board of directors?
Check the 2020WOB.com website for the statistics if the company is on the Russell 3000. For any company, check its website under Investor Relations tab or Corporate Governance. 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. Bloomberg also lists the directors of every public company.

8) What are corporate board committees?
The four primary board committees are: executive, audit, compensation, and nominating/governance. There may be additional committees created such as enterprise risk or technology depending on corporate philosophy and special circumstances relating to a company’s line of business. It’s usually recommended that the compensation and audit committees be made up of independent directors. The executive committee is a smaller group that might meet 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, including the board itself. The nominating committee decides the slate of directors for the shareholders to vote their approval.

9) Why are some board members considered independent and others are not?
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 backgrounds to decision making and are unbiased regarding company decisions. Independent directors are paid a standard fee for each board meeting. Inside directors are members of the corporation, usually part of the corporation’s management team, and not considered independent. There may also be familial connections with the CEO which would determine that 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 the board wishes to change bylaws, they sometimes need to have shareholders approve any changes.

11) What is conflict of interest?
Conflict of interest occurs 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. A conflict of interest might occur if two CEOs sit on each other’s boards.

12) What are the qualifications to be on a corporate board of directors?
Relied upon by the CEO and shareholders, board members must bring executive experience 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 constituents that a company serves, including ethnic diversity, gender, and age.

13) How are new board members chosen?
In a 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 already know. Or, they will 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 now looking outside their personal networks to find qualified women.

14) How has the role of the board of directors evolved over the years?
Decades ago, many boards used to be 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 of a board member?
Board directors must be able to commit the time necessary to responsibly fulfill their commitment to the organization. This includes board training, analyzing financial statements, reviewing board documents before board meetings, attending board meetings, serving on committees to which they are assigned, 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) What are the personal and professional benefits of being on a corporate board?
Being asked to serve on a corporate board is flattering. It shows that your skills are valued outside your own organization. Directors meet interesting people and grapple with interesting issues. Independent directors are often well paid.

17) What compensation are board members paid?
Corporate 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 each year they serve. They often are also granted stock options, which could 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 to current board members that they should retire or step down, or plan 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. A number of states have mandated that companies have gender diverse boards so companies in those states will need to add women or pay a fine.