10 Things About The Board of Directors

  1. Representative Democracy.  The primary purpose of the Board of Directors is to represent the shareholders, to protect their investments, and to ensure that they receive an adequate return.  Directors are elected by the shareholders to serve terms of one or more years, concurrently or staggered, as provided in the Bylaws.
  2. The Big Picture.  The Board of Directors is the highest governing authority in a company.  It is generally the Board’s job to hire, oversee and approve compensation for the Chief Executive Officer and other executives, to approve payment of dividends, and to recommend for or against major transactions affecting the shareholders.
  3. One Director, One Vote.  Actions and decisions of the Board of Directors generally require the vote of a majority of the directors.  The Bylaws might require supermajority or unanimous approval for certain decisions.  The Board may hold live or telephonic meetings (at which minutes must be kept), or they may sign written resolutions in lieu of a meeting.
  4. Caring Souls.  Directors owe a duty of care to the company and shareholders.  The must act in an informed and deliberate manner.  Directors should have a good working knowledge of the business, its plans, and potential problems.  The Board should avoid not only haste, but the appearance of haste.
  5. Trust But Verify.  In exercising their duty of care, directors may rely on information and advice provided by company executives, managers, and employee, as well as outside experts, such as attorneys, CPAs, and investment bankers.  But directors should actively question and test the information and advice they receive.
  6. Always Be True.  Directors also owe a duty of loyalty to the company and shareholders.  They must make decisions based on the best interests of the company, and not any personal interest.  Directors must first offer to the company any opportunity to that is related to the business of the company.
  7. Cured.  A director has a conflict of interest when he or she has a personal interest in a transaction to be approved by the Board.  The conflict may be “cured,” and the transaction upheld, provided the conflict is known to the disinterested directors of shareholders who approve the transaction.
  8. Inside Out.  Directors who are also employed by the company are known as “inside directors,” while independent directors are known as “outside directors.” In some sense, inside directors always have a conflict of interest (their paychecks).  For this reason, it’s good practice for the Board to have a majority of outside directors (this is generally a requirement for publicly traded companies).
  9. Committee Time.  Especially when the Board of Directors has a large number of members, it is often more effective for directors to act and make decisions in committees made up of a small number of directors.  Committees are created to focus on specific topics, like executive compensation or finances.  A committee of independent directors can be used to approve decisions for which inside directors have a conflict.
  10. Personal Judgment.  Directors are not personally liable for losses suffered by the company or the shareholders, provided they have met their duties of care and loyalty.  Even if the directors’ decisions turn out to be unsuccessful or unwise, the directors are generally protected under the so-called business judgment rule.

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