The Purpose of the Board
The board is the highest authority within the structure of a corporation or a publicly traded business. It owes the shareholders the highest financial duty under corporation law in the U.S., known as a “fiduciary duty.” It’s the board’s job to select and approve the right level of pay for the chief executive officer (CEO). It gauges the appeal of dividends and pays them. It may recommend stock splits. The board oversees share-repurchase programs and approves the financial statements. It may even recommend or strongly discourage acquisitions and mergers.
The Structure and Makeup of the Board
The board is made up of persons (the “directors”) who are elected by the shareholders for multi-year terms. Many companies work on a rotating system so that only a fraction of these people are up for election each year. They do that because it makes it harder for a complete board change to take place due to a hostile takeover. Some directors have a vested interest in the company. They work in upper management. They’re referred to as “inside directors.” Other independent “outside directors” might not have any direct ties to the company, but they’re often known for their business abilities, and may be paid for their services, sometimes in stock. Directors are often tied to major vendors to strengthen key relationships. You might expect to see a high-ranking employee of The Coca Cola Company on the board of McDonald’s Corporation, or vice versa. They have a mutually beneficial relationship. While most state and federal laws do not generally stipulate that individual board members be independent, the boards of companies listed on the New York Stock Exchange and Nasdaq must have a majority of independent directors. Independent directors aren’t linked with or employed by the company. In theory, at least, they won’t be subject to pressure. They’re more likely to act in the shareholders’ best interests when those interests run counter to the goals of entrenched management.
How Committees Work
Setting up audit and compensation committees is also the duty of the board. The audit committee makes sure that all financial statements and reports are correct. They use fair estimates. The board members select, hire, and work with an outside firm that does the auditing. The compensation committee sets base pay, stock option awards, and incentive bonuses for the company’s executives, including the CEO. Many boards came under fire in 2020 for letting these salaries reach very high levels.
How Board Members Are Paid
Directors are paid a yearly salary. They receive extra pay for each meeting they attend and for stock options, as well as other benefits in exchange for their services. The total amount of fees can vary. The compensation, along with any other benefits, can be found in a special issue known as the “proxy statement.” This statement also includes a short bio, their age, and their level of ownership in the business.
Structure and Its Impact
The ownership structure of a firm has a huge impact on the effectiveness of the board. An entity or investor could more or less control the corporation if just one large shareholder existed. The directors could appeal to the controlling shareholder in that case. The directors often act as if a controlling shareholder does indeed exist, when in fact there isn’t one. They attempt to protect this imaginary entity at all times, even if it means firing the CEO, making changes to the structure, or turning down acquisition opportunities. The controlling shareholder can also sometimes serve as the CEO and/or chairman of the board. A director serves at the will of the owner in that case and has no real way to override their decisions.
