Do All Corporations and Companies Have a Board of Directors?
Every public company is required by law to have a board of directors. Many private and nonprofit organizations also have a board of directors. Many people believe that holding regular board meetings and maintaining a board of directors are simply formalities. In fact, there are many important reasons to have a board of directors, including maintaining liability protection for the company.
Smaller companies may designate the initial board of directors in their articles of incorporation. Larger corporations (including S and C corporations) are required to elect a board of directors. Although the precise rules and regulations for a corporation’s board varies among states, every state requires that the board of directors must hold at least one yearly meeting, have meeting minutes taken to document any discussions or actions, and that the shareholders elect the board.
What Does a Corporate Board of Directors Do?
A board of directors is an elected group of individuals that represent shareholders, meeting at regular intervals to set policies for corporate management and maintain oversight of the corporation. The board of directors makes such decisions as:
- Hiring and firing senior executives
- Determining executive compensation
- Understanding the organization’s mission, policies, and needs
- Setting broad goals for the corporation
- Ensuring the corporation has well-managed resources
- Attending and taking part in board meetings and other events
What is the Time Commitment for Members of a Board of Directors?
Those considering being a member of a board of directors may wonder how often the board meets. Each state sets the minimum number of board meetings. Beyond that, it largely depends on the size and scope of the company or corporation. Small companies may meet only once a year, while larger corporations could meet on a monthly basis, with additional meetings any time a crisis situation arises. On average, boards meet four times a year—once a quarter. The chairman of the board or CEO may also want to have access to each board member via phone on a regular basis.
How Many Members are on a Board of Directors?
A board of directors can
include from three to 31 members, although many analysts believe the “ideal”
number is seven. Ideally, the board of directors should represent both
shareholder interests, as well as management, including internal and external
members. An internal member has the interests of shareholders, officers, and
employees as a primary goal, while an outside director is less likely to be
involved in the day-to-day inner workings of the corporation. Outside directors
can bring more objective, independent views as far as corporate goal setting
and disputes.
What Positions Make Up a Board of Directors?
The primary positions which make up a board of directors include a chairperson, a secretary, and a treasurer. The chairperson is the highest-ranking officer on the board and is considered a facilitator and a guide. The chairperson is responsible for such things as:
- Keeping tabs on the performance of other directors
- Ensuring the board implements strategic plans
- Ensuring the board receives proper, timely information and setting the agenda
The chairperson is generally the “face” of the corporation—the person who explains the aims and policies to the outside world.
The board secretary handles legal and regulatory compliance issues, ensuring legal filings are made properly and on time, keeping the board minutes, setting agendas, making disclosures to shareholders, and keeping up to date with regulatory changes. The board treasurer provides oversight on the corporation’s financial strategies, ensuring compliance, and creating in-depth financial forecasts for shareholders. The treasurer may also develop the annual budget, invest extra cash, and develop policies and procedures related to the corporation’s finances.
What is the Average Pay for Board of Directors Positions?
According to chron.com, the “average” pay for a director on a corporate board was about $36,000 in 2016. That being said, pay for directors varies widely, depending on the size of the corporation. Fortune.com found that the average base pay for directors at Fortune 500 companies was about $245,000 in 2016. In addition to cash compensation, independent board members could be offered equity in the corporation. According to techcrunch.com, a start-up company might offer its director between 0.5 percent and 2.0 percent equity.
How are Board of Directors Members Chosen—and Removed?
Members of the board of directors are elected by shareholders, after being nominated by a nomination committee. The terms of directors are usually staggered to ensure only a few directors are elected in any given year. Removing a board member comes with challenges of its own, usually including a contentious split among board members.
Further, the contracts of many directors include a golden parachute—a disincentive for removal of a board member, which requires the corporation to pay a bonus to the director if they are removed. “Typical” reasons for removal of a board member include misuse of directorial powers, using proprietary information for personal gain, or making deals with third parties to sway a board vote.
New Laws and Trends for Corporate Boards of Directors
Due to a lack of female presence on many corporate boards of directors, some States (like California) are taking measures to ensure more diverse boards. By enacting Senate Bill 826, which required all public companies headquartered in California that were traded on the NYSE or NASDAQ to have at least one female director by December 31, 2019, the State is making an impact. By December 31, 2021, these companies must have at least three female directors for boards with more than six members. Companies who are not in compliance will be fined $100,000 for a first offense and $300,000 for a second offense.
According to russellreynolds.com, the trends that will primarily impact boards and directors in 2020 include:
- A greater focus on environmental and social issues;
- A challenge to directors to put shareholders at the heart of every corporation’s purpose;
- Increased board oversight of “culture” of the corporation;
- Increased board diversity, including ethnicity and race; and
Increased levels of corporate activism in areas such as climate change or the “me too” movement.