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A board of directors (commonly referred simply as the board) is an executive committee that jointly supervises the activities of an organization, which can be either a for-profit or a nonprofit organization such as a
business Business is the practice of making one's living or making money by producing or buying and selling products (such as goods and services). It is also "any activity or enterprise entered into for profit." Having a business name does not separa ...
, nonprofit organization, or a government agency. The powers, duties, and responsibilities of a board of directors are determined by government regulations (including the jurisdiction's corporate law) and the organization's own
constitution A constitution is the aggregate of fundamental principles or established precedents that constitute the legal basis of a polity, organisation or other type of entity and commonly determine how that entity is to be governed. When these princi ...
and
by-laws A by-law (bye-law, by(e)law, by(e) law), or as it is most commonly known in the United States bylaws, is a set of rules or law established by an organization or community so as to regulate itself, as allowed or provided for by some higher authorit ...
. These authorities may specify the number of members of the board, how they are to be chosen, and how often they are to meet. In an organization with voting members, the board is accountable to, and may be subordinate to, the organization's full membership, which usually elect the members of the board. In a stock corporation, non-executive directors are elected by the shareholders, and the board has ultimate responsibility for the management of the corporation. In nations with
codetermination In corporate governance, codetermination (also "copartnership" or "worker participation") is a practice where workers of an enterprise have the right to vote for representatives on the board of directors in a company. It also refers to staff havin ...
(such as Germany and Sweden), the workers of a corporation elect a set fraction of the board's members. The board of directors appoints the
chief executive officer A chief executive officer (CEO), also known as a central executive officer (CEO), chief administrator officer (CAO) or just chief executive (CE), is one of a number of corporate executives charged with the management of an organization especially ...
of the corporation and sets out the overall strategic direction. In corporations with dispersed ownership, the identification and nomination of directors (that shareholders vote for or against) are often done by the board itself, leading to a high degree of self-perpetuation. In a
non-stock corporation A non-stock corporation is a corporation that does not have owners represented by shares of stock. That type of corporation is called a stock corporation. Instead, a non-stock corporation typically has members who are the functional equivalent of ...
with no general voting membership, the board is the supreme governing body of the institution, and its members are sometimes chosen by the board itself.


Terminology

Other names include ''board of directors and advisors'', ''board of governors'', ''board of managers'', ''
board of regents In the United States, a board often governs institutions of higher education, including private universities, state universities, and community colleges. In each US state, such boards may govern either the state university system, individual co ...
'', ''board of trustees'', and ''board of visitors''. It may also be called the ''executive board''.


Roles

Typical duties of boards of directors include: * Governing the organization by establishing broad policies and setting out strategic objectives * Selecting, appointing, supporting and reviewing the performance of the
chief executive A chief executive officer (CEO), also known as a central executive officer (CEO), chief administrator officer (CAO) or just chief executive (CE), is one of a number of corporate executives charged with the management of an organization especially ...
(of which the titles vary from organization to organization; the chief executive may be titled
chief executive officer A chief executive officer (CEO), also known as a central executive officer (CEO), chief administrator officer (CAO) or just chief executive (CE), is one of a number of corporate executives charged with the management of an organization especially ...
,
president President most commonly refers to: *President (corporate title) *President (education), a leader of a college or university *President (government title) President may also refer to: Automobiles * Nissan President, a 1966–2010 Japanese ful ...
or executive director) * Terminating the chief executive * Ensuring the availability of adequate financial resources * Approving annual budgets * Accounting to the stakeholders for the organization's performance * Setting the salaries, compensation and benefits of senior management The legal responsibilities of boards and board members vary with the nature of the organization, and between jurisdictions. For companies with publicly trading stock, these responsibilities are typically much more rigorous and complex than for those of other types. Typically, the board chooses one of its members to be the ''
chairman The chairperson, also chairman, chairwoman or chair, is the presiding officer of an organized group such as a board, committee, or deliberative assembly. The person holding the office, who is typically elected or appointed by members of the gro ...
'' (often now called the "chair" or "chairperson"), who holds whatever title is specified in the
by-law A by-law (bye-law, by(e)law, by(e) law), or as it is most commonly known in the United States bylaws, is a set of rules or law established by an organization or community so as to regulate itself, as allowed or provided for by some higher authorit ...
s or
articles of association In corporate governance, a company's articles of association (AoA, called articles of incorporation in some jurisdictions) is a document which, along with the memorandum of association (in cases where it exists) form the company's constituti ...
. However, in membership organizations, the members elect the president of the organization and the president becomes the board chair, unless the by-laws say otherwise.


Directors

The directors of an organization are the persons who are members of its board. Several specific terms categorize directors by the presence or absence of their other relationships to the organization.


Inside director

An inside director is a director who is also an employee, officer, chief executive, major shareholder, or someone similarly connected to the organization. Inside directors represent the interests of the entity's stakeholders, and often have special knowledge of its inner workings, its financial or market position, and so on. Typical inside directors are: * A chief executive officer (CEO) who may also be
chairman of the board The chairperson, also chairman, chairwoman or chair, is the presiding officer of an organized group such as a board, committee, or deliberative assembly. The person holding the office, who is typically elected or appointed by members of the gro ...
* Other executives of the organization, such as its
chief financial officer The chief financial officer (CFO) is an officer of a company or organization that is assigned the primary responsibility for managing the company's finances, including financial planning, management of financial risks, record-keeping, and financi ...
(CFO) or executive vice president * Large shareholders (who may or may not also be employees or officers) * Representatives of other stakeholders such as labor unions, major lenders, or members of the community in which the organization is located An inside director who is employed as a manager or executive of the organization is sometimes referred to as an executive director (not to be confused with the title executive director sometimes used for the CEO position in some organizations). Executive directors often have a specified area of responsibility in the organization, such as finance, marketing, human resources, or production.


Outside director

An outside director is a member of the board who is not otherwise employed by or engaged with the organization, and does not represent any of its stakeholders. A typical example is a director who is
president President most commonly refers to: *President (corporate title) *President (education), a leader of a college or university *President (government title) President may also refer to: Automobiles * Nissan President, a 1966–2010 Japanese ful ...
of a firm in a different industry. Outside directors are not employees of the company or affiliated with it in any other way. Outside directors bring outside experience and perspectives to the board. For example, for a company that serves a domestic market only, the presence of CEOs from global multinational corporations as outside directors can help to provide insights on export and import opportunities and international trade options. One of the arguments for having outside directors is that they can keep a watchful eye on the inside directors and on the way the organization is run. Outside directors are unlikely to tolerate "insider dealing" between inside directors, as outside directors do not benefit from the company or organization. Outside directors are often useful in handling disputes between inside directors, or between shareholders and the board. They are thought to be advantageous because they can be objective and present little risk of conflict of interest. On the other hand, they might lack familiarity with the specific issues connected to the organization's governance, and they might not know about the industry or sector in which the organization is operating.


Terminology

*''Director'' – a person appointed to serve on the board of an organization, such as an institution or business. *''Inside director'' – a director who, in addition to serving on the board, has a meaningful connection to the organization *'' Outside director'' – a director who, other than serving on the board, has no meaningful connections to the organization *''Executive director'' – an inside director who is also an executive with the organization. The term is also used, in a completely different sense, to refer to a CEO *'' Non-executive director'' – an inside director who is not an executive with the organization *''De facto director'' – an individual who acts as a director of the company but has not actually or validly been appointed as such. *''Shadow director'' – an individual who acts as a director of the company but is not a named director (a ''de jure'' director) and does not claim or purport to act as director. * ''Nominee director'' – an individual who is appointed by a shareholder, creditor or interest group (whether contractually or by resolution at a company meeting) and who has a continuing loyalty to the appointors or other interest in the appointing company Individual directors often serve on more than one board. This practice results in an
interlocking directorate Interlocking directorate refers to the practice of members of a corporate board of directors serving on the boards of multiple corporations. A person that sits on multiple boards is known as a ''multiple director''.Scott, 1997p. 7/ref> Two firms ...
, where a relatively small number of individuals have significant influence over many important entities. This situation can have important corporate, social, economic, and legal consequences, and has been the subject of significant research.


Process and structure

The process for running a board, sometimes called the
board process Board or Boards may refer to: Flat surface * Lumber, or other rigid material, milled or sawn flat ** Plank (wood) ** Cutting board ** Sounding board, of a musical instrument * Cardboard (paper product) * Paperboard * Fiberboard ** Hardboard, a ty ...
, includes the selection of board members, the setting of clear board objectives, the dissemination of documents or board package to the board members, the collaborative creation of an
agenda Agenda may refer to: Information management * Agenda (meeting), points to be discussed and acted upon, displayed as a list * Political agenda, the set of goals of an ideological group * Lotus Agenda, a DOS-based personal information manager * Per ...
for the meeting, the creation and follow-up of assigned
action item Action Item is a four-piece pop rock band based out of Bergen County, NJ. History Action Item started off as a five-piece consisting of Cag, Li, Brozek, Buczkowski, and Politz. After self-releasing numerous songs via their Myspace page, the f ...
s, and the assessment of the board process through standardized assessments of board members, owners, and CEOs. The science of this process has been slow to develop due to the secretive nature of the way most companies run their boards, however some standardization is beginning to develop. Some who are pushing for this standardization in the USA are the
National Association of Corporate Directors The National Association of Corporate Directors (NACD) is an independent, not-for-profit, section 501(c)(3) founded in 1977 and headquartered in Arlington, Virginia. NACD's membership includes the entire boards of 1,700+ corporations as well as ...
,
McKinsey McKinsey & Company is a global management consulting firm founded in 1926 by University of Chicago professor James O. McKinsey, that offers professional services to corporations, governments, and other organizations. McKinsey is the oldest a ...
and The Board Group.


Board meetings

A board of directors conducts its meetings according to the rules and procedures contained in its governing documents. These procedures may allow the board to conduct its business by
conference call A conference call is a telephone call in which someone talks to several people at the same time. The conference call may be designed to allow the called party to participate during the call or set up so that the called party merely listens into ...
or other
electronic Electronic may refer to: *Electronics, the science of how to control electric energy in semiconductor * ''Electronics'' (magazine), a defunct American trade journal *Electronic storage, the storage of data using an electronic device *Electronic co ...
means. They may also specify how a quorum is to be determined.


Non-corporate boards

The responsibilities of a board of directors vary depending on the nature and type of business entity and the laws applying to the entity (see
types of business entity A business entity is an entity that is formed and administered as per corporate law in order to engage in business activities, charitable work, or other activities allowable. Most often, business entities are formed to sell a product or a servi ...
). For example, the nature of the business entity may be one that is traded on a public market (public company), not traded on a public market (a private, limited or closely held company), owned by family members (a family business), or exempt from income taxes (a non-profit, not for profit, or tax-exempt entity). There are numerous types of business entities available throughout the world such as a corporation, limited liability company, cooperative, business trust, partnership, private limited company, and public limited company. Much of what has been written about boards of directors relates to boards of directors of business entities actively traded on public markets. More recently, however, material is becoming available for boards of private and closely held businesses including family businesses. A
board-only A nonprofit organization (NPO) or non-profit organisation, also known as a non-business entity, not-for-profit organization, or nonprofit institution, is a legal entity organized and operated for a collective, public or social benefit, in co ...
organization is one whose board is self-appointed, rather than being accountable to a base of members through elections; or in which the powers of the membership are extremely limited.


Membership organizations

In membership organizations, such as a society made up of members of a certain profession or one advocating a certain cause, a board of directors may have the responsibility of running the organization in between meetings of the membership, especially if the membership meets infrequently, such as only at an annual general meeting. The amount of powers and authority delegated to the board depend on the bylaws and rules of the particular organization. Some organizations place matters exclusively in the board's control while in others, the general membership retains full power and the board can only make recommendations. The setup of a board of directors vary widely across organizations and may include provisions that are applicable to corporations, in which the "shareholders" are the members of the organization. A difference may be that the membership elects the officers of the organization, such as the president and the secretary, and the officers become members of the board in addition to the directors and retain those duties on the board. The directors may also be classified as officers in this situation. There may also be ex-officio members of the board, or persons who are members due to another position that they hold. These ex-officio members have all the same rights as the other board members. Members of the board may be removed before their term is complete. Details on how they can be removed are usually provided in the bylaws. If the bylaws do not contain such details, the section on disciplinary procedures in '' Robert's Rules of Order'' may be used.


Corporations

In a
publicly held company A public company is a company whose ownership is organized via shares of stock which are intended to be freely traded on a stock exchange or in over-the-counter markets. A public (publicly traded) company can be listed on a stock exchange ( lis ...
, directors are elected to represent and are legally obligated as fiduciaries to represent owners of the company—the shareholders/stockholders. In this capacity they establish policies and make decisions on issues such as whether there is dividend and how much it is,
stock options In finance, an option is a contract which conveys to its owner, the ''holder'', the right, but not the obligation, to buy or sell a specific quantity of an underlying asset or instrument at a specified strike price on or before a specified dat ...
distributed to employees, and the hiring/firing and compensation of upper management.


Governance

Theoretically, the control of a company is divided between two bodies: the board of directors, and the shareholders in
general meeting A general assembly or general meeting is a meeting of all the members of an organization or shareholders of a company. Specific examples of general assembly include: Churches * General Assembly (presbyterian church), the highest court of pres ...
. In practice, the amount of power exercised by the board varies with the type of company. In small private companies, the directors and the shareholders are normally the same people, and thus there is no real division of power. In large
public companies A public company is a company whose ownership is organized via shares of stock which are intended to be freely traded on a stock exchange or in over-the-counter markets. A public (publicly traded) company can be listed on a stock exchange (lis ...
, the board tends to exercise more of a supervisory role, and individual responsibility and management tends to be delegated downward to individual professional executives (such as a finance director or a marketing director) who deal with particular areas of the company's affairs.Titles Associated with Executive Compensation
, Compensation Resources Inc.
Another feature of boards of directors in large public companies is that the board tends to have more '' de facto'' power. Most shareholders do not attend shareholder meetings, but rather cast proxy votes via mail, phone, or internet, thus allowing the board to vote for them. However, proxy votes are not a total delegation of the voting power, as the board must vote the proxy shares as directed by their owner even when it contradicts the board's views. In addition, many shareholders vote to accept all recommendations of the board rather than try to get involved in management, since each shareholder's power, as well as interest and information is so small. Larger institutional investors also grant the board proxies. The large number of shareholders also makes it hard for them to organize. However, there have been moves recently to try to increase
shareholder activism A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the legal owne ...
among both institutional investors and individuals with small shareholdings. A contrasting view is that in large public companies it is upper management and not boards that wield practical power, because boards delegate nearly all of their power to the top executive employees, adopting their recommendations almost without fail. As a practical matter, executives even choose the directors, with shareholders normally following management recommendations and voting for them. In most cases, serving on a board is not a
career The career is an individual's metaphorical "journey" through learning, work and other aspects of life. There are a number of ways to define career and the term is used in a variety of ways. Definitions The '' Oxford English Dictionary'' defi ...
unto itself. For major corporations, the board members are usually professionals or leaders in their field. In the case of outside directors, they are often senior leaders of other organizations. Nevertheless, board members often receive remunerations amounting to hundreds of thousands of dollars per year since they often sit on the boards of several companies. Inside directors are usually not paid for sitting on a board, but the duty is instead considered part of their larger job description. Outside directors are usually paid for their services. These remunerations vary between corporations, but usually consist of a yearly or monthly salary, additional compensation for each meeting attended, stock options, and various other benefits. such as travel, hotel and meal expenses for the board meetings. Tiffany & Co., for example, pays directors an annual retainer of $46,500, an additional annual retainer of $2,500 if the director is also a chairperson of a committee, a per-meeting-attended fee of $2,000 for meetings attended in person, a $500 fee for each meeting attended via telephone, in addition to stock options and retirement benefits.


Two-tier system

In some European and Asian countries, there are two separate boards, an executive board (or management board) for day-to-day business and a supervisory board (elected by the shareholders and employees) for supervising the executive board. In these countries, the chairman of the supervisory board is equivalent to the chairman of a single-tier board, while the chairman of the management board is reckoned as the company's CEO or managing director. These two roles are always held by different people. This ensures a distinction between management by the executive board and governance by the supervisory board and allows for clear lines of authority. The aim is to prevent a conflict of interest and too much power being concentrated in the hands of one person. There is a strong parallel here with the structure of government, which tends to separate the political
cabinet Cabinet or The Cabinet may refer to: Furniture * Cabinetry, a box-shaped piece of furniture with doors and/or drawers * Display cabinet, a piece of furniture with one or more transparent glass sheets or transparent polycarbonate sheets * Filin ...
from the management
civil service The civil service is a collective term for a sector of government composed mainly of career civil servants hired on professional merit rather than appointed or elected, whose institutional tenure typically survives transitions of political leaders ...
. In the United States, the board of directors (elected by the shareholders) is often equivalent to the supervisory board, while the executive board may often be known as the executive committee (operating committee or executive council), composed of the CEO and their direct reports (other C-level officers, division/subsidiary heads). Board structures and procedures vary both within and among OECD countries. Some countries have two-tier boards that separate the supervisory function and the management function into different bodies. Such systems typically have a "supervisory board" composed of nonexecutive board members and a "management board" composed entirely of executives. Other countries have "unitary" boards, which bring together executive and non-executive board members. In some countries there is also an additional statutory body for audit purposes. The OECD Principles are intended to be sufficiently general to apply to whatever board structure is charged with the functions of governing the enterprise and monitoring management.


History

The development of a separate board of directors to manage/govern/oversee a company has occurred incrementally and indefinitely over legal history. Until the end of the 19th century, it seems to have been generally assumed that the general meeting (of all shareholders) was the supreme organ of a company, and that the board of directors merely acted as an agent of the company subject to the control of the shareholders in general meeting. However, by 1906, the
English Court of Appeal The Court of Appeal (formally "His Majesty's Court of Appeal in England", commonly cited as "CA", "EWCA" or "CoA") is the highest court within the Senior Courts of England and Wales, and second in the legal system of England and Wales only to ...
had made it clear in the decision of ''
Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame ''Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame'' 9062 Ch 34 is a UK company law case, which concerns the enforceability of provisions in a company's constitution. The Court of Appeal affirmed that directors were not agents of t ...
''
906 __NOTOC__ Year 906 ( CMVI) was a common year starting on Wednesday (link will display the full calendar) of the Julian calendar. Events By place Europe * February 27 – Battle of Fritzlar: The Conradines defeat the Babenberg co ...
2 Ch 34 that the division of powers between the board and the shareholders in general meaning depended on the construction of the
articles of association In corporate governance, a company's articles of association (AoA, called articles of incorporation in some jurisdictions) is a document which, along with the memorandum of association (in cases where it exists) form the company's constituti ...
and that, where the powers of management were vested in the board, the general meeting could not interfere with their lawful exercise. The articles were held to constitute a contract by which the members had agreed that "the directors and the directors alone shall manage." The new approach did not secure immediate approval, but it was endorsed by the House of Lords in ''Quin & Axtens v Salmon''
909 __NOTOC__ Year 909 ( CMIX) was a common year starting on Sunday (link will display the full calendar) of the Julian calendar. Events By place Britain * King Edward the Elder and his sister, Princess Æthelflæd of Mercia, raid Danish ...
AC 442 and has since received general acceptance. Under English law, successive versions of
Table A Table A in UK company law is the old name for the Model Articles or default form of articles of association for companies limited by shares incorporated either in England and Wales or in Scotland before 1 October 2009 where the incorporators do ...
have reinforced the norm that, unless the directors are acting contrary to the law or the provisions of the Articles, the powers of conducting the management and affairs of the company are vested in them. The modern doctrine was expressed in ''
John Shaw & Sons (Salford) Ltd v Shaw ''John Shaw & Sons (Salford) Ltd v Shaw'' 9352 KB 113 is a UK company law case, concerning the proper interpretation of a company's articles of association. Facts Peter, John and Percy Shaw had a company together. They had an argument over owi ...
''
935 Year 935 ( CMXXXV) was a common year starting on Thursday (link will display the full calendar) of the Julian calendar. Events By place Europe * Spring – Arnulf I ("the Bad") of Bavaria invades Italy, crossing through the Uppe ...
2 KB 113 by Greer LJ as follows:
A company is an entity distinct alike from its shareholders and its directors. Some of its powers may, according to its articles, be exercised by directors, certain other powers may be reserved for the shareholders in general meeting. If powers of management are vested in the directors, they and they alone can exercise these powers. The only way in which the general body of shareholders can control the exercise of powers by the articles in the directors is by altering the articles, or, if opportunity arises under the articles, by refusing to re-elect the directors of whose actions they disapprove. They cannot themselves usurp the powers which by the articles are vested in the directors any more than the directors can usurp the powers vested by the articles in the general body of shareholders.
It has been remarked that this development in the law was somewhat surprising at the time, as the relevant provisions in
Table A Table A in UK company law is the old name for the Model Articles or default form of articles of association for companies limited by shares incorporated either in England and Wales or in Scotland before 1 October 2009 where the incorporators do ...
(as it was then) seemed to contradict this approach rather than to endorse it.


Election and removal

In most legal systems, the appointment and removal of directors is voted upon by the shareholders in general meeting or through a proxy statement. For publicly traded companies in the U.S., the directors which are available to vote on are largely selected by either the board as a whole or a
nominating committee A committee or commission is a body of one or more persons subordinate to a deliberative assembly. A committee is not itself considered to be a form of assembly. Usually, the assembly sends matters into a committee as a way to explore them more ...
. Although in 2002 the New York Stock Exchange and the NASDAQ required that nominating committees consist of independent directors as a condition of listing, nomination committees have historically received input from management in their selections even when the CEO does not have a position on the board. Shareholder nominations can only occur at the general meeting itself or through the prohibitively expensive process of mailing out ballots separately; in May 2009 the SEC proposed a new rule allowing shareholders meeting certain criteria to add nominees to the proxy statement. In practice for publicly traded companies, the managers (
inside director An inside director is a member of the board of directors of a corporation who is also a member of the corporation's management, almost always a corporate officer Corporate titles or business titles are given to corporate officers to show what ...
s) who are purportedly accountable to the board of directors have historically played a major role in selecting and nominating the directors who are voted on by the shareholders, in which case more "gray outsider directors" (independent directors with
conflicts of interest A conflict of interest (COI) is a situation in which a person or organization is involved in multiple interests, financial or otherwise, and serving one interest could involve working against another. Typically, this relates to situations in ...
) are nominated and elected.Shivdasani A, Yermack D. (1999)
CEO involvement in the selection of new board members: An empirical analysis
''Journal of Finance''.
In countries with co-determination, a fixed fraction of the board is elected by the corporation's workers. Directors may also leave office by resignation or death. In some legal systems, directors may also be removed by a resolution of the remaining directors (in some countries they may only do so "with cause"; in others the power is unrestricted). Some jurisdictions also permit the board of directors to appoint directors, either to fill a vacancy which arises on resignation or death, or as an addition to the existing directors. In practice, it can be quite difficult to remove a director by a resolution in general meeting. In many legal systems, the director has a right to receive special notice of any resolution to remove them; the company must often supply a copy of the proposal to the director, who is usually entitled to be heard by the meeting. The director may require the company to circulate any representations that they wish to make. Furthermore, the director's contract of service will usually entitle them to compensation if they are removed, and may often include a generous " golden parachute" which also acts as a deterrent to removal. A 2010 study examined how corporate shareholders voted in director elections in the United States. It found that directors received fewer votes from shareholders when their companies performed poorly, had excess CEO compensation, or had poor shareholder protection. Also, directors received fewer votes when they did not regularly attend board meetings or received negative recommendations from a proxy advisory firm. The study also shows that companies often improve their corporate governance by removing poison pills or classified boards and by reducing excessive CEO pay after their directors receive low shareholder support. Board accountability to shareholders is a recurring issue. In 2010, the ''New York Times'' noted that several directors who had overseen companies which had failed in the financial crisis of 2007–2010 had found new positions as directors. The SEC sometimes imposes a ban (a "D&O bar") on serving on a board as part of its fraud cases, and one of these was upheld in 2013.


Exercise of powers

The exercise by the board of directors of its powers usually occurs in board meetings. Most legal systems require sufficient notice to be given to all directors of these meetings, and that a quorum must be present before any business may be conducted. Usually, a meeting which is held without notice having been given is still valid if all of the directors attend, but it has been held that a failure to give notice may negate resolutions passed at a meeting, because the persuasive oratory of a minority of directors might have persuaded the majority to change their minds and vote otherwise. In most common law countries, the powers of the board are vested in the board as a whole, and not in the individual directors. However, in instances an individual director may still bind the company by their acts by virtue of their ostensible authority (see also: the rule in ''Turquand's Case'').


Duties

Because directors exercise control and management over the organization, but organizations are (in theory) run for the benefit of the shareholders, the law imposes strict duties on directors in relation to the exercise of their duties. The duties imposed on directors are fiduciary duties, similar to those that the law imposes on those in similar positions of trust: agents and
trustee Trustee (or the holding of a trusteeship) is a legal term which, in its broadest sense, is a synonym for anyone in a position of trust and so can refer to any individual who holds property, authority, or a position of trust or responsibility to ...
s. The duties apply to each director separately, while the powers apply to the board jointly. Also, the duties are owed to the company itself, and not to any other entity. This does not mean that directors can never stand in a fiduciary relationship to the individual shareholders; they may well have such a duty in certain circumstances.


"Proper purpose"

Directors must exercise their powers for a proper purpose. While in many instances an improper purpose is readily evident, such as a director looking to enrich themselves or divert an investment opportunity to a relative, such breaches usually involve a breach of the director's duty to act in good faith. Greater difficulties arise where the director, while acting in good faith, is serving a purpose that is not regarded by the law as proper. The seminal authority in the United Kingdom in relation to what amounts to a proper purpose is the Supreme Court decision in Eclairs Group Ltd v JKX Oil & Gas plc (2015). The case concerned the powers of directors under the
articles of association In corporate governance, a company's articles of association (AoA, called articles of incorporation in some jurisdictions) is a document which, along with the memorandum of association (in cases where it exists) form the company's constituti ...
of the company to disenfranchise voting rights attached to shares for failure to properly comply with notice served on the shareholders. Prior to that case the leading authority was ''
Howard Smith Ltd v Ampol Ltd ''Howard Smith Ltd v Ampol Petroleum Ltd'' is a leading company law case, concerning the duty of directors to act only for "proper purposes". This duty has been codified into the Companies Act 2006 section 171, and arises particularly in cases i ...
''
974 Year 974 ( CMLXXIV) was a common year starting on Thursday (link will display the full calendar) of the Julian calendar. Events By place Europe * Battle of Danevirke: Emperor Otto II defeats the rebel forces of King Harald I, who has ...
AC 821. The case concerned the power of the directors to issue new shares. It was alleged that the directors had issued many new shares purely to deprive a particular shareholder of his voting majority. An argument that the power to issue shares could only be properly exercised to raise new capital was rejected as too narrow, and it was held that it would be a proper exercise of the director's powers to issue shares to a larger company to ensure the financial stability of the company, or as part of an agreement to exploit mineral rights owned by the company. If so, the mere fact that an incidental result (even if it was a desired consequence) was that a shareholder lost their majority, or a takeover bid was defeated, this would not itself make the share issue improper. But if the sole purpose was to destroy a voting majority, or block a takeover bid, that would be an improper purpose. Not all jurisdictions recognised the "proper purpose" duty as separate from the "good faith" duty however.


"Unfettered discretion"

Directors cannot, without the consent of the company, fetter their
discretion Discretion has the meaning of acting on one's own authority and judgment. In law, discretion as to legal rulings, such as whether evidence is excluded at a trial, may be exercised by a judge. Some view discretion negatively, while some view it ...
in relation to the exercise of their powers, and cannot bind themselves to vote in a particular way at future board meetings. This is so even if there is no improper motive or purpose, and no personal advantage to the director. This does not mean, however, that the board cannot agree to the company entering into a contract which binds the company to a certain course, even if certain actions in that course will require further board approval. The company remains bound, but the directors retain the discretion to vote against taking the future actions (although that may involve a breach by the company of the contract that the board previously approved).


"Conflict of duty and interest"

As fiduciaries, the directors may not put themselves in a position where their interests and duties conflict with the duties that they owe to the company. The law takes the view that good faith must not only be done, but must be manifestly seen to be done, and zealously patrols the conduct of directors in this regard; and will not allow directors to escape liability by asserting that their decisions were in fact well founded. Traditionally, the law has divided conflicts of duty and interest into three sub-categories.


=Transactions with the company

= By definition, where a director enters into a transaction with a company, there is a conflict between the director's interest (to enrich themselves with the transaction) and their duty to the company (to ensure that the company gets as much as it can out of the transaction). In some places, this rule is so strictly enforced that, even where the conflict of interest or conflict of duty is purely hypothetical, the directors can be forced to disgorge all personal gains arising from it. In ''Aberdeen Ry v Blaikie'' (1854) 1 Macq HL 461
Lord Cranworth Robert Monsey Rolfe, 1st Baron Cranworth, PC (18 December 1790 – 26 July 1868) was a British lawyer and Liberal politician. He twice served as Lord High Chancellor of Great Britain. Background and education Born at Cranworth, Norfolk, he w ...
stated in his judgment that: :"A corporate body can only act by agents, and it is, of course, the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal. And it is a rule of universal application that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, ''or can have'', a personal interest conflicting ''or which possibly may conflict'', with the interests of those whom he is bound to protect... So strictly is this principle adhered to that no question is allowed to be raised as to the fairness or unfairness of the contract entered into..." (''emphasis'' added) However, in many jurisdictions the members of the company are permitted to ratify transactions which would otherwise fall foul of this principle. It is also largely accepted in most jurisdictions that this principle can be overridden in the company's constitution. In many countries, there is also a statutory duty to declare interests in relation to any transactions, and the director can be fined for failing to make disclosure.


= Use of corporate property, opportunity, or information

= Directors must not, without the informed consent of the company, use for their own profit the company's assets, opportunities, or information. This prohibition is much less flexible than the prohibition against the transactions with the company, and attempts to circumvent it using provisions in the articles have met with limited success. In ''
Regal (Hastings) Ltd v Gulliver , is a leading case in UK company law regarding the rule against directors and officers from taking personal advantage of a corporate opportunity in violation of their duty of loyalty to the company. The Court held that a director is in breac ...
''
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All ER 378 the House of Lords, in upholding what was regarded as a wholly unmeritorious claim by the shareholders, held that: : "(i) that what the directors did was so related to the affairs of the company that it can properly be said to have been done in the course of their management and in the utilisation of their opportunities and special knowledge as directors; and (ii) that what they did resulted in profit to themselves." And accordingly, the directors were required to disgorge the profits that they made, and the shareholders received their windfall. The decision has been followed in several subsequent cases, and is now regarded as settled law.


= Competing with the company

= Directors cannot compete directly with the company without a conflict of interest arising. Similarly, they should not act as directors of competing companies, as their duties to each company would then conflict with each other.


Common law duties of care and skill

Traditionally, the level of care and skill which has to be demonstrated by a director has been framed largely with reference to the non-executive director. In ''
Re City Equitable Fire Insurance Co ''Re City Equitable Fire Insurance Co'' 925Ch 407 is a UK company law case concerning directors' duties, and in particular the duty of care. It is no longer good law, as it stipulated that a "subjective" standard of competence applied. Now und ...
''
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Ch 407, it was expressed in purely subjective terms, where the court held that: : "a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of ''his'' knowledge and experience." (''emphasis'' added) However, this decision was based firmly in the older notions (see above) that prevailed at the time as to the mode of corporate decision making, and effective control residing in the shareholders; if they elected and put up with an incompetent decision maker, they should not have recourse to complain. However, a more modern approach has since developed, and in ''
Dorchester Finance Co Ltd v Stebbing ''Dorchester Finance Co v Stebbing'' 989BCLC 498 is a UK company law case under the wrongful trading provision of the Insolvency Act 1986 s.214. The director of a company must act in good faith and in the interests of the company, he must displ ...
''
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BCLC 498 the court held that the rule in ''Equitable Fire'' related only to skill, and not to diligence. With respect to diligence, what was required was: : "such care as an ordinary man might be expected to take on his own behalf." This was a dual subjective and objective test, and one deliberately pitched at a higher level. More recently, it has been suggested that both the tests of skill and diligence should be assessed objectively and subjectively; in the United Kingdom, the statutory provisions relating to directors' duties in the new
Companies Act 2006 The Companies Act 2006 (c 46) is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. The Act was brought into force in stages, with the final provision being commenced on 1 October 2009. It largely ...
have been codified on this basis.''Norman v
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BCLC 1027


Remedies for breach of duty

In most jurisdictions, the law provides for a variety of remedies in the event of a breach by the directors of their duties: *
Account of profits An account of profits (sometimes referred to as an ''accounting for profits'' or simply an ''accounting'') is a type of equitable remedy most commonly used in cases of breach of fiduciary duty. It is an action taken against a defendant to recover t ...
*
Damages At common law, damages are a remedy in the form of a monetary award to be paid to a claimant as compensation for loss or injury. To warrant the award, the claimant must show that a breach of duty has caused foreseeable loss. To be recognised at ...
or compensation *
Injunction An injunction is a legal and equitable remedy in the form of a special court order that compels a party to do or refrain from specific acts. ("The court of appeals ... has exclusive jurisdiction to enjoin, set aside, suspend (in whole or in ...
or
declaration Declaration may refer to: Arts, entertainment, and media Literature * ''Declaration'' (book), a self-published electronic pamphlet by Michael Hardt and Antonio Negri * ''The Declaration'' (novel), a 2008 children's novel by Gemma Malley Music ...
* Rescission of the relevant contract * Restoration of the company's property *
Summary dismissal In law, a summary judgment (also judgment as a matter of law or summary disposition) is a judgment entered by a court for one party and against another party summarily, i.e., without a full trial. Summary judgments may be issued on the merits of a ...


Current trends

Historically, directors' duties have been owed almost exclusively to the company and its members, and the board was expected to exercise its powers for the financial benefit of the company. However, more recently there have been attempts to "soften" the position, and provide for more scope for directors to act as good corporate citizens. For example, in the United Kingdom, the
Companies Act 2006 The Companies Act 2006 (c 46) is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. The Act was brought into force in stages, with the final provision being commenced on 1 October 2009. It largely ...
requires directors of companies "to promote the success of the company for the benefit of its members as a whole" and sets out the following six factors regarding a director's duty to promote success: * The likely consequences of any decision in the long term * The interests of the company's employees * The need to foster the company's business relationships with suppliers, customers and others * The impact of the company's operations on the community and the environment * The desirability of the company maintaining a reputation for high standards of business conduct * The need to act fairly as between members of a company This represents a considerable departure from the traditional notion that directors' duties are owed only to the company. Previously in the United Kingdom, under the
Companies Act 1985 The Companies Act 1985 (c. 6) is an Act of the Parliament of the United Kingdom of Great Britain and Northern Ireland, enacted in 1985, which enabled companies to be formed by registration, and set out the responsibilities of companies, their ...
, protections for non-member stakeholders were considerably more limited (see, for example, s.309 which permitted directors to take into account the interests of employees but which could only be enforced by the shareholders and not by the employees themselves). The changes have therefore been the subject of some criticism. Board of directors technology The adoption of technology that facilitates the meeting preparation and execution of directors continues to grow. Board directors are increasingly leveraging this technology to communicate and collaborate within a secure environment to access meeting materials, communicate with each other, and execute their governance responsibilities. This trend is particularly acute in the United States where a robust market of early adopters garnered acceptance of board software by organizations resulting in higher penetration of the board portal services in the region.


The board and society

Most companies have weak mechanisms for bringing the voice of society into the board room. They rely on personalities who were not appointed for their understanding of societal issues. Often they give limited focus (both through time and financial resource) to issues of corporate responsibility and sustainability. A social board has society designed into its structure. It elevates the voice of society through specialist appointments to the board and mechanisms that empower innovation from within the organisation. Social boards align themselves with themes that are important to society. These may include measuring worker pay ratios, linking personal social and environmental objectives to remuneration, integrated reporting, fair tax and B-Corp certification. Social boards recognise that they are part of society and that they require more than a licence to operate to succeed. They balance short-term shareholder pressure against long-term value creation, managing the business for a plurality of stakeholders including employees, shareholders, supply chains and civil society.


United States


Sarbanes–Oxley Act

The
Sarbanes–Oxley Act The Sarbanes–Oxley Act of 2002 is a United States federal law that mandates certain practices in financial record keeping and reporting for corporations. The act, (), also known as the "Public Company Accounting Reform and Investor Protecti ...
of 2002 has introduced new standards of accountability on boards of U.S. companies or companies listed on U.S.
stock exchange A stock exchange, securities exchange, or bourse is an exchange where stockbrokers and traders can buy and sell securities, such as shares of stock, bonds and other financial instruments. Stock exchanges may also provide facilities for the ...
s. Under the act, directors risk large fines and prison sentences in the case of accounting crimes.
Internal control Internal control, as defined by accounting and auditing, is a process for assuring of an organization's objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations and policies. A broa ...
is now the direct responsibility of directors. The vast majority of companies covered by the act have hired internal auditors to ensure that the company adheres to required standards of internal control. The internal auditors are required by law to report directly to an audit board, consisting of directors more than half of whom are outside directors, one of whom is a "financial expert". The law requires companies listed on the major stock exchanges (NYSE, NASDAQ) to have a majority of independent directors—directors who are not otherwise employed by the firm or in a business relationship with it.


Size

According to the Corporate Library's study, the average size of publicly traded company's board is 9.2 members, and most boards range from 3 to 31 members. According to Investopedia, some analysts think the ideal size is seven. State law may specify a minimum number of directors, maximum number of directors, and qualifications for directors (e.g. whether board members must be individuals or may be business entities).


Committees

While a board may have several committees, two—the compensation committee and audit committee—are critical and must be made up of at least three independent directors and no inside directors. Other common committees in boards are nominating and governance.


Compensation

Directors of
Fortune 500 The ''Fortune'' 500 is an annual list compiled and published by '' Fortune'' magazine that ranks 500 of the largest United States corporations by total revenue for their respective fiscal years. The list includes publicly held companies, along ...
companies received median pay of $234,000 in 2011. Directorship is a part-time job. A 2011 study by the
National Association of Corporate Directors The National Association of Corporate Directors (NACD) is an independent, not-for-profit, section 501(c)(3) founded in 1977 and headquartered in Arlington, Virginia. NACD's membership includes the entire boards of 1,700+ corporations as well as ...
in the United States estimated that directors averaged 4.3 hours a week on board work. Surveys have indicated that about 20% of
nonprofit foundation A foundation (also a charitable foundation) is a category of nonprofit organization or charitable trust that typically provides funding and support for other charitable organizations through grants, but may also engage directly in charitable act ...
s pay their board members, and 2% of American nonprofit organizations do. 80% of nonprofit organizations require board members to personally contribute to the organization. As of 2007, this percentage had increased in recent years.


Criticism

According to John Gillespie, a former investment banker and co-author of a book critical of boards, "Far too much of their time has been for check-the-box and cover-your-behind activities rather than real monitoring of executives and providing strategic advice on behalf of shareholders". At the same time, scholars have found that individual directors have a large effect on major corporate initiatives such as mergers and acquisitions and cross-border investments. The issue of
gender representation on corporate boards of directors Gender representation on corporate boards of directors refers to the proportion of men and women who occupy board member positions. To measure gender diversity on corporate boards, studies often use the percentage of women holding corporate boar ...
has been the subject of much criticism in recent years. Governments and corporations have responded with measures such as legislation mandating gender quotas and
comply or explain Comply or explain is a regulatory approach used in the United Kingdom, Germany, the Netherlands and other countries in the field of corporate governance and financial supervision. Rather than setting out binding laws, government regulators (in ...
systems to address the disproportionality of gender representation on corporate boards. A study of the French corporate elite has found that certain social classes are also disproportionately represented on boards, with those from the upper and, especially, upper-middle classes tending to dominate.


See also

*
Alternate director An alternate director is an individual who is appointed to attend a board meeting on behalf of the director of a company A company, abbreviated as co., is a legal entity representing an association of people, whether natural, legal or a mix ...
*
Celebrity board director A celebrity board director is an officer with significant influence in the company's governance decision-making process and who possesses one or more celebrity traits including credibility, goodwill, rights, image, influence, liability, and standa ...
*
Gender representation on corporate boards of directors Gender representation on corporate boards of directors refers to the proportion of men and women who occupy board member positions. To measure gender diversity on corporate boards, studies often use the percentage of women holding corporate boar ...
*
Governing boards of colleges and universities in the United States In the United States, a board often governs institutions of higher education, including private universities, state universities, and community colleges. In each US state, such boards may govern either the state university system, individual c ...
*
Parliamentary procedure in the corporate world Parliamentary procedure in the corporate world may follow traditional parliamentary authorities such as Robert's Rules of Order or simpler rules of order considered by some commentators to be more appropriate in the corporate setting. Use of par ...
* Supervisory board (in German: ''Aufsichtsrat'') *''
Vorstand In German corporate governance, a ''Vorstand'' is the executive board of a corporation (public limited company). It is hierarchically subordinate to the supervisory board (''Aufsichtsrat''), as German company law imposes a two-tier board of dire ...
'', German for 'management board' *
Worker representation on corporate boards of directors Worker representation on corporate boards of directors, also known as board-level employee representation (BLER) refers to the right of workers to vote for representatives on a board of directors in corporate law. In 2018, a majority of Organisatio ...


Notes


References


Citations


Sources

* P. Blumberg, 'Reflections on Proposals for Corporate Reform Through Change in the Composition of the Board of Directors: "Special Interest" or "Public" Directors' (1973) 53 Boston University Law Review 547 * * KJ Hopt,
The German Two-Tier Board: Experience, Theories, Reforms
in KJ Hopt and others. (eds), ''Comparative Corporate Governance: The State of the Art and Emerging Research'' (Clarendon 1998) * KJ Hopt and PC Leyens, 'Board Models in Europe – Recent Developments of Internal Corporate Governance Structures in Germany, the United Kingdom, France, and Italy' (2004
EGCI Working Paper
* * Acre Resources LTD (2018)
The Case for a Social Board
London, UK


External links


NEDonBoard
— UK professional body for non-executive directors & board members
Website of the Board of a large U.S. university, illustrating a typical board's composition, duties, concerns, etc.National Association of Corporate DirectorsInstitute of Directors UKGBAC Global Board Advisors Corp
ref>
{{DEFAULTSORT:Board Of Directors Business law Business terms Corporate law Committees