Board of directors

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Board of directors definition

A group of people that provides expertise for a company or organization. The board of directors offers high-level overall direction and strategy for the organization and protects the financial interests of investors.

What is a board of directors?

A board of directors is a group of people who represent the interests of a company’s shareholders. It also provides guidance and advice to an organization’s CEO and executive team.

A board provides general oversight of operations without getting involved in day-to-day operations. Boards can be more future focused, while the CEO and management concentrate on day-to-day challenges. In recent years, boards have been putting an increased emphasis on the environmental and social impacts of businesses.

Every board member is expected to use their position and expertise to advance the best interests of the company.

What is a board of directors’ role?

A company’s board of directors sets policies and advises the executive team on strategy, executive compensation, dividends, resource management, social responsibility and other matters. Every board member is expected to use their position and expertise to advance the best interests of the company, while remaining objective and free from conflicts of interest. Board members are also expected to keep corporate information confidential and uphold the company’s code of conduct.

“It offers oversight of the company’s operations, but one of the duties of the board is the hiring and firing of the CEO,” says Lori Brotherton, Manager of the David and Sharon Johnston Centre for Corporate Governance Innovation at the University of Toronto’s Rotman School of Management, who adds that the board also approves the strategy and ensures it’s being executed.

Who makes up a board of directors?

Ideally, a board will include both management and non-management personnel, each elected for a specific period. Many companies aim to have board members’ terms begin and end at different times to avoid vacancies and the need to fill multiple positions at once.

The structure, composition and operating requirements of a board of directors are spelled out in a company’s bylaws.

Can shareholders be on the board of directors?

“Yes, they can,” says Brotherton. “You sometimes see that in larger organizations, or with a smaller company, depending on whether there’s a shareholders’ agreement, which may call for a board seat for a shareholder.”

Do board members get paid?

“If you are on the board of a publicly traded company, yes, there will be director compensation, and that will be clearly articulated and disclosed in a company’s proxy circular,” Brotherton says. “When it comes to smaller businesses, there may be some remuneration or fees. But there’s not really a consistent standard among smaller businesses. There’s a wide range of compensation.”

How are board of directors’ members appointed?

Board members, known as directors, are nominated by a committee and elected by shareholders. Terms can vary. Many organizations stagger terms, which helps provide a blend of continuity and new ideas.

Is a board of directors required for a private company?

“In order to meet the minimum requirements of the Canada Business Corporations Act, every for-profit company needs to have a director. The composition of the directors will be determined by each company,” says Brotherton.

“A founder, or CEO will have the discretion to choose who will be on the board. It’s very common that, in the early stages, the board is simply the founder and two key investors.”

What are the benefits of having a board?

Having a board of directors means being able to leverage external expertise.

“No CEO is an expert in everything—but the board of directors can be. In an advisory capacity, the board can weigh in, and have a lens that is very high-level and strategic, to help a CEO navigate through what can be tricky times,” Brotherton explains.

“As an example, let’s look at COVID-19. CEOs would have leaned on their boards to help them navigate through unknown waters. The board members can provide a lot of knowledge and expertise,” she says.

Brotherton says another benefit of having a board is that members can be looking ahead a few years.

“The CEO is focused on what’s happening right now, but the board can also help look at what’s going to be happening in five or 10 years down the road.”

Brotherton says there may be problems if too much advice is coming from too many board members—especially if some of the advice is contradictory.

“That’s not always helpful,” Brotherton says. “There’s an expression ‘noses in, fingers out,’ meaning actively overseeing what’s happening, but not being involved in the doing of the action.”

She says it’s the responsibility of the board chair to make sure board members provide appropriate oversight.

Brotherton compares the chair’s managing of board members to an orchestra conductor. “The role of the board chair is critical, and it’s also a very difficult role. It takes strong leadership to navigate potentially eight or 10 different personalities who all may have very strong opinions.”

The board of directors can act as a sounding board to help a CEO navigate through tricky times.

How has COVID-19 affected board operations?

Brotherton says since COVID-19, there has been more talk around boardroom tables about corporate culture and mental health wellness, as well as a call for more human resources expertise among board members, and whether so many in-person board meetings are really required.

When does a company need a board of directors?

As an organization grows larger, more complex and more sophisticated, there may be greater benefits to having a board.

“No one can say precisely at what point an organization needs a board of directors,” says Brotherton, who says the pressure sometimes comes from reaching out to investors who then are asking for a more formal setup. “Those investors may want to know how your company is structured, and what the board governance is.”

Today’s board members largely have specific experience and a skillset they bring to the table.

How have boards changed over the years?

“In the past 20 years or so we have seen a ‘professionalization’ of boards. The image of the director as a post-retirement position is beginning to fade,” Brotherton says. “Today’s board members largely have specific experience and a skillset they bring to the table. There has also been a focus on director education, to ensure you have the right people with the right experience.”

How important is diversity of skills on boards?

“If an organization is embarking on an ambitious digital transformation, then someone with a strong background in that area will be important,” Brotherton says.

She says diversity of skills—including such things as accounting, marketing and legal expertise – is essential, so you’ve got people around the board table who have a range of skills that can help the board reach decisions that are best for the organization.

How important is demographic diversity on boards?

Board diversity can mean more than a diversity of skills, but also such elements as race, ethnic background, gender and sexual orientation. Boards are starting to look different than in the past.

“There’s a qualified talent pool of women who are capable of being on boards, and I think we have seen that shift. Canada is not leading the pack, but there has definitely been improvement during the past decade or so.”

“When it comes to diversity beyond gender, more work needs to be done. It’s not just a question of who is at the boardroom table, but also who is not at our boardroom tables,” Brotherton says.

“The lack of demographic diversity calls into question how we are recruiting directors. How do we find them? Are our processes to find directors transparent and open?”

What are some of the challenges facing boards in the future?

Looking ahead, Brotherton says boards will be paying more attention to ESG—environmental, social and governance issues.

“For example, companies are being asked, ‘What are you doing when it comes to climate change, sustainability and your supply chain?’” She adds that there will be social questions related to diversity of stakeholders, customers and employees, as well as how your business operates in certain communities and governance issues with regard to the diversity of your board of directors and executive compensation.

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