One of the first acts of a new corporation is to set up a corporate board of directors. The board of directors for a corporation is responsible for steering the corporation through the rough waters of its mission to the shareholders. A corporate board also has legal duties and other duties, spelled out in this article.
Duties of Corporate Board Members
The individuals who are selected to be on the board of directors of a corporation have overall responsibility for the activities of the corporation. A corporate board is not responsible for day-to-day decision-making; the daily decisions are made by the corporation's executives and managers. The corporate officers are the people who head departments, and these executives are responsible for running the business.
Think of it this way: The board of directors operates like an airline pilot at the 30,000 feet level, overseeing everything, seeing the big picture, and changing course when necessary. The executives operate at the 1000 foot level, while the employees are on the ground.
The board acts on behalf of the shareholders to make overall policy decisions and provide oversight. The board has a fiduciary duty with respect to the shareholders; that is, the board has financial and other responsibilities to keep the corporation running efficiently, so the shareholders don't lose money.
The bylaws establish the specific duties of the board of directors and establish rules of procedure for the board. While this sounds just procedural, the operations of the board are key to the running of the corporation. For example, the board can vote on a move to a new location or a change in major products or services.
Primary Duties of Board Members
- Fiduciary responsibility
As noted above, corporate board members have a fiduciary responsibility to care for the finances and legal requirements of the corporation. They must act in good faith and with a reasonable degree of care, and they must not have any conflicts of interest. That is, the interests of the company must take precedence over personal interests of individual board members.
- Mission and Vision
Board members are responsible for setting the mission of the company and assuring that all actions are related to and adhere to that mission. The board can change the mission, but only after careful deliberation. All large corporations have mission statements, and creating a mission statement should be one of the first things the board of a small business should tackle.
Corporate boards of directors do not participate in day-to-day decision-making; instead, they set overall policy, based on the corporate mission and vision, and they exercise an oversight function, reviewing the actions of corporate officers and executives.
- Annual Meeting
At the annual meeting of the corporation, the board announces the annual dividend, oversees the election of corporate board members, elects or appoints officers and key executives, and amends the bylaws, if necessary.
Number of Directors on Your Board
First, select an uneven number of board members, to avoid ties. The number of board members depends on the size and complexity of the organization. For a small organization, five to seven people are plenty. For a larger, more complex, organization with several committees, you might want 9 to 11 people at the minimum.
You need enough people on your board so that, if several people are not present, you can still have enough to make a decision, and for a quorum. But too many board members can slow down any meetings and progress.
What a Good Board Member Looks Like
When you are recruiting board members, look for these characteristics:
- Expertise in a specific area which can help your corporation. For example, many corporations include an attorney and a financial advisor on their boards.
- Leadership and management experience, especially in related businesses. For example, if your business is in a technical area like computers, you should have people who do business in that area. They know others who can help you, and they understand the specifics of the management and operation of the business.
- Commitment to the business. Board members must be interested in the business and its continued well-being. They should not be serving just for the money or for personal interests. You don't want to have to pay your board members.
- Time and energy to devote to board duties. Board members will be expected to spend time preparing for and attending board meetings and to serve on additional committees.
- Integrity and lack of a conflict of interest. Board members will need to sign a conflict of interest statement, and they must act in the best interest of the business, not their individual or business interests. For example, a board member who profits from his or her service on a board of directors may put the entire company in jeopardy.
- Ability to raise money for the corporation. Your business can have a significant advantage if you select one or more board members who have experience raising capital for business startup or expansion.
Who Not to Select for Your Board of Directors
- Don't select someone just because they are a friend or relative.
- Don't select someone who hasn't been checked out thoroughly. Do a background check, get references.
- Don't select anyone who has a conflict of interest or potential conflict of interest.
Liability of Board Members
What liability does a corporate board of directors members have in their board positions? Not as much as you might expect. Corporate board members have a good deal of latitude within the scope of their duties as corporate board members. Board members must be free to act in the interest of the shareholders to run the corporation in the best way they see fit and to take appropriate risks to help the company grow.
Many corporations include officer and director liability insurance in their insurance packages, but remember that this insurance doesn't cover certain lawsuits against board members. Gregory Boop, Business Insurance Expert, says this about the liability of corporate board members:
Directors and officers may be sued individually for acts or errors they commit while serving the corporation. These individuals may be held personally liable for such acts. If a director or officer is found liable for a wrongful act, his or her personal assets may be used to pay damages to the plaintiff.