Learn about this elected group's roles and responsibilities.
One of the first acts of a new corporation is to set up a board of directors. This group of elected individuals is responsible for representing the company's shareholders.
This article describes the legal duties of a board of directors and how to select board members for your small business.
Who Are Board Members?
The individuals who are selected to be on the board of directors of a company have overall responsibility for its activities.
Boards of directors do not participate in day-to-day decision-making; instead, they set overall policy, based on the company's mission and vision, and exercise an oversight function, reviewing the actions of its officers and executives.
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.
Primary Duties of Board Members
A board of directors has several important duties. They
- Recruit, supervise, evaluate, and compensate management and executives
- Provide direction for the business through a mission statement
- Establish bylaws and a system of governing the business
- Act as fiduciaries to protect the business assets and shareholder investments
- Monitor and control business functions1
Fiduciary Responsibilities
A company's board members have a fiduciary responsibility to care for its finances and legal requirements. They have financial and other responsibilities to keep the corporation running efficiently, so the shareholders don't lose money.
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.
Annual Meeting
The board must have at least one meeting of the stockholders each year. At this annual meeting, the board announces the annual dividend, oversees the election of board members, elects or appoints officers and key executives, and amends the bylaws, if necessary.
The annual meeting may be held virtually, or as a hybrid (in-person and virtual) meeting, depending on state laws. Several states have changed their laws to allow virtual meetings.2
Liability of Board Members
What liability does a board of directors' members have in their board positions? Not as much as you might expect. A company's board members have a good deal of latitude within the scope of their duties as part of this group. Board members must be free to act in the interest of the shareholders to run the company in the best way they see fit and to take appropriate risks to help it grow.
Many companies include officer and director liability insurance in their insurance packages, but this insurance doesn't cover certain lawsuits against individual board members for acts they commit outside their scope of duties.
How To Choose Good Board Members
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, business with several committees, you might want nine 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 quorum to be able to make decisions. But too many board members can slow down any meetings and progress.
Look for these characteristics in potential board members.
Experience and Leadership
Your board members should have experience and leadership positions in a specific area which can help your company. For example, many businesses include an attorney and a financial advisor on their boards. If your business is in a technical area like computers, you should have people who have held leadership roles in in that area. They know others who can help you, and they understand the specifics of the management and operation of this type of business.
Your business can also gain a significant advantage if you select one or more board members who have experience raising capital for business startup or expansion.
Commitment to the Company
Board members will be expected to spend time preparing for and attending board meetings and to serve on additional committees, so they must make a time commitment. Board members must be interested in the business and its continued well-being and not serving just for the money or for personal interests. You don't want to have to pay your board members.
Integrity and Lack of Conflict of Interest
Integrity and lack of a conflict of interest are important qualities for board members. They will need to sign a conflict of interest statement, and must act in the best interest of the business, not their individual or professional interests. For example, a board member who profits from their service on a board of directors may put the entire company in jeopardy.
Don't select someone who hasn't been checked out thoroughly. Do a background check on all potential and get references.
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