Understanding the Roles of a Board of Directors
One might naturally assume that the C.E.O. of a company is the one who is in charge of the business. The reality is, that while C.E.Os often enjoy the spotlight, and are indispensable to the success of a company, there is a group of individuals, often operating behind the scenes, that has the ultimate fiduciary responsibility–the board of directors.
In a publically traded company, the board of directors, chosen by shareholders, have the monumental task of looking out for the shareholder’s interests. In many cases, this is a directive which they are legally bound to uphold, even above their investments. The board oversees the litany of activities of a business. Boards usually serve in an advisory role while also actively engaging with the company in an oversight capacity. Another function of the board of directors involves hiring talent and senior executives overseeing their compensation packages.
According to the Chief Marketing Officer of the National Association of Corporate Directors (NACD), “the role of the board is to oversee the affairs of a company from 50,000 feet, to ensure the long-term sustainability of the company.” Still, other board members prefer a more active role and view such an investment of time and energy as a benefit to the company.
This role often comes with significant responsibilities, as some boards are subject to federal legislation including those of the stock exchange. Since the actions of the board will either positively or negatively affect the company’s profitability, it is incumbent upon shareholders to elect board members that align themselves with the core mission of the company.
As directors are in the front lines of strategic planning, M&A, declaring dividends and even nominating new board members (in some corporate structures, board members are not permitted to put forward their successors for consideration), choosing the right board of directors becomes more like a game of chess than checkers.
Typical boards focus on certain committees to meet specialized tasks. The kinds of committees board members are involved in will vary from industry to industry; however, the main purpose for committees within a board of directors is to streamline processes and see tasks to completion for the benefit of the company. Still, some boards elect to delegate committee-type tasks to workgroups within the company as special needs arise.
Generally speaking, there are three kinds of directors; the independent director; the outside director; and the inside director. Independent directors are typically held to a higher standard as they cannot have real ties to the company they serve. The idea is that there be no conflicts of interest between the board member and the company. With the fallout from recent financial crisis’, new regulations and exchange rules, many companies are opting for independent directors.
The main difference between inside and outside directors is simply an issue of roles. Inside directors serve a dual purpose as company executives; whereas, outside directors are not employed by the company. Both functions may have some financial compensation; however, it is not uncommon for this compensation to come in the form of company stock.
When it comes to outside directors, who bring vast experience with them to their role, some companies prefer these professionals as their insights and experiences often lend to forward progress and an “outside looking in” perspective which naturally allows for objectivity.
Inside board members, who serve dual roles within a company have come under fire recently. Proponents of inside board members see this as an advantage, as the C.E.O. generally runs the company and has their finger on the pulse of the day-to-day affairs of the business. Opponents argue that this is the exact reason why inside board members should not be allowed, citing the risk of conflicts of interest. Still, this is a long-standing practice as approximately 50% or higher S&P 500 companies utilized inside directors with the combined role of chairman and C.E.O, which raises the issue of C.E.O. performance evaluation. To address this, the C.E.O. will generally consent to peer review and submit to majority rule. These kinds of issues, addressed in company articles pertaining to inside board members and their roles, are unique to each company.
Depending on the companies policies and procedures, each year, the shareholders have the opportunity to vote on who holds positions of leadership in a publically traded company. It is of vital importance that proxy collateral is concise as shareholders will scrutinize these materials.
At Ferguson Interests, LLC., we tackle these kinds of issues head-on. With over ten years of experience in creating value for public companies, growing them in some instances from $30 million to $350 million dollar businesses, Rob is adept at helping small and middle market companies with some of their toughest business challenges. Rob is a member of the National Association of Corporate Directors and brings expertise and direction to companies who may be looking at developing a board of directors.