eli5: How do corporate Boards of Directors work? What is their function? Do they get a salary? Isn’t there a conflict of interest if a CEO of one company is on the board of another company? Do all companies have them? If not, which companies have them and why?
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A corporate board of directors are ‘hired’ (elected) by the shareholders to supervise/manage/measure the officers (CEO, CFO, COO) who actually run the day-to-day operations of the corporation. They have the power to set executive compensation, and hire/fire the executives.
The job of the board is to represent the interests of the shareholders (ie the owners). They are appointed by the shareholders and often one or two members will be some of the largest shareholders themselves.
They would typically be paid quite well but only for a small number of hours a year, just covering the various meetings and any other ad hoc duties they might do.
There are two ways to avoid conflicts of interest: do not appoint people who have conflicts, or simply ignore the issue like in lots of other aspects of business!
Edit: their job is oversight of the executives of the business; appointing the officers, setting strategy, scrutinising accounts and reports etc. Guiding the business and ensuring it is being run in a way that the shareholders approve of (ie profitably).
Other organisations like charities have boards which have a very similar function, but don’t represent shareholders in the same way.
Others have talked about what Boards are, but not answered the last part. In the US, to have a corporation, you must have a Board of Directors. Granted since the vast vast majority of corporations are private, this typically means the Board of Directors are simply executives and reps for any investors in the company as they are likely the only stockholders.
(1 & 2) Boards of directors are elected by the shareholders. They exist to oversee the operations of the company, Mainly, they hire the executive officers of the company, delegate authority to those officers so the officers can do the day-to-day running of the company. The board of directors approves significant transactions regarding the company and monitor the company’s operations.
(3) Usually they get a salary.
(4) Sometimes it can be conflict of interest to be on the board of another company. If that happens, then they typically tell the other directors about the conflict and abstain from voting. But, just being on another board isn’t normally a conflict. A conflict can occur when the board needs to approve some sort of transaction where the director is on “Both sides” of the transaction — e.g. the company wants to buy property that a director owns.
(5) Only companies organized as “corporations” have boards of directors. Businesses can be organized in many different ways.
Let’s say that you have a company that makes shoes. You own 100%, but as it gets bigger, you get investors and now a bunch of people own part of this company.
You need to hire a CEO and make sure the finances are in good shape and all that. At first, you might be the CEO, but very soon, you want more time to yourself and you need to hire one. Who makes that decision when 20 people own 1-10% of the company each?
So you hire a group of people, “The Board of Directors”, to oversee the very large things. Are the numbers looking good this year? Is the CEO doing his job right?
These people usually come from one of several pools of people:
* Shareholders of a large stake can usually be on the board or name someone
* Industry experts. If this is a shoe company, you might have a retired shoe designer or someone in the leather industry
* Partners, like if a celebrity does a lot of endorsements for you, they might get a seat on the board because their reputation is tied to yours
* Non-industry experts, maybe an import-export lawyer or so
In a for-profit business, yes, there’s a salary, but you’re not getting paid for the hours you’re putting in. you’re getting paid for being the person keeping an eye on things. The lawyer above might review some really high level things twice a year to make sure nothing REALLY bad will happen.
By law, all companies have them, but in Canada, for example, a board can be one person. I own, like, 6 corporations for various things, and I’m the only director of them. Other places might say you need 3 directors or so, and those might be your sister and your accountant, who both know they have nothing to say.
As to conflicts, those exist, but it’s up to the rest of the board and shareholders to assess the risk. Like, if someone works at a competing company, and a legal battle starts between them, then it’s up to the board to decide to what degree they need a separation.
For example, I recently started an organization to fight a specific legal battle with a township, with 2 other people from the community. We sued, and while this was in court, a municipal election got both of these other two people onto municipal council.
They were sitting on a board that was suing the council they were sitting on. The nice thing was that the new elected government was going to drop the matter, so it was resolved anyway, but basically the two of them went to council and said “we’re on this other board, what do y’all want us to do about it?”
Some expert opinions came in and it was mostly a non-issue, again, because the new council didn’t care about the matter anyway.
In the UK a board is more collective responsibility, each director on the board is an executive of their own department. So finance director, HR director etc, the roles chosen can be quite strategic as a board is only manageable at around 6-8 people more than that and it gets quite hard to manage the politics. As such some functions get promoted and demoted, so tech could be within finance or operations, if it’s a fashion company design might be so important in its own directorate. You can in older boards have a chairman and a secretary whoes job is to manage the board meeting, control the adgenda, and record the minutes. If its not on the agenda it doesn’t exist if its not in the minutes it never happened…and all
That.
The managing director is just the manager of each director and overall co-ordination like the prime minister manages his secretaries of state. They usually report to a chairman who has the power to remove them and run the election for the new MD. Its why when there is a scandle the chairman steps down as it effects operations less than if the MD does. But from a reutation point of view the MD Stepping down can be seen as the company is turning its back on the MD
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