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?
In: 66
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.
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