FAQs

What is a board of directors?

A board of directors is an elected group of individuals that represent shareholders. The board is a governing body that sets policies and oversees corporate management. The board is responsible for protecting investors’ interests. Every public company must have a board of directors. Many private companies and nonprofit organizations also have a board of directors. (Investopedia)

What is the difference between corporate boards and nonprofit boards?

In general, corporate directors of public companies focus on growth strategies and generate profits to return to shareholders in stock equity and dividends. Nonprofit board members do not seek to maximize and disperse profits but are focused on raising funds for programs and services to constituents. For-profit board members typically are paid; nonprofit board members usually are not.

 What does a board of directors do?

Corporate boards hire, manage, and terminate the Chief Executive Officer. Boards are responsible for the compensation and incentive plans for senior executives, ensuring that financial resources are available. Boards review and approve annual budgets and company financials and guide the CEO and senior management regarding strategic decisions.

What is the role of the board’s Chairman?

The Chairman of the board (or chair) directs and facilitates the meetings of the board. The chair determines board composition and organization, oversees board and management responsibilities, plans and manages committee meetings, and develops the board’s effectiveness. In some corporations, the CEO also serves as Chairman; in other companies the role is separated.

 What is the difference between the CEO and the Chairman?

A CEO is the company’s top decision maker. All other executives answer to him or her. The CEO is accountable to the board of directors for company performance. The Chairman of the company is the head of the board of directors. The board usually elects the Chairmen. Board members are selected by the Nominating/Governance Committee and then approved by shareholders at the annual meeting.

 How many members does a board of directors usually have?

Boards usually have between 7 and 12 members; some boards have as few as four members, and some have as many as 30. The average board size of the Russell 3000 companies is 8.9 members. Some analysts think boards should have at least seven members to satisfy board roles and the committees’ requirements.

 How do I find out how many women are on a board of directors?

To find the number of women serving on Russell 3000 companies’ boards, use our Gender Diversity Directory to search by company name, state headquarters, sector, or rating. The company’s board of directors will also be listed under its investor relations or corporate governance tab on their website or 10K document online. 

 What do corporate board committees do?

There are four primary board committees: executive, audit, compensation, and nominating/governance. An executive committee is a small group of directors who can implement the board’s fiduciary and strategic policies when the full board is not available. The audit committee reviews the financial statements with internal and external auditors. The compensation committee determines the salaries and bonuses of senior-level executives and the board. The nominating committee decides the slate of directors for shareholders to vote their approval. There may be additional committees created depending on corporate philosophy and particular circumstances relating to its line of business.

What’s the difference between independent directors and inside directors?

An independent director, or outside director, is a board director who does not work for the company. Independent directors are essential because they bring diverse and backgrounds to decision making and are unbiased. Independent directors are paid a standard fee for each board meeting. Inside directors are often members of the corporation, usually part of the corporation’s management team. There may also be familial connections with the CEO, which would suggest that the director is not “independent” or free of influence or potential conflicts. 

What are corporate bylaws, and why are they important?

Corporate bylaws are rules that govern how a company operates. Bylaws state the rights and powers of shareholders, directors, and officers. If a board wishes to change its bylaws, it is often necessary for shareholders to vote to approve the change.

When might a conflict of interest arise?

Conflicts of interest occur when the personal or professional interests of a board member or senior executive are potentially at odds with the corporation’s best interests. Conflicts of interest often result in loss of public confidence and a damaged reputation.

What are the qualifications to serve on a corporate board?

Board members must bring senior-level executive or other equivalent professional experience in critical areas beneficial to the company. Directors must be able to read, understand, and offer suggestions and comments on financial statements. Although not required, board members should reflect the constituents that a company serves, including ethnic diversity, gender, and age.

How are new board members chosen?

Public company directors are selected based on the nominating committee’s criteria, and often new directors are chosen for their expertise in critical areas useful to the corporation. CEOs and board chairs select directors they know. Sometimes they turn to executive search firms to find qualified candidates that meet their search criteria. However, gender representation and diversity are business imperatives, so directors should expand their search and look outside their networks to find qualified women to serve on boards.

How has the role of the board of directors evolved over the years?

Years ago, a company’s board of directors included employees, family members, and friends. But shareholder influence and government regulations require boards to have independent directors not associated with the company or its executive team. Today, many shareholder resolutions request companies to diversify their boards and appoint directors of different backgrounds, gender, and race.

What is the time commitment expected of a corporate board director?

Board directors must be able to dedicate the time necessary to fulfill their commitment to the company responsibly. Including board training, analyzing financial statements, reviewing board documents before board meetings, attending board meetings, serving on committees, participating in discussions, phone calls, or other board requirements. Most boards meet at least four times a year and some meet monthly.

Are there personal and professional benefits to serving on a corporate board?

If you serve on corporate boards, it signals that you are advanced in your career and can provide you with valuable career recognition. Being elected as a board director demonstrates that your skills are useful outside of your organization. Directors meet diverse individuals to grapple with timely and relevant issues.

Are corporate board directors compensated?

Corporate board directors are well compensated, and the size of the company often determines compensation. It’s not unusual for large companies’ corporate directors to be paid six-figures for each year they serve and receive stock options.

Do boards have term or age limits?

 Some boards have term limits and age limits, and others do not. The National Association of Corporate Directors recommends term limits of 10 to 15 years to promote turnover and obtain fresh ideas. Age limits range from 70 to 80 years old, and many companies have no limit. Without term or age limits, it is often difficult for companies to suggest that current board members retire or step down, making it more difficult for women to enter the boardroom.

How do boards of directors affect people and communities?

Boards of directors guide corporate behavior. Decisions made by the boards of public companies can directly impact our daily lives. For example, a board might approve decisions to close or relocate factories or merge with other companies, resulting in job loss. Good companies often provide financial support to nonprofit organizations in their communities.

Are boards required to consider diversity when electing directors?

There are no rules about board composition with a few exceptions, but it is well recognized that diversity on boards contributes to better decision making. In 2018, California became the first state in the nation, mandating that public companies headquartered in the state have at least one woman on their boards of directors by the end of 2019 (SB 826), with further future increases required depending on board size. Other states are considering similar legislation. Additionally, in September of 2020, California passed AB 979. The bill requires publicly held companies headquartered in the state to include board members from underrepresented communities. Underrepresented communities are defined as “an individual who self‑identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self‑identifies as gay, lesbian, bisexual, or transgender.” Most recently, in December of 2020, Nasdaq (Nasdaq: NDAQ) filed a proposal with the U.S. Securities and Exchange Commission (SEC) to adopt new listing rules related to board diversity and disclosure. If approved by the SEC, the new listing rules would require all companies listed on Nasdaq’s U.S. exchange to publicly disclose consistent, transparent diversity statistics regarding their board of directors. (Harvard.edu, Nasdaq.com)