The members of the board are also the directors of an organization, who may be either outside directors or inside directors. The board members are elected or appointed to oversee the business activities and their powers and responsibilities are outlined in the company’s bylaws. Outside directors are those not employed or otherwise connected to the corporation in a stakeholder capacity.
Although there is not usually a specific contract for the board of directors, many companies offer guidelines for new directors. These guidelines describe the fiduciary responsibility of the board to act in the company’s best interest. In order to avoid misunderstandings, the Corporate Governance Committee may issue a set of guidelines concerning the expectations for directors. These guidelines will discuss the role and responsibility of the board and explain how the directors are selected and their qualifications, the duties of the board’s leadership (Chairman of the Board), conduct of the board members, committee matters, director compensation, management evaluation, and selection of the Chief Executive Officer.
Inside directors are those who do have a stake in the company’s interests. The inside director may be an employee, officer, major shareholder or anyone else who has a vested interest in the outcome of the activities of the business. Because inside directors represent the business and the company’s stakeholders and often have special knowledge of the inner workings of the organization, its financial position, and situations not known to the general board, these officers often have special contracts with the company. Examples of these types of inside directors include the Chief Executive Officer or CEO, the Chief Financial Officer, and the Executive Vice President.
Because of the impact the actions of inside directors on the business, its investors, employees, customers and suppliers, as well as communication with unions, community, government and trade associations, it is important that the duties and responsibilities of these directors be spelled out. The director’s agreement states that the company has appointed the director, what his or her term of employment and remuneration will be and what the director’s duties and responsibilities entail. The agreement provides a clear understanding of what the company requires and expects of the director, outlines the benefits the company will provide, and may have a nondisclosure agreement relating to client lists or trade secrets. It clarifies the rules concerning the use of company property and outlines methods, such as arbitration or mediation, for solving any disputes. The agreement explains the reasons and grounds for terminations, and provisions for an extension of the term of the contract. The agreement also outlines any constraints on the director; for example, it may specify that the director may or may not supply the same services either directly or indirectly in competition with the firm, both during the term of the contract and as a covenant not to compete for some time period after the contract’s end.
A contract is useful in that it leaves no misunderstanding about certain matters. This contract gives the company more control over the board and the chief officers, including the CEO. By making clear the specific standards the company expects, the board will be able to fire or discipline a director who does not meet these standards.
Another reason for having a contract is that the director may know trade secrets, so a confidentiality clause is useful in preventing the disclosure of trace secrets or client details. Again, the covenant not to compete for a certain time period after termination is also good for preventing directors or key employees from using what they learned from the company to help them in their own business ventures. By the same token, a contract is useful for retaining good employees, since it provides for the period of employment.
A contract has certain legal ramifications if broken. It is more than a promise; it represents a commitment to behave or act in a certain manner. For example, the violation of a covenant not to compete, or to act with “good faith and fair dealing” goes beyond simple breach of contract, as it can also be a breach of duty, which could have further legal consequences, which could include an injunction, damages, restoration of company property or recovery of profits, rescission of a contract, and summary dismissal.
To summarize, not having a contract for an inside director can severely limit the recovery options of a corporation. While outside directors may simply require a set of guidelines as to what is expected of them, inside directors, particularly the CEO, need a properly drafted contract to protect both the company from lawsuits and disputes and the director’s tenure of employment.
This article is written for individuals or directors of companies. Sources include, “Board of Directors,” “Board of Directors Responsibility,” “Executive Director Employment Agreement,” and “Director-Board Agreement.”