You know the term, but what does a board of directors actually do?

When you incorporate your small business, you will likely have a board of directors. Knowing what this board does will provide you with some idea of how to choose and work with your board.

Board of Director Basics

A board of directors are either appointed or elected officials who oversee a corporation’s operations. This body might also be called a board of visitors, executive board, board of regents, board of trustees, board of managers or, more colloquially, “the board.”

Company bylaws delineate specific duties. These bylaws also determine how the members are chosen, how many board members there are and when and how often the board must meet.

Board of Director Duties

While bylaws determine specific duties, common duties delegated to a board of directors include:

  • Setting salaries and compensation for themselves.
  • Overseeing and governing the organization, including setting forward the broader direction and objectives for the company.
  • Accountability to shareholders for the overall performance of the organization.
  • Recruiting, appointing and doing performance reviews for the chief executive.
  • Approving the budget on an annual basis.
  • Making sure that the company has adequate financial resources available at all times.

Ethical Duties

There are some broad ethics generally accepted for any board of directors. These include:

  • Avoiding Conflicts of Interest: Directors are expected to avoid all situations where their duties and interests as directors come into conflict with other interests. This is not merely an ethical concern -- it can also have serious legal ramifications.
  • Unfettered Discretion: Directors are forbidden from making agreements to vote in a particular way in the future. This is unrelated to whether or not the director is receiving any benefit from his future votes. It is expressly forbidden in all situations, regardless of the circumstances.
  • Proper Purpose: Members of the board must use their authority for its proper purpose. That is to say, directors must use their seat on the board to make sure the company prospers to the best of their ability.
  • Good Faith: A board of directors has to operate in good faith. While difficult and subjective to gauge, the directors must act in the best interests of the company at all times. Good faith is similar to proper purpose and considered one and the same in many jurisdictions.

What Does a Board of Directors Do?

A board of directors can be considered the highest-ranking and most important advisor a corporation can have. It will be made up of, regardless of the mechanism for choosing its members, highly qualified business officials with many years of experience. Having a board of directors, even for a privately held corporation, can provide a meaningful way to get several minds working on the problems that confront the modern business. Having several experienced businessmen working on the issues confronting your company is always better than one.