What is a company’s board of directors and what does it do?

In the business realm, the board of directors stands as a pivotal and influential entity. It serves as the collective governing and managerial force for companies structured as public or private limited entities.

Comprising a minimum of three directors, the board holds responsibility for strategic decision-making and overseeing company management. Thus, it plays a pivotal role in charting the company’s course, ensuring alignment with its objectives and values.

“Essentially, the board of directors functions as the strategic nucleus, tasked with making pivotal decisions that shape the company’s long-term trajectory.”

Who elects the board members and how does it operate? This article delves into the board of directors’ functions – setting it apart from concepts like the general meeting – scrutinizing its internal framework and the governing regulations. We will also provide insights into how to join this crucial body.

The difference between the general meeting and the board of directors

While the board of directors and the general meeting share similarities, they hold distinct roles within the company:

• The general meeting comprises shareholders and holds supreme authority on pivotal matters, including annual account approval and dividend distribution. Members of the general shareholders’ meeting elect board members by means of a voting process, entrusting them with strategic functions.
• The board of directors shoulders the responsibility for strategic decisions and directs day-to-day management. It establishes primary guidelines for the general management and department directors, who then decide how to execute these strategic decisions and lead their teams to achieve set objectives and results.

What does it do? Ten duties of a board of directors

The board of directors’ duties are pivotal to the company’s success and future, offering managers a clear framework for effective operation.

Its main duties include:

1. Defining business strategy: as mentioned above, setting long-term objectives and company vision;
2. Enforcing agreements and commitments made with the general shareholders’ meeting;
3. Supervising and evaluating management team performance, aiding in strategic goal attainment;
4. Making key decisions: approving budgets, investment plans, acquisitions, mergers, asset transactions;
5. Appointing/dismissing management team members, defining their remuneration, and that of the board members;
6. Monitoring the company’s budgets and financial planning, including reviewing the annual accounts and analyzing financial results;
7. Convening shareholders’ meetings for extraordinary matters.
8. Establishing internal regulations and operational/administrative guidelines;
9. Risk control: ensuring the company has implemented policies to manage potential risks;
10. Compliance and ethics: ensuring the company operates in accordance with legal and ethical standards, in coordination with the Compliance team.

“The effectiveness of the board of directors hinges on its ability to make informed decisions that shape the organization’s future.”

Are all companies required to have this body?

The requirement to have a board of directors depends on the type of company and the applicable legislation in each country.

In many countries, public limited companies must have a board of directors to ensure supervision and control.

For listed companies, it is a crucial body.

For private limited companies, the requirement can vary, with many opting for a sole director or multiple joint or several directors instead of a board. This often depends on the company’s size and the shareholders’ preferences.

In family businesses or small enterprises, having a board of directors is less common. However, implementing a board in a family business offers clear organizational advantages, given the complexity of balancing competitive demands with economic interests, family loyalties, and emotional ties.

Organizational structure of the board of directors

The composition of the board of directors can vary between companies, but it typically includes a chair, a secretary, and various types of directors. It must have at least three members, who can be shareholders or not, and either natural or legal persons.

The maximum number of members is defined in each company’s bylaws and may vary: in listed companies, for example, the shareholders’ meeting sets the maximum, while in limited liability companies, it may not exceed twelve.

Chair

The chairperson of the board of directors, who may also sometimes be the chief executive officer, holds the principal role in heading up the board, ensuring its efficient and consistent operation. The Chair’s responsibilities include convening meetings, setting agendas, and facilitating discussions. This individual plays a crucial role in ensuring the board meets its obligations and represents the company in external interactions.

Types of directors

The board of directors typically comprises three types of directors:

• Executive directors: These board members also hold management roles within the company.
• Independent directors: With no direct ties to the company’s management or shareholders, independent directors offer an external and impartial professional viewpoint.
• Proprietary directors: These directors represent significant shareholders, possessing a vested interest in the company’s affairs.

“Board members are required to possess a deep understanding of the company’s status to engage in decision-making discussions and contribute value.”

Secretary

The secretary of the board of directors plays a crucial role in preparing meetings, alongside the chairperson, and ensuring their proper conduct in compliance with legal and statutory requirements. Responsibilities include taking and keeping accurate minutes, recording decisions made during meetings. This figure is key as they authenticate resolutions and certify the actions of the board.

The secretary can be a board member or an external individual, often a lawyer.

Operation and regulations of this corporate body

The functioning of the board of directors is governed by the corporate laws of the country in which the company operates and its internal bylaws. These documents outline protocols for meeting arrangements, decision-making processes, and directorial rights and responsibilities.

Regulations aim to foster transparent, ethical, and efficient board operations, safeguarding the interests of shareholders and other stakeholders.

How a board of directors works

• Board meetings are must be convened by the chairperson at least once per quarter or as specified in the company’s bylaws.
• For a valid quorum, more than half of the members plus one must be present. Directors unable to attend have the option to appoint a proxy to represent them.
• Every board member holds both a voice and a vote in discussions and decision-making processes.
• Resolutions and decisions are ratified based on either a consensus or an absolute majority among the attending directors, unless the company’s bylaws stipulate a larger majority.
• By law, board discussions and resolutions must be documented in a minute book, which is then signed by both the chairperson and the secretary.

How do you become a member of a board of directors?

Gaining a board position necessitates a blend of experience, skills, connections, and reputation.

Mario Lara Sanz and Antonio Núñez Marín highlight in an article on Do Better, Esade’s knowledge portal, that transitioning from an executive to a board member demands more than simply holding a C-Level position and leadership experience:

“Success stories of executives who have spearheaded significant business transformation resonate profoundly at shareholders’ meetings.”

In essence, individuals who have navigated and triumphed over complex management scenarios. But, obviously, there are other points that can help a candidate to reach the position of director:

5 key points to become a board member

1. Hold a C-level management position with a stellar professional track record, particularly demonstrating success in leading business transformation.
2. Cultivate a network of high-quality contacts, including investors, shareholders, chairpersons, and other board members, who can advocate for your candidacy.
3. Acquire specialized knowledge and training in corporate governance, encompassing business administration, strategic foresight, risk mitigation, sectoral and company-specific expertise, and robust decision-making frameworks. Participation in dedicated programs such as the Program for Board Members or the Program for Boards of Directors in Family Businesses at Esade can be advantageous.
4. Gain prior experience by serving on boards of smaller companies or participating in advisory committees, enhancing the strength of your candidacy.
5. Uphold an impeccable reputation and showcase a dedication to ethical conduct and regulatory adherence. Boards and directors bear commercial and legal responsibilities, so maintaining integrity and compliance is paramount to mitigate risks of malpractice.

If you are seeking to elevate your profile as a board member or to submit your application, don’t hesitate to reach out to us.

We will work with you to identify the program that best aligns with your profile and requirements.