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Every company has a CEO or someone like a CEO who oversees the activities of their organization. When the organizations in question are large corporate companies, the responsibility of overseeing all the activities are doled out to a select few people. Those people usually hold a position on the Board, or Board of Directors.
The board’s activities are usually determined by the powers, duties and responsibilities delegated to it by an authority outside of the board itself. However, the board always acts on behalf of the organization, no matter whom or what is dictating their activities. In order to always act in the best interests of the company, the board is usually a professional society, which means that they vote on members. In some organizations, the board members are voted in by other board members; in others, they are voted in by people within the company, but outside themselves; in others, there is no voting process, and board members are merely chosen by other members.
Each board has a very distinct way of doing business. This specialized process is called the board process, and though it varies from organization to organization, it typically includes the selection of board members, the setting of clear board objectives, the dissemination of documents to board members, the collaborative creation of an agenda for the meeting, the creation of follow-up actions items and the assessment of the board process itself. This last part is done through standardized assessments of board members, owners and CEOs. Because of the extremely private nature of most organizations, the science behind the board process has been slow to develop; however, standardization is beginning to develop. Some major organizations are actually pushing for standardization; they include National Association of Corporate Directors, McKinsey Consulting and The Board Group.
Generally speaking, the control of any company or organization should be divided between two bodies: the board of directors and the shareholders. The amount of power exercised by each group varies with the type of company. In smaller, privately owned companies, the directors and the shareholders and generally one in the same, and so, there is no real division of power. However, in larger public companies, the board tends to exercise more power, and individual responsibility and management duties tend to be delegated down to individual professional executives, such as the finance director or marketing director, who do with particular areas.
Also, in large public companies, the board tends to have more de facto power. Shareholders grant directors proxies to vote their shares at general meetings, and accept all recommendations of the board rather than trying to actually get involved in the meetings. Larger institutional investors tend to do this as well.
The funny thing is that even though board members have so much power, a lot of times in large public companies it is upper management and not boards that wield practical power, because boards delegate nearly all of their power to the top executive employees, adopting their recommendations almost without fail. As a practical matter, executives even choose the directors, with shareholders normally following management recommendations and voting for them.
Believe it or not, serving on a board is not a career in itself, but board members receive remunerations that amount to hundreds of thousands of dollars a year, especially since they often sit on the board of several companies. So, though it is not a career, it sure pays well enough to be one. Inside directors are usually not paid for sitting on a board, but the duty is instead considered part of their larger job description. Outside directors are usually paid for their services.
So, how did “The Board” come about? The development of a separate board occurred over time, and not until the late 19th century. Up until then, it was the shareholders that made all the major decisions of the company, and that were the backbone of any organization; the board was merely an agent of the company, subject to control of the shareholders.
By 1906, however, the English Court of Appeal made it clear that the division of powers between the board and the shareholders in general meeting depended on the construction of the articles of association, and that were the powers of management given to the board in said articles, the general meeting (being the shareholders) could not interfere. The articles were held to constitute a contract by which the members had agreed that “the directors and the directors alone shall manage.”
Though this new approach to general meeting did not meet immediate approval, it was endorsed by the House of Lords in 1909, and has since received general acceptance.
“A company is an entity distinct alike from its shareholders and its directors. Some of its powers may, according to its articles, be exercised by directors, certain other powers may be reserved for the shareholders in general meeting. If powers of management are vested in the directors, they and they alone can exercise these powers. The only way in which the general body of shareholders can control the exercise of powers by the articles in the directors is by altering the articles, or, if opportunity arises under the articles, by refusing to re-elect the directors of whose actions they disapprove. They cannot themselves usurp the powers which by the articles are vested in the directors any more than the directors can usurp the powers vested by the articles in the general body of shareholders.”
You do not want a board member that wants to get involved in every little aspect of your day-to-day business. These people will only add confusion to your board, and not structure and organization, which is what they’re there to do. Instead, the candidates that add the most value are those that bring focused expertise to the table. They add their two cents when they know that they can give sound advice, or when they believe they can add real value, but they leave the day-to-day operations to the CEO and their management team. Your new board member should help you tackle the larger business issues, and don’t meddle in your operations on a daily basis.
What good is a board member if they can’t effectively communicate with you or other members of the board? Regular communication is vital to the health of your company. Information should be focused, timely and digestible. You don’t want a board member who will send out an 80-page packet with your financials in the night before the meeting; there is no way that the others will be able to stay up to speed like this, so your new board member must be the type to keep other members updated and in the know.
Focus: All board members need to know how to keep their focus on substantive issues. If you had a board of directors that only wanted to talk about dress code or the competition the whole time, then you’re in trouble. In order to keep focus, board members should be able to present solutions to current problems, and not just open-ended questions. This way, they’ll get immediate input, and not become bogged down by minor issues.
Though every board needs a few yes-people, it needs just as many who are willing to say no. An effective board is comprised of people of diverse backgrounds and viewpoints that differ from each other’s. A board shouldn’t be the least bit afraid about offering guidance and feedback that may be disconcerting. A solid board of directors is comprised of people who don’t think like one another, and who are not afraid to stand up for what they believe in. Boards require strong-willed people with a great deal of experience.