As a business owner or investor, do you ever wonder what exactly the board of directors does? Beyond just attending the occasional meeting, the board serves some core functions that are vital for company oversight and strategy.
In this post, we’ll break down the key responsibilities of the board and why they matter. Understanding the board’s role can help you evaluate whether your own board is operating effectively or if changes may be needed.
A high-functioning board is critical for governance and guiding the company to success. Read on to learn more about what your board should be doing and the value they can bring.
What is a Board of Directors?
A board of directors is a group of individuals elected to represent shareholders and oversee management of the company. The board is ultimately responsible to the shareholders and stakeholders of the business.
Board members may include inside directors who are part of the company’s executive team as well as independent directors from outside the company who can provide an objective perspective.
The board size and composition varies based on the size and needs of the organization. Larger companies may have boards with 10-15 members while smaller businesses may only need 3-5 board members.
Regardless of the board’s size or structure, some core responsibilities remain the same across most boards.
9 Key Functions of the Board of Directors
1. Select and Evaluate the CEO
One of the board’s most important jobs is to hire, evaluate, and if necessary replace the CEO. This involves assessing CEO candidates during the hiring process and then conducting ongoing performance reviews.
The board must provide clear expectations for the CEO role and set goals aligned with the company’s strategy and objectives. Regularly evaluating the CEO’s progress and effectiveness is key to ensuring the right leadership for the company.
2. Review and Guide Strategy
The board reviews and advises on the company’s overall strategy as developed and proposed by management. This high-level oversight ensures the strategy aligns with shareholder interests and the future vision for the company.
Guiding strategy involves analyzing things like:
- Growth opportunities
- Risk management
- Competitive landscape
- Industry trends
- Economic factors
By advising on strategy, the board aims to ensure wise, informed decisions that will drive sustainability and growth.
3. Assess Major Risks
A core duty of the board is to identify, understand, and determine how to respond to risks facing the company. This includes reviewing management’s risk assessments and mitigation plans.
Some top risks the board may evaluate include:
- Cybersecurity threats
- Supply chain disruptions
- Financial risks
- Legal and regulatory compliance
- Environmental impact
The board helps gauge the most significant risks and advise on proper risk oversight processes. Their guidance can help management avoid preventable pitfalls.
4. Review Financial Performance
Boards are responsible for closely monitoring the company’s financial statements and performance. This involves regularly reviewing financial reports and metrics versus plans and projections.
Some key aspects the board may analyze include:
- Revenue and sales data
- Profit and loss
- Cash flow
- Liabilities and debt levels
- Spending and budgets
- Growth trends
Strong financial oversight requires understanding the numbers as well as questioning assumptions, estimates, and management decisions that influence the finances.
5. Set Executive Compensation
The board has the important task of setting appropriate compensation for the CEO and other senior executives. This includes elements like:
- Base salary
- Equity participation
Aligning pay with individual and company performance helps attract and retain qualified leaders. It also ensures executives are fairly compensated for their contributions.
6. Develop Succession Plans
To prepare leadership continuity, the board constructs a succession plan for the CEO and other critical roles. This involves working with management to identify and develop future leaders from within the company.
Having qualified succession candidates helps avoid disruption if key executives leave. It also empowers rising talent when opportunities open up.
7. Maintain Governance Standards
Boards create and uphold governance policies and practices for the company. This can cover things like:
- Codes of conduct
- Transparency expectations
- Board appointment rules
- Conflict of interest guidelines
- Internal controls
- Accountability systems
Setting governance standards enhances integrity, ethics, and decision-making practices across the organization.
8. Provide Advice and Counsel
In addition to their oversight duties, board members act as trusted advisors to the CEO and leaders. They offer insights, ideas, and expertise to help guide strategy and operations.
This advisory role relies on the experience board members bring from other leadership positions and industries. Their wisdom and perspective can prove invaluable for management.
9. Manage board members
Directors are also responsible for managing each other. i.e., other board members. Board members, depending on the circumstances or business needs, may hire or release their colleagues from the board.
For example, if the board believes that it needs additional support in a particular section or project of the company, it may hire new personnel or promote someone from the company to do the job.
Maintaining transparency in board operations can be very challenging for the board. It is vital to keep track of what other board members are doing. One way to manage board members effectively is to use virtual boardroom software. Board room software helps the board ensure maximum transparency, improves collaboration between board members, and automates board document management.
Why an Effective Board Matters
As this overview illustrates, the board serves critical functions that impact customers, employees, shareholders, and the whole company. A board that performs its duties well promotes:
- Strong leadership at the top
- Wise strategy setting
- Prudent risk management
- Oversight on finances
- Fair executive compensation
- Robust succession planning
- High ethical standards
- Sound advice and counsel
On the other hand, a disengaged or dysfunctional board can lead to problems like poor strategy, uncontrolled risk, leadership gaps, and even financial misconduct or corporate scandals in extreme cases.
For any company, it’s important to empower and leverage your board for maximum impact. Assess if your board has the right skills, structure, practices, and engagement to fulfill its intended role.
An effective board enriches company leadership and helps drive growth and sustainability for the future. With diligent effort and ongoing evaluation, your board can elevate governance and guide your organization to prosperity.
Frequently Asked Questions
What are the key functions of the board of directors?
The board has 8 core functions: Select/evaluate the CEO; review and guide strategy; assess major risks; monitor financial performance; set executive compensation; develop succession plans; uphold governance standards; and provide advice/counsel to management.
What is the board’s role in company strategy?
The board reviews, advises on, and approves the overarching company strategy created by management. Their guidance aims to ensure the strategy aligns with shareholder interests and the long-term vision.
How is the board involved in risk management?
The board reviews assessments and plans related to top risks like cyber threats, supply chain issues, legal/regulatory matters, and more. Their oversight helps ensure risks are properly evaluated and mitigated.
How does the board oversee finances?
The board regularly reviews financial statements, metrics, projections, budgets, and performance trends to maintain strong oversight of the company’s financial health.
How are board members selected?
Board members are elected by shareholders, though the current board often nominates candidates to recommend. Board size and composition depends on the company’s needs and stakeholder interests.
Should the CEO be the board chairman?
Opinions vary on whether the CEO should also hold the chairman role. Potential benefits include unity of command, but downsides can be less oversight on management. Many prefer separating the two roles.
Do board members get paid?
Yes, board directors receive compensation typically in the form cash retainers and stock awards. Compensation varies based on the board role, company size, industry, and other factors.
How often does the board meet?
Most boards meet quarterly, though urgent matters may warrant ad hoc meetings. Committees like audit and compensation meet more frequently depending on needs.
What qualifications should board members have?
Desired qualifications depend on current needs but often include leadership experience, industry expertise, finance skills, strategic thinking, among other areas.
Effective oversight by a high-functioning board is a tremendous asset for any company. Understanding the board’s core responsibilities empowers you to evaluate and optimize their role within your organization. With an engaged board playing close strategic partner to management, companies can pursue success and lasting prosperity.