Much of it describes the roles that boards should play, not those that they really do. For over a quarter century, I have observed, served on, and studied boards of directors. In the process, I have developed a healthy skepticism about the prevailing and generally accepted concepts of boards of directors. What my experience bears out has, in fact, little relationship to the classic statements concerning their appropriate functions.
In short, the generally accepted roles of boards—e. The purpose of this article, which is based on a recent research project see accompanying ruled insert for my methodology , is fourfold.
First, I shall describe briefly what I have found boards to be actually doing and note the disparity between theory and practice. Then, I shall discuss what directors do not do. Third, I shall identify the critical and controlling role of presidents. And finally, I shall offer a five-point program for more active board involvement in large and medium-sized, widely held companies.
My study project covered a two-and-a-half-year period of concentrated and intensive field research interviews. During , , and , I conducted about seventy-five in-depth interviews and held several hundred shorter discussions with top business executives.
Thus this is not a statistical study dependent upon questionnaires filled out by corporate respondents. The size of the sample was such that a pattern became apparent, and I concluded that additional interviews would have added little of incremental value. However, there are certain limitations.
For the most part, this study is concerned with large and medium-sized, widely held companies in which the president and the directors own little common or other voting stock. Instances are included, though, where directors own or represent the ownership of large stock interests.
This study is also confined exclusively to the boards of directors of manufacturing, mining, and retailing companies. In most companies, boards of directors serve as a source of advice and counsel, offer some sort of discipline value, and act in crisis situations —if the president dies suddenly or is asked to resign because of unsatisfactory management performance.
I found that most presidents and outside board members agree that the role of directors is largely advisory and not of a decision-making nature. Management manages the company, and board members serve as sources of advice and counsel to the management. In addition, most presidents exploit the sources of advice represented on the board, both at board meetings and outside as well.
And some thoughtful presidents, when selecting new members of the board to fill vacancies, identify the particular sets of desired qualities or areas of advice—general or specialized—which the presidents believe will add something to their management decisions.
My field interviews turned up some interesting comments on the important function of the board in providing advice and counsel. Here are two typical responses of the presidents interviewed:. A cabinet is an assemblage of sources of advice—the cabinet name is a good one for a board.
All the rest of our job is to advise the management. The board rubber-stamps the action of management, and the board members are there to mollify the outside stockholders. Since typically directors do not devote substantial amounts of time to the affairs of the companies they serve, their advice cannot be of the sort which requires lengthy and penetrating analysis.
Accustomed, however, to dealing with top management problems involving sums of money and financial implications of considerable magnitude, directors, within the time constraints, can provide useful inputs to presidents willing to listen. Outside directors are especially helpful in the advisory role where their general or specialized backgrounds and experiences can be applied to the specific management problems of the company served.
For example, if new loans are to be negotiated or if new financing is to be arranged, these are the kinds of problems commonly faced by those on the board, and their judgments on interest rates or terms are useful to the president.
And if a new plant location, domestic or abroad, is involved in a request for a capital appropriation, members of the board with similar recent experience can often suggest useful and sometimes new factors bearing on the decision to commit large amounts of capital to a specific location. Occasionally, but only very rarely, the advice and counsel of a board member leads to a reversal of a management commitment or decision.
A second role performed by boards of directors is serving as some sort of discipline for the president and his subordinate management. The president and his subordinates know that periodically they must appear before a board made up largely of their peers.
I have found that even in those situations where top managements know from previous experience that members of the board will not ask penetrating, discerning, and challenging questions, considerable care is taken in preparing figures and reports for board meetings.
Something in the way of discipline results simply from the fact that regular board meetings are held. Presidents and other members of top management in describing the discipline value of boards, indicated that the requirement of appearing formally before a board of directors consisting of respected, able people of stature, no matter how friendly, motivates the company managers to do a better job of thinking through their problems and of being prepared with solutions, explanations, or rationales.
There is a discipline factor here. We go to a lot of trouble to make sure that what we present to the board is well thought through and an attractively presented proposal—we want to manifest that the proposal is a product of thoughtful management. But I think we behave differently internally, knowing that we have outside directors. The mere existence of outside directors makes us think a little bit harder, makes us organize our thoughts.
It sharpens up the whole organization. The discipline value of boards also serves as an administrative device for presidents to use in establishing standards of performance for work done by subordinates.
For example, with capital appropriations on the agenda for the next board meeting, many presidents remind functional or divisional managers that market and financial justifications have to be carefully organized and documented so that there will be no possibility of embarrassing questions from board members.
If management did not have this requirement, I wonder what the ceiling or limits would be on what management might do. The conscience role of the board is a device that makes sure that homework is being done, and that criteria are thought through and proposed. The conscience function is involved in capital appropriations, operating budgets, compensation decisions, and others.
Usually, the symbols of corporate conscience are more apparent than real, and presidents with complete powers of control make the compensation policies and decisions. The compensation committee, and the board which approves the recommendations of the committee, are not decision-making bodies. These decisions are made by the president, and the committee and board approval is perfunctory.
The president has de facto powers of control, and in most cases he is the decision maker. The board does, I believe, tend to temper the inclinations of presidents with de facto control, and it does contribute to the avoidance of excesses.
Thus it serves the important role of a corporate conscience. There are two critical states of corporate affairs in which the role of the board of directors is more than advisory. First, if the president dies suddenly or becomes incapacitated, the board has the decision-making responsibility to select his successor. Only when confronted with the unexpected death of the president have they been propelled into a decision-making function. But the board is there—and it is legally constituted to pick a successor and to ensure the continuity of an entity organized to operate in perpetuity.
The drama and trauma that develop when a board of directors has thrust upon it unexpectedly the complete de facto powers of control were illustrated during many of my field research interviews. The dynamics of the assumption of all or part of the de facto powers of control by individual directors and combines of directors, in these situations, is worthy in my judgment of a separate study.
Second, if the leadership and performance of the president are so unsatisfactory that a change must be made, the board of directors performs a decision-making role: here, the president is asked to resign—an important decision; and then the board must decide on his successor—an equally important decision. I have concluded that generally boards of directors do not do an effective job of evaluating or measuring the performance of the president.
Rarely are standards or criteria established and agreed upon by which the president can be measured other than by the usual general test of corporate profitability; and it is surprising how slow some directors are to respond to years of steadily declining profitability.
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Download course brochure. Become a member. By using the iod. OK, I agree. Home Member services Information and advice Resources and factsheets Details. Factsheets What is the role of the board? Here we discuss what the role of the Board involves. Call us: Training team. Knowledge, skills and mindset for a challenging world IoD courses are designed to tackle the core competencies needed to thrive at board-level.
IoD Professional Benefits Programme Carefully chosen, specially negotiated A range of essential products and services handpicked for you. View all. After putting the details together, they must present them to the board for a vote.
Here are a few different types of boards:. Working: In a working board, the members are also employees of the organization. This type of board is more common in startups or smaller organizations with limited resources. A company should look for the following characteristics when recruiting new board members:.
Ability to raise money for the business. For example, a celebrity director may be a plus in marketing campaigns for the company. Find jobs. Company reviews. Find salaries. Upload your resume. Sign in. Career Development. What is a board of directors? What is a shareholder? What does a board of directors do? Establishing compensation for executives Hiring and firing senior executives Creating dividend policies and payouts Establishing stock option policies Leading acquisitions and mergers Responding to crises within the company Setting company goals Supporting executive duties Providing necessary resources.
How does a board of directors function? Elections and dismissal. Conducting transactions with the company that are considered a conflict of interest Attempting to sway a board vote by making deals with outside individuals Making money by utilizing the company's proprietary information Abusing directorial powers.
Types of board members. Outside directors: These members are expected to bring an independent view to company issues. Outside directors are often chosen for their expertise in associated business fields.
Since they are not a company employee, they receive reimbursement or pay to attend meetings. Board officers and other members. While the chairman sets the direction for the board, all board members are considered peers. A director can be expelled for breaking foundational rules. There are several types of infractions, including, but not limited to:. Some European and Asian countries divide corporate governance into two tiers — executive boards and supervisory boards.
The executive board is headed by the CEO or managing director, who employees and shareholders elect. The executive board is responsible for the day-to-day operations of the business. The supervisory board is chaired by an independent outside director the chair and consists of non-executive directors.
Directors outside the company NEDs are paid. Also of note is the fact that many high-profile non-executive directors hold multiple directorships in addition to their full-time executive positions. You can work for an organisation, rise through the ranks and become a c-suite executive elected to the board by the shareholders.
To become a non-executive director, you must first know how to be a director and gaining a formal qualification always helps. On a board, the highest rank is held by the chair. They are responsible for governing teams of people, so they must have strong leadership abilities.
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