What is a Board of Directors?
A board of directors is the governing body for a company composed of an elected group that represents shareholders. Ideally, a board of directors includes both internal (from within the company or connected to the company) and external (not part of the company) members.
What is the difference between an inside and outside director?
An inside director is a director who’s connected to the organization (e.g., as an employee), executive, or major shareholder. They aren’t paid for sitting on the board; it’s considered part of their job description.
An outside director is one who has no connection to the company, other than serving on the board of directors. They are usually paid for their services, often with an annual retainer plus a per-meeting attendance fee. They typically have expertise in an associated field.
How many people sit on a board of directors?
Boards of directors can range in size from 3 to 31 members. Typically, private companies have between 3 and 7 people on the board of directors.
A board of directors almost always consists of an odd number of people. This is intentional to avoid tie votes.
What does the board of directors do?
The board of directors has a number of duties. They:
- Establish broad policies and set out strategic objectives
- Appoint the CEO of the company
- If necessary, terminate the CEO
- Approve annual budgets
- Have accountability to the stakeholders for the company’s performance
- Set the salaries and benefits of senior management
Members must abstain from voting on matters where they have a conflict of interest.
How are members of the board of directors chosen and elected?
Individuals are nominated by a nomination committee (which could be the existing board of directors) and are then voted for by shareholders. The process of election is formally set out in documents such as the company’s articles of incorporation, bylaws, operating agreement, or shareholder agreement.
State laws govern the methods for selecting boards of directors.
What types of companies require a board of directors?
C corporations and S corporations must have a board of directors. In contrast, sole proprietorships and LLCs do not need to have a board of directors. However, they can choose to elect one if they wish.
A board of directors is composed of an elected group of representatives who make decisions about a company’s governance. The board of directors represents the company’s shareholders and acts in shareholders’ best interests.