12 Important Board of Directors Functions
Updated June 24, 2022
A company's board of directors ensures there are several people from different roles involved in decision-making. Each board member likely has their own role and expertise at the executive level to help a company succeed. Knowing the functions of a board can help you better understand what they do and why they're useful. In this article, we discuss what a board of directors is and 12 common functions of company boards.
What is a board of directors?
A board of directors is a group of people who collectively decide how a company can operate and supervise its current activities. The board usually comprises company members like the chief executive officer (CEO), chief financial officer (CFO) and other executive leaders, along with large shareholders. The board makes many decisions for a company, including the election of new members or new CEOs.
Read more: The Role of the Board of Directors
12 board of directors functions
As the primary governing group for a company, the board has several important responsibilities. Here's a list of the board's primary functions:
1. Hiring and evaluating the CEO
The board decides who the CEO of a company is, when they might replace one and how they might measure the CEO's success. When hiring a new CEO, board members may analyze the company's current performance and goals to determine their most important needs. This can help them design the job description and solicit applications for other executives within the industry. For example, if a company hopes to increase its digital presence, the board may seek a CEO with a background in technology or digital marketing.
Once the company hires a new CEO, the board oversees their responsibilities, team and success metrics. The board determines what initiatives they want the CEO to accomplish within their first years of service. If the CEO doesn't meet their expectations, the board can select a new CEO to better achieve their goals.
2. Creating the company's vision
Board members can define a company's values and its plans for the future. This includes short- and long-term goal setting, strategic planning and work environment. For example, an educational technology company might have a goal to implement its course platform in 50% of schools nationwide.
Team members might also draft different goals for their visions and hold meetings to decide which goals to pursue. The leadership team, including the CFO and CEO, can then communicate the vision to their teams. The board might have monthly meetings to review this vision and ensure employees understand and agree with the plans and have the tools to execute them.
3. Defining strategies
Strategy setting is another primary function of a board of directors. Once the board establishes its mission and purpose, it can decide how to achieve its goals. For example, a technology company may choose between outsourcing or hiring new internal employees. The board for this company may consider the positives and negatives of both options before deciding which may help the company best achieve its goals.
4. Allocating and protecting resources
Allocating resources can mean determining where to place financial resources, employees or tools to best serve a business. Whether executives or shareholders, all members on the board must determine which departments or teams will receive additional or fewer resources in response to their strategic goals and mission. For example, if a company's primary goal is to increase revenue generated from social media engagement, its board may agree on additional funding for advertising and new algorithm tools that can target customers more accurately.
Besides the allocation of resources, the board may also establish security measures to ensure they can protect their data, employees and intellectual property. Since board members have a legal responsibility to be transparent about how they're managing and protecting assets, they may communicate risks and responsibilities that employees should consider, such as password-changing requirements.
5. Ensuring legal compliance
Companies often ensure their employees and organizations comply with local, state and federal laws. They can achieve compliance with behavioral requirements, like ethics training, proper recording of financial records and appropriate documentation for conflicts. For example, if a photo department frequently uses proprietary images for marketing, the board may decide to invest in technology that can identify rights or permissions quickly or invest in training to ensure they're compliant.
6. Overseeing finances
A board determines the company's budget and sales goals and may meet regularly to discuss current financial figures and future predictions. Companies may also establish automated controls or manual checks to ensure all team members are following proper financial protocol. Besides these controls, some companies also create internal auditing teams or hire external ones to review their financial activity and reports to ensure compliance.
7. Making financial decisions
Beyond general financial oversight, the board makes some of the largest financial decisions for a company. This can include if a company merges with or acquires another company, divests from certain assets or moves to a new office building. A company may benefit from a board with a diverse group of individuals that must agree on these financial decisions.
8. Managing board members
The directors also share responsibility for managing each other. When a board chooses a CEO, they may hire or release board members in response to the business needs. For example, the board may notice they need additional support in a specific area and consider candidates who are currently executives from an internal department or outside investors with specific expertise. The board can write the job description, monitor performance and evaluate new board members. Sometimes, the board might perform self-evaluations to find opportunities for change.
9. Improving public opinion
Since a company's board may have outside stakeholders on the team, it's important that they're transparent with one another and with the public. For example, a company might communicate earnings publicly throughout the year, and the board might communicate if the company met its expectations and what its outlook is. This might influence new shareholders to purchase stocks and help build trust in the organization.
10. Investing in company programs
Having a clear mission may influence what kind of programs the company invests in or provides to the community. This requires the board to decide what's most beneficial to the company's employees. This can involve specialized training, community programs or volunteer opportunities. Determining which programs can best uphold the company's culture may also require the board to research the value, overall satisfaction and outcomes of each program.
11. Setting company goals
Board members often align company goals with the company's mission and determine how to accomplish these goals. For example, a company might want to be an industry leader in publishing, so the board may discuss its strategy and goals. Their strategy might be to use new digital reader technology and accessibility resources, and their goal might be to sell 500,000 e-books a year or have 50,000 new people sign up for their mailing list. These plans align with the company's purpose and can contribute to the higher sales goal.
12. Establishing governance rules
The board decides how they govern one another and the decisions affecting the organization. This includes establishing meeting times with the CEO and the board, holding individual status meetings, creating a process for adding or removing board members and determining the cast votes. Governance can ensure a smooth transition between members and CEOs and provide each board member with an equal opportunity for participation.
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