What is a board of directors?

A board of directors is a group of professionals elected to act as representatives for company shareholders. Board members work together to promote company success in areas like finance, legal andethical practices. Public companies usually have a board of directors to ensure they comply with government regulations and other policies, but private and not-for-profit organizations can also have a board of directors.

Importance of having a board of directors

There are many reasons why businesses choose to institute a board of directors. Some ways board members can benefit a business include:

• Holding CEOs and upper management accountable:A board of directors can offer leadership and guidance to your corporation’s CEO and upper management, ensuring they make the right decisions for the company. This can help promote productivity and ethical business practices from the top down.
• Providing strategic direction for the company:The board of directors offers a unique perspective because they look at your business from an external standpoint. They might be able to identify potential legal issues or new markets where you can expand your business. Therefore, they can influence how your company strategically plans for the future.
• Offering professional expertise across specialties:Your board of directors could have expert knowledge in areas such as finance, law, marketing or management, enabling them to contribute new ideas and insights to your company that you might not think of.
• Instilling credibility in a company:Board members could be well-known political figures or leaders in your industry. This can have a positive effect on your company’s public image and encourage investors to buy shares.

Different roles that make up a board of directors

Within a board of directors, there are a few key roles that provide order and governance within the group. Here are the different roles that typically make up a board of directors:

Chair/President

The chairperson of the board or president leads board members and acts as a liaison between the board and the CEO. This person typically schedules and facilitatesboard meetingsto make sure they’re productive.

Vice chair/Vice president

The vice chair of the board or vice president assists the chair person in running board meetings, creating an agenda for each session and finalizing reports that summarize the topics discussed at each meeting. The vice chair can act as a substitute for the chair when they have other responsibilities that prevent them from completing their duties.

Secretary

The secretary of the board records and organizes all company documents. They also make sure the board and the company act in accordance with laws and regulations.

Treasurer

The treasurer of the board manages and reports the corporation’s finances. They typically make financial reports using company data to present at board meetings.

Board members

General board members make up the rest of the board of directors. They discuss company topics at board meetings, contribute funds to the company and participate in votes on company decisions.

General duties of a board of directors

The board of directors can have many duties. Here are some of their general responsibilities:

Choose candidates to fill top positions

The board of directors appoints each new chief executive officer or chief financial officer. They use their professional expertise and knowledge of your company to determine which candidate would offer the best leadership.

Provide funding for company operations

Board of director members often offer their funds to help create and market new products, pay off company debts or contribute to rent or operation costs because they’re financially invested in your company and want to see you succeed.

Lend expertise to the CEO

Board members help CEOs make important company decisions. For example, they could assist in decisions regarding layoffs, bankruptcy, expansion or rebranding.

Evaluate the CEOs performance

The board of directors looks at factors such as company revenue and leadership abilities to determine how beneficial the CEO is to the company.

Work with the CEO to establish company policies and procedures

Board members influence the establishment of company policies and procedures. These could include workplace ethics, workplace safety, organizational culture or structure, international and domestic trade procedures and anything else they deem important for your company.

How to determine if your business needs a board of directors

Several factors determine whether your business needs a board of directors. Use these steps to determine if you could benefit from creating a board of directors:

1. Find out if your business is classifiedas a C or S corporation

According to QuickBooks, state laws typically dictate that C and S corporations must have a board of directors. C corporations typically trade in the public sector and allow unlimited shareholders in their business.On the other hand, Scorporations fall under chapter one of subchapter S in the Internal Revenue Code and typically limit shares to 100 shareholders or less.

2. Ensure you aren’t a sole proprietorship or LLC

According tothe U.S. Small Business Administration, sole proprietorships are businesses run by one person. An LLC, meaning limited liability corporation, is a type of business where there’s a partnership between individuals or corporations that helps the owners limit their legal liability, like an online store that oversees the sale of goods for individual retailers. Sole proprietorships and LLCsdon’t typically need a board of directorsbecause of certain state requirements. You can find more information about state-specific laws and regulations by visiting your state’s Division of Corporations website.

3. Operate as a nonprofit or for-profit business

Nonprofits are organizations that aim to spread awareness or make funds for a social or environmental cause. In contrast, for-profit organizations seek to earn money to put toward their organization and its success, rather than a public cause. As mentioned by BoardEffect, nonprofit and for-profit organizations are typically required to have a board of directors to ensure that they adhere to their mission statement and have adequate funding to continue or expand operations.

4. See if your state requires you to have a board of directors

Always check the requirements of the state or states in which you operate your business. According to theU.S. Securities and Exchange Commission, all states typically require you to allow your shareholders to elect a board of directors. Also, individual states might have varying requirements related to the number of sitting board members.

A board of directors can be a great source of support for your business, whether you operate a small business or large corporation. Consider establishing board members as part of your business practices.