What Is a Board of Directors? The Definition and Functions

By Indeed Editorial Team

Updated September 7, 2022 | Published November 5, 2021

Updated September 7, 2022

Published November 5, 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

There are several forms of managing an organization, such as a singular owner who acts as the top manager or a board of managers or directors. One common management form for organizations is having a board of directors. Learning the purpose and workings of a board of directors can help you understand your role on a board or committee. In this article, we discuss the definition, purpose and function of a board of directors, identify the positions and roles of directors, and highlight various committees formed from the board.

What is a board of directors?

A board of directors, also called a board, is an elected group of people who represent the interests of a company's stakeholders. They are the governing body of a company that meets regularly to determine the organization's guiding principles, select top management positions, and oversee policies for the business. National business regulations require all publically held companies to have a board of directors to protect the organization's shareholders. Private and non-profit organizations may also have a board, although it's not a legal requirement.

Functions of a board of directors

A board of directors acts as a fiduciary for the organization's shareholders. A fiduciary is a guardian or trustee who represents another's interests in business or legal matters. The board of directors is legally and ethically bound to look out for the interests of the investment shareholders. Some duties of a board of directors include:

  • interviewing and hiring senior executives and top company management

  • determining compensation packages, including bonus criteria, for executives

  • managing mergers and acquisitions

  • establishing dividend policies and payouts

  • creating stock option policies and approving the issuance of stocks

  • setting high-level company goals and objectives

  • providing crucial company resources for the organization to thrive

  • responding to emergencies and critical situations within the company

  • providing support to executive duties

Related: Board of Advisors vs. Board of Directors (Differences and Benefits)

How does a board of directors function?

The functioning of a board of directors varies depending on the organization and the individual company's bylaws. An organization's bylaws dictate the power and structure of the board, such as how often the board meets, how it elects new members and the number of seats on the board.

Board size

The size of the board depends on the individual organization and typically ranges from three to 31 directors. Most business analysts recommend an odd number of members to avoid a tie when voting on issues. It's thought that seven is the ideal number for a well-organized and effective board of directions. Regardless of the size, it's important to have directors that protect the interests of the company and shareholders.

Member elections

A nomination committee comprising independent outside directors who vote on submitted nominations for recommended board members. Once they finalize the list, the company's shareholders typically elect the board members during the annual shareholder's meeting. Boards usually stagger director terms to minimize elections each year.

Related: CEO vs. COO: Everything You Need to Know (With Salaries)

Director dismissal

The organization's bylaws typically contain the process for dismissing a board member. When removing a director through a resolution, the individual can usually review the notice before the meeting and have an opportunity to represent themself to the board. This can cause discord amongst the board members. Many directors also have a specific clause in their compensation that pays a bonus when dismissed from their board position.

Most boards avoid dismissing a director unless there has been a considered breach of protocol or ethics, such as:

  • abusing directorial powers for something other than the benefit of the company

  • using proprietary information or intellectual property for personal gain

  • attempting to sway a board vote by making deals with outside individuals or third parties

  • engaging in activities that are a conflict of interest for the organization

Who makes up a board of directors?

A board of directors comprises elected representatives or directors. There are two types of directors on a board that include internal or inside directors and external or outside directors:

Internal directors

An internal director is a representative from within the organization. They speak on behalf of major shareholders, company executives, and employees. An inside director works for the company in some capacity, such as a c-level executive, union representative, or company shareholder. Because the organization employs them, they bring value to the board by having an intimate knowledge of its structure, workings, and challenges. An internal director on the board works for the organization in some capacity and doesn't receive additional compensation for sitting on the board.

Related: CEO vs. President: Key Differences in Top Business Positions

External directors

An external director is an individual chosen from outside the organization. They may be an industry expert or can consult in a specific area of business. An outside director brings an independent viewpoint to the organization and can help recognize challenges from a different perspective. The organization pays external directors for their involvement on the board of directors, as they are from outside the organization, and receive compensation for their time, expertise, and effort.

Positions on the board of directors

There are several standard positions on a board of directors, as well as several optional roles, including:

  • Chairperson or president: This position acts as the head of the board, and often the CEO or chief executive officer fills this role. While the chairperson sets the direction for the board, all board members are equals and peers.

  • Vice-chairperson or vice-president: This position serves as the head of the board when the chairperson is absent. They're also referred to as the chairperson-elect, as they often serve as the next president.

  • Treasurer: This position oversees the organization's financial health while not being involved in the daily operations. They manage the annual budget, investments, financial audits, and financial policies and procedures for the company.

  • Secretary: This position oversees all the creation, maintenance, and organization of corporate records and documentation, including board meeting minutes.

  • Executive director: This position is an executive within the organization who also sits as an internal director.

  • Shadow or de facto director: This optional position is an individual who controls or directs the company, but the board doesn't list them as a board member.

  • Nominee director: An interest group, creditor, or shareholder appoints this member as an optional position and protects the appointee's interests.

  • Celebrity director: This optional position is a celebrity or well-recognized individual used to lend credibility and influence to the organization.

Board committees

A board of directors creates and manages committees to identify problems within the organization, develop ideas, and present solutions. Committees help a board make effective decisions by dividing work into smaller groups and specializing their focus on particular areas of the business. Several examples of board committees include:

Executive committee

An executive committee comprises board directors and various committee heads that meet to provide overall direction for the board. The chairperson appoints members to the executive committee, or an election takes place to fill the committee. It offers guidance to the board, the various committees, and oversees actionable tasks between board meetings. The executive committee also focuses its attention on creating and managing board policies.

Related: 10 Executive Positions to Pursue (With Salaries and FAQs)

Finance committee

The finance committee comprises the Treasurer and other nominated board members, including the CFO or chief financial officer. It oversees the creation and management of the annual budget, prepares for financial audits, and evaluates potential investments. In addition, while not involved in the daily financial operations of the organization, the finance committee monitors and ensures that employees follow financial policies and procedures.

Related: Everything You Need to Know About How to Become a CFO

Marketing and communication committee

A marketing and communication committee works with the organization's management and employees to develop a comprehensive marketing plan for the company. This plan focuses on the overall message the company wants to convey to its customers. The committee can also provide direction on high-level public relations, internal communication, and external marketing campaigns. Committee members monitor the success of the organization's marketing and communications plan and make recommendations and suggestions based on the strategic marketing plan.

Compensation committee

A compensation committee comprises appointed or elected board members to develop executive compensation packages. Compensation packages include base salaries, bonus program criteria, and other position benefits. Once the committee has a recommendation, they present their suggestions to the board for a vote.

Audit committee

Because all public organizations require an annual and external financial audit, the audit committee researches potential auditors. Then, the committee presents its findings to the board for a vote. Once the board agrees, the audit committee hires the auditing company and supports the audit process, along with the finance committee.

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