The U. Small Business Administration notes that typical titles include president, secretary, and treasurer. Observing corporate rules is an important part of maintaining limited liability for company shareholders.
The Digital Media Law Project warns that neglecting to elect directors, hold director meetings, or prepare meeting minutes are all viable reasons for a court to pierce the veil. The board of directors, elected by shareholders, is responsible for overseeing the company and setting corporate policy.
Directors authorize stock issuance, declare stock dividends, and set executive salaries. They also make significant financial decisions around big ticket items like business loans and real estate purchases. If you are not ready to pay the price for such insurance, consider establishing an advisory board. Victoria Duff specializes in entrepreneurial subjects, drawing on her experience as an acclaimed start-up facilitator, venture catalyst and investor relations manager.
Since she has written many articles for e-zines and was a regular columnist for "Digital Coast Reporter" and "Developments Magazine. By Victoria Duff. Nonprofit and For-Profit Nonprofit boards normally take active roles in the running of their organizations. Small Private Corporations Many corporations consist only of the founders and a few employees.
Larger Private Corporations Expertise becomes more important if you are trying to build your small company into a large one. My research disclosed few exceptions to this routine. In a handful of instances, presidents said that they do in fact want discerning, challenging questions and active discussions of important issues at their board meetings.
There are also a few directors who do in fact ask discerning questions, the desires of the president notwithstanding. Typical garden-variety outside directors, selected by the president and generally members of a peer group, do not ask questions inside or outside board meetings.
However, directors who serve on corporate boards of companies because they own or represent the ownership of substantial shares of stock generally do in fact ask discerning questions. Their willingness to query presidents is, in part, a manifestation of the split in the de facto powers of control of those companies.
The large stockholder-directors are not usually on the board because the president wants them there, but because through cumulative voting procedures they can force their way onto the board. Directors, as described in the literature, represent the stockholders. Yet, typically, they are actually selected by the president and not by the stockholders. Accordingly, the directors are on the board because the president wants them there. Implicitly, and frequently explicitly, the directors in point of fact represent the president.
But a large stockholder-director is not selected by the president and does not therefore represent the president; rather, he represents himself and an interest more likely to be consistent with that of the other stockholders. These differing attitudes with regard to stock ownership often are manifested in the extent to which discerning questions are asked of the president by the directors.
A third classic role usually regarded as a responsibility of the board of directors is the selection of the president.
Yet I found that in most companies directors do not in fact select the president, except under the two crisis situations cited earlier. The board does not select the management; the management selects the board. In some situations, formal or informal committees of outside members of boards are charged with the responsibility of evaluating candidates inside the management for the presidency.
But, generally, these committees have no more control over the naming of the president than do similar committees charged with identifying and recommending the names of candidates for board membership.
In both committee situations, the president with de facto powers of control essentially makes the decisions. The administrative use by the president of board committees to evaluate candidates for his successor in the presidency gives the selection process an appearance of careful evaluation and objectivity. But in most cases the decision as to who should succeed the president is made by the president himself.
Certainly, the president knows the key members of his organization better than anyone else. He has worked with them closely and, typically, over a considerable period of time. Board members with relatively brief exposure to company executives—whether on the board or not—base their appraisals necessarily on very inadequate evidence.
When insiders appear before the board for presentations of their divisional operations, for example, or to explain a request for a large capital appropriation, the setting is artificial and synthetic.
Executives, aware that the process of evaluation is going on, rehearse their appearances to communicate to the board that they have the capacities and skills needed for the presidency. Boards of directors, I found, do serve in an advisory role in the selection of a new president—in their capacity as a sort of corporate conscience. The process of electing a new president requires a vote by the board, and the president generally observes the amenities of corporate good manners by discussing his choice with individual members prior to the meeting.
Rarely does a board of directors reject a candidate for the presidency who is recommended by the president. In the small family company, the ownership of the stock and the management are identical.
In an earlier study, I found that the powers of control are in the family owners, and what the board of directors does is determined by the owners. The owner-managers of some small companies add outside directors to multiply the inputs to policy making, policy implementation, and day-to-day operating problems. The primary function of the outside directors is to provide a source of advice and counsel to the family owner-managers, and they do not serve in a decision-making role, except in the case of the unforeseen death of the dominant family owner-manager.
They have the authority to manage the enterprise, and the board is at most a legally required body which can be used for advice and counsel on management or family problems.
The family owners determine what the board does or does not do. At the opposite end of the spectrum is the large, widely held corporation in which typically the president and members of the board own little stock. Here, the de jure powers of control are dispersed among thousands of stockholders who are generally both unorganized as owners and essentially unorganizable.
With this absence of control or influence by the corporate owners, the president typically does have the de facto powers to control the enterprise, and with these powers of control it is the president who, like the family owner-managers in the small company, determines in large part what the board of directors does or does not do.
Between the two corporate situations just cited, there are many variations and combinations of centers of control, or ownership influences on control, of the company. Complete de facto control by the professional manager-president may be diminished or influenced by the presence on the board of a person who owns, or represents ownership of, a substantial block of stock. This may constitute a challenge to the president. My research findings show that many directors who own, or who represent the ownership of, substantial numbers of shares of stock take a deep interest in the operations of the company, spend considerable time in learning the business, and insist on being involved in major company decisions.
My analysis of the situations where substantial stockholdings are represented on the board has produced no factors which make possible any reliable prediction of whether the stockholder-director will take an active and involved question-asking role.
There is some evidence that if the owner of the stock had come into possession of it through his own efforts, such as an entrepreneur developing his own business and then selling it to a larger company for its shares, the acquired entrepreneur will take a very active role as a director of the acquiring company. If the outside director with large stockholdings is a second or third generation heir of an entrepreneur, his involvement as an active director is less likely.
Another situation in which the president of a large-or medium-sized company does not possess the full and complete de facto powers of control is that of a retired president who stays on as a member of the board. Then, typically, the outside board members have been selected and invited to the board by the retired president, not the new president. A similar complication of relationships exists in the situation following the sudden death of the president where his successor is designated by the board of directors.
The new president holds his position because the directors selected him—directors who were themselves selected by his predecessor. While the new president is demonstrating his capacities to head the enterprise, the outside directors generally share the powers of control of the company.
In both cases, with the passage of time, and with the designation by the new president of new directors who are his directors, the complete powers of control will flow back into the office of the president. Generally, when the president and the directors own only a little stock, the president possesses and exercises the complete powers of control of the enterprise. But, here again, it should be noted that the president with complete powers of control could determine that the directors will, to the extent he wishes, serve primarily as sources of advice and counsel.
The controlling influence of the president in determining what the directors will or will not do was illustrated by many of the discussions during my field research. The top executive of one company said:. If he wants to use the board, he will use them. Basically, the board can be made just about as useful as the president wishes it to be. Most presidents are completely aware of their powers of control, but they choose to exercise them in a moderate manner acceptable to their peers on the board.
Many of them, as presidents of their own companies with board members of their own, thoroughly understand the existence and location of the powers of control. The president, with powers of control, generally selects and invites directors to serve on the board.
In some instances, a nominating committee of the board is created to identify, screen, and recommend candidates for board membership. Even with the presumed objectivity of a committee of outside directors, though, the president makes the decision as to new members. In these cases, the stock-owning directors are interested in adding new directors of their choice, and the president is interested in new directors of his choice.
Discussion and negotiation inevitably result in some sort of agreement on who should be added, and the balance of power issue continues. Having a trusted board of directors in place to help the entrepreneurs, CEOs, and company founders make objective decisions for the sake of the company will go a long way in preventing damaging consequences in the future.
A board of directors is a composition of people appointed as the representatives of a company's shareholders so they can make decisions on their behalf. The purpose of the board of directors is to create and implement policies to be upheld by company management and resolve major company problems. Some matters that the board of directors oversees include:. Skills and knowledge are needed to operate effectively in a dynamic environment are available by a well-rounded board of directors , which allows the executive management to focus strategically on its business.
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