Guide on Board of Directors
Here is a complete guide on what you should know about a board of directors.
All commercial entities, large, medium, and small, are required to have boards of directors by the states in which they are incorporated. Typically, these statutes state that the corporation’s business “must be overseen by a board of at least three directors”. However, neither the law nor 150 years of legal history and litigation have disclosed precisely what directors do or do not do when they “manage”. Here is a complete guide on what you should know about a board of directors.
Board of Directors
A board of directors (often referred to as the ‘Board’) is a group of individuals elected by shareholders to represent them. The directors are a governing body that meets on a regular basis to establish business management and oversight regulations. They are required for every public corporation.
Management’s performance should be evaluated and rewarded by the board of directors. Both the legal framework and financial accounting and reporting processes must be maintained while the Board ensures that the company’s credibility is maintained by making timely and accurate disclosures.
Who is the board of directors?
Shareholders elect a group of people to serve as the board of directors of a company. Nonprofit organizations and many private businesses, although not legally mandated, also have boards of directors. The board is responsible for ensuring that shareholders’ interests are protected, creating policies for management, and overseeing the corporation or organization.
Key Roles and Responsibilities in a Board of Directors
The Board is the ultimate decision-making body of the company. In exercising its business judgment, the Board advises and counsels senior management and sets and enforces accountability standards, allowing senior management to fully discharge their duties in the best interests of the Company and its stockholders. There are a few key roles and responsibilities of a board of directors:
- Chairman – The directors elect the head of the Board of Directors (the “Chairman”) on an annual basis. The Chairman shall be a member of the Board of Directors and may or may not be a Company officer or employee. The Chairman’s primary responsibility is to lead and supervise the Board’s actions. Additionally, the Chairman will consult as necessary in conjunction with analyzing and recommending Board candidates in accordance with the processes outlined in this section.
- CEO – A chief executive officer (CEO) is a company’s highest-ranking executive. In broad terms, a chief executive officer’s principal tasks include making significant business decisions, managing a company’s overall operations and resources, and serving as the primary point of contact between the board of directors and corporate operations. Often, the chief executive officer serves as the company’s public face. The board of directors and the company’s stockholders elect the CEO. They report to the chair and board, both of whom are elected by shareholders.
- Lead Director – A lead director is nominated by independent directors of the Board. The Board thinks that having Independent Directors of stature who are well-versed in the Company’s industry helps it oversee the top management’s performance. The duties of a Lead Director are:
- Liaison between Chairman and Independent Directors
- The agenda for Executive Sessions (as defined below) and meetings with other non-management directors;
- Presiding over all Board meetings, including Executive Sessions, while the Chairman is absent.
- Advising the Chairman on Board agendas, pre-read materials, and meeting calendars;
- Acting as the Board’s contact for stockholder dialogue and communication
Basic structure of the board of directors
The bylaws of a firm or organization define a board’s structure, responsibilities, and directors’ powers. The bylaws generally determine the number of board members, how they are elected, and how often they meet. The size and structure of a director depending on the company or organization, the industry, and the shareholders.
- The number of directors – A private business must have a minimum of two directors, while a public firm must have a minimum of three. A corporation may have up to fifteen directors. A person designated as a director is responsible for carrying out all of the director’s duties and powers in accordance with the terms of the Companies Act, 2013 (“Act”).
- Meeting attendance – Members of the Board of Directors are expected to attend all meetings of the Board and the committees on which they serve, as well as devote the time necessary to perform their duties effectively. As a guest, the Chairperson attends select committee meetings.
- Skills and Selection of Director Candidates – The candidate should possess positive characteristics such as leadership abilities, decision-making abilities, effective communication, diligence, and commitment, as well as any other characteristics that the Committee believes the candidate possesses, and that is in the best interests of the Company.
- Independence – In the board of directors, an independent director is a person who has no material connection to the firm, is not a member of the executive team, and is not actively involved in the company’s daily activities. At least 50% of the board should be non-executive directors. If the board chairman is a non-executive director, the board should have at least one-third of independent directors.
- Term Limits, Retirement – Terms are just how long you have to be on the board. This is how it works: In most cases, they are written down in an organization’s by-laws in most cases. For nonprofits, BoardSource recommends two three-year terms. However, only one-third of the directors can be long-term, and out of the rest, one-third must retire every year. Section 152(6)(c) of the Companies Act, 2013 says that this rule would also cover first directors.
- Equity involvement – In most cases, the independent board members are compensated with stock options. Depending on the stage, a typical director might receive between 0.5 percent and 2.0 percent equity in a company in its early stages. As the company grows, it is expected that this percentage will drop.
How many members of a board of directors should a company have?
There must be at least three directors in limited public businesses, two directors in private limited firms, and one director in a one-person company to meet law requirements. A corporation can only have a total of fifteen board members. An additional board member could be appointed without the company’s board of directors passing a specific resolution.
How do you appoint a member of the board of directors?
There is a board of directors rules of procedures for appointing a director governed by both law and the company’s governing documents (the articles of association). The shareholders of a corporation can appoint directors. This is typically accomplished by passing a simple resolution in support of the appointment (i.e., a majority of the shareholders agree to the appointment).
Ensure that you check the articles of association to determine whether they contain any additional requirements (e.g., requiring at least 75 percent of shareholders to agree to the appointment).
The Board of Directors can typically appoint directors as well, but check the articles of association to see if this is permitted and whether shareholders must then confirm the nomination at a general meeting. Businesses House must be notified of the appointment of a director – This must be accomplished within 14 days of the scheduled visit. When a new director is appointed, the company must also update its director register and director’s home address registry.
Removal of directors
A company’s shareholders can always dismiss a director through a statutory process. This normally entails the shareholders passing an ordinary resolution authorizing the director’s removal (i.e., a majority of the shareholders agree to the removal). If this occurs, the LOA or service agreement may provide the director with rights but cannot prevent him from being removed.
Often, the articles, LOA, or service agreement often provide a simpler mechanism for removing a director than a shareholder resolution. It is critical to verify the language in these documents regarding the removal of a director.
Importance of having a board of directors
The board of directors of a corporation is crucial in determining the company’s strategy, high-level structure, and the nomination of the CEO. The board of directors’ primary function is to guarantee that the firm’s executive management is acting in the best interests of shareholders and stakeholders. In terms of innovation, the directors oversee the progress of plan execution and influence the executive leadership to build an innovation-friendly corporate culture.
The board operates through a well-established committee structure that covers executive remuneration, finance, audit, sustainability, and ethics (which were added more recently). The increased emphasis on ethics, corporate social responsibility, and diversity has elevated these components of the board of directors’ responsibilities to essential status. As a result, the board of directors plays a critical role in ensuring the company’s success.
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Allotting and issuing shares to the board of directors can be arduous due to all the corporate filing paperwork required. The procedure for issuing shares is as follows: Issue of Prospectus, Receiving Applications, and Allotment of Shares. Allocation or allotment refers to the process of creating new shares. Issue shares with the board of directors with Eqvista as we manage those efficiently in your shoes.