What is a Board of Directors?
The board of directors is an essential part of business, what is a board of directors? The board of directors is a corporation’s governing body. Furthermore, it consists of a group of individuals elected by shareholders. The board of directors are also responsible for setting company policy and overseeing the company’s managers.
A major theme of corporate governance is the separation of ownership and control. The shareholders own the company, but the managers control the operations. The board of directors is expected to try to align the interests of shareholders and managers. Furthermore, they need to always act in the best interest of the company.
All publicly owned companies must have a board of directors. Many private companies also have a board of directors. Boards typically meet several times a year. Furthermore, compensate board members for their services. Consider members of the board insiders, for stock trading purposes. A board often includes the following
- Inside directors
- Outside directors
- A chairperson
Inside Director vs. Outside Director
There are two types of directors on a board: inside directors and outside directors. Inside directors are members of the board and executives at the company, such as the chief executive officer (CEO). They have a dual role, serving as members of the governing body and working as managers at the company.
In comparison, outside directors are not executives at the company. They are independent individuals selected for their experience and expertise in the relevant industry or sector. Furthermore, outside directors serve only one role – they are not company managers – and are thus considered the more objective members of the board. The chairperson can be an inside director or an outside director.
Board of Director Responsibility
The board of directors has many responsibilities that include the following:
- Hiring top executives
- Setting executive compensation
- Monitoring the performance of executives
- Dismissing executives when necessary
- Approving stock issuance
- Declaring dividends
- Overseeing corporate governance and internal controls
- Determining other matters of company policy
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