What is a board of directors & how does it work?

Discussions of publicly traded companies often include references not only to company executives like CEOs and CFOs but also to board members (sometimes called directors). In fact, every public company in the United States must have a board of directors—but just who are they, and what do they do?

What is a board of directors?

A company’s board of directors is a group of individuals who, together, act as the company’s governing body. They make decisions, evaluate risks, set strategies, provide guidance to company executives, and protect the interests of shareholders and other stakeholders.

In a technical sense, a company’s board acts as its fiduciary, meaning it is legally and ethically bound to provide advice and make decisions with the company’s best interests in mind.

Who usually serves on a company’s board of directors?

When it comes to publicly traded companies listed on the NYSE or Nasdaq, the majority of board members must be company outsiders (i.e., not company employees or major stakeholders). Typically, these independent outsiders are individuals who were selected for their industry experience and expertise. This requirement helps avoid the occurrence (or appearance) of conflicts of interest.

Despite the requirement that a company’s board comprise mostly outsiders, it is not uncommon for one or more company executives or insiders—often a CEO or founder—to serve on the board as well.

In other cases, a significant shareholder may serve on a company’s board. A notable example of this situation occurred in late 2020 prior to GameStop’s (NYSE: GME) notorious January 2021 short squeeze, when activist investor Ryan Cohen joined the video game retailer’s board of directors after scooping up over 10% of the company’s outstanding shares.

What does a board of directors do?

In general, a board of directors has very little influence on a company’s day-to-day operations. Instead, a board attempts to optimize a company’s long-term outlook by instituting broad, high-level policies and making decisions on a macro basis, allowing a company’s management to oversee and direct the company’s employees and short-term operations.

The exact role of a board of directors (and individual board members) can vary quite a bit from company to company. Often, a company’s bylaws or articles of incorporation detail the ins and outs of how its board is supposed to function, including its powers, limitations, meeting requirements, and election protocols.

While specifics may vary between companies, there are a few major directives most boards of directors tend to focus on over the long term:

Provide value to shareholders

Ostensibly, every board’s primary directive is to ensure the long-term success of the company so that its owners (shareholders) see their equity appreciate in value over time. This doesn’t necessarily mean accounting for short-term fluctuations in the price of a company’s stock, but instead attempting to steer the company toward ongoing growth, financial health, and profitability.

Mitigate risks to company health

As part of its role as fiduciary, a company’s board must also attempt to identify and manage any major risks to the company’s ongoing operations. This can mean steering company leadership away from risky financial decisions, ensuring that financial reporting is conducted properly to avoid penalties from the SEC, and identifying the potential for lawsuits from consumers or competitors.

Maintain company relationships

A company’s board is usually also responsible for maintaining positive relationships with important stakeholders, including other businesses the company works with (e.g., suppliers, non-profit partners, sponsees, etc.). The board may also communicate with significant shareholders whose buying or selling of large volumes of company stock could have a significant impact on the stock’s price or the public’s perception of the company’s health.

Set dividend policies

A company’s board is almost always responsible for making decisions about dividends that are paid to shareholders. Dividends come out of a company’s profits and serve as an incentive for shareholders to remain invested, and it is up to the board to decide whether the company will pay a dividend, in what amount, and how often.

In some cases, a company’s board may need to reduce or eliminate dividends in order for the company to retain more profits to reinvest in its operations, while in other cases, it might institute or increase a dividend to broadcast the company’s financial health to the public.

Other responsibilities

In addition to the roles listed above, a board of directors is usually also responsible, to some degree, for the following tasks:

• Hiring and firing high-level executives like CEOs, CFOs, and COOs
• Determining executive compensation
• Establishing the company’s long-term goals and objectives
• Overseeing any mergers or acquisitions the company is involved in
• Overseeing PR efforts during any periods of controversy
• Overseeing and instituting changes or updates to a company’s accounting and financial reporting procedures
• Overseeing high-level budget and resource-allocation decisions
• Creating and maintaining certain employee-related policies, such as stock options, PTO, and benefits

How is a company’s board appointed?

Typically, board nominees are selected by a nomination committee within the company. Board members are then elected by shareholders, with each shareholder’s voting power proportional to the number of shares they possess.

Typically, board member election is staggered such that the board isn’t replaced in full each election cycle. This helps introduce fresh perspectives while still maintaining a level of institutional knowledge and experience among the board.

Example of a board of directors: Meta

The board of directors at Meta (NASDAQ: META) is fairly typical for a large public corporation. It includes Mark Zuckerberg, the company’s founder and CEO; Sheryl Sandberg, the company’s former COO, who also used to work for Google and the U.S. Department of the Treasury; and six other company outsiders, most with a wealth of experience in the tech and finance industries.

Frequently Asked Questions (FAQ)

The following are answers to some of the most common questions investors have about boards of directors.

Is a company’s CEO usually on its board of directors?

It is fairly common for a company’s CEO (who may also be the company’s president and/or one of its founders) to serve on the board of directors, although this isn’t always the case. When a CEO does sit on their company’s board, they often serve as its chair.

Are board members employees?

Board members are not considered company employees (unless they also happen to work as an executive within the company). They do, however, typically receive compensation for their work as directors.

How many members do boards usually have?

The size of a company’s board is typically outlined in its bylaws or articles of incorporation, but most large, public companies have somewhere between eight and 12 directors. Some companies have an odd number of board members so that ties do not occur during voting.

Do all public companies have a board of directors?

All publicly traded companies in the U.S. must have a board of directors. If listed on the NYSE or Nasdaq, the majority of board members must be “independent outsiders,” or people who do not work for or otherwise have a vested stake in the company. This helps prevent the occurrence (or appearance) of conflicts of interest.