- July 1, 2020
Aboard of directors is a group of elected or nominated members who, inconcert, oversee the processes and activities of a firm. The membersof the board are empowered an authority greater than the board thisgreater party is responsible for delegating various powers,responsibilities, and duties of the board of directors, which areoutlined in the organization’s constitution and bylaws. The boardof directors acts as a fiduciary that makes decisions for the firm onbehalf of the stakeholders additionally, it ensures the financialstability of the organization. By definition, a fiduciary is a personor a group of people that hold a monumental ethical or legalrelationship of trust with other people or parties inherently,fiduciaries are charged with taking care of the assets and financialresources of a firm (Roy, 2008). Moreover, the board sets broad goalsfor the firm, supports company executives in their tasks, and ensuresthe organization has adequate resources, and manages themappropriately. Nevertheless, it is important to assess the efficiencyof the board to ensure it does its job well this can be achieved byconducting a financial or social performance analysis. Financialperformance is a measure of how efficiently a firm can utilize theassets from its primary mode of business to generate profits.Contrarily, social performance is a measure of how well anorganization achieves its mission in line with accepted socialvalues. Overall, a board of directors’ role of optimizing thefirm’s financial and social performance is facilitated by itsprocesses, structure, and strategic roles.
Theprocess of running a board of directors is called the board processit entails a series of several sequential steps. Particularly, theboard process involves the appointment or election of board members,the outlining of clear objectives for the board, the distribution ofrelevant documents, also known as the board package, to the membersof the board, the joint creation of an agenda for a board meeting ofthe members, the establishment and follow-up of the tasked actionitems, and, lastly, the evaluation of the board process throughconducting standardized assessments of firm owners, chief executiveofficers (CEOs), and the board members. The board process is largelyfacilitated by the predominantly secretive nature of board operationsin most companies essentially, the board handles sensitive matters,such as trade secrets, whose confidentiality is vital to the survivalof the firm in such a manner, the scientific study of the boardprocess has developed very slowly over the years in comparison withmost fields of management. Nevertheless, various business groups suchas McKinsey Consulting and the National Association of CorporateDirectors have been campaigning for the standardization of theprocess. The board conducts its processes with adherence to theprocedures and rules outlined in the documents that govern firmactivities (the constitution and bylaws). Where the legal corporateprocedures allow it, the board of directors can discuss business byconference calls or any other suitable electronic method.
Thestructure of the board of directors is also guided by a firm’sbylaw essentially, these guidelines state the number of members theboard should contain, the manner in which they should be elected, thefrequency of elections, and the frequency with which they confer. Thesize of the board of directors varies between companies in some, themembers are only three, while in others, they may be as few as three.Nevertheless, the ideal or desirable number of board members byconvention is seven (Van et al., 2006). Regardless of the board size,however, the members should represent the interests of bothshareholders and the management this is facilitated by having bothinside and outside directors.
Aninside director is a board member who represents the interests ofmajor shareholders, employees, and officers, and whose activities inthe business as well as the market add value to the firm’s board.These individuals are not compensated for their service on the boardas it is considered their professional responsibility they includestakeholders such as union representatives, c-level executives, andmajor shareholders (Williamson, 2016). Contrarily, outside directorsof the board are not part of the firm’s inner workings rather,they bring experience of working with other companies. Since they arenot original members of the firm, they are reimbursed or compensatedfor their efforts this is often in the form of allowances forattending meetings. Outside directors are important because theyprovide an objective view of the goals that the company must meet aswell as how best to settle internal and external disputes. Ideally, aboard of directors should have a balanced number of inside andoutside members effectively, too many insiders will lead to biaseddecision making in favor of the management, whereas excessindependent directors will be disadvantageous to the management. Insuch a manner, the ultimate board structure usually consists of equalnumbers of inside and outside directors.
Aboard of directors serves various roles in an organization,particularly as a fiduciary and as a custodian of the firm’sfinancial resources. Fundamentally, a board of director has variousstrategic roles. Some of the most important roles are as follows:
Governing the firm by implementing firm policies broadly and outlining strategic objectives
Approving budgets for the firm, usually on an annual basis.
Providing an account of the firm’s performance to the stakeholders.
Paying the senior management, as well as settling their benefits and compensation.
Guaranteeing that financial resources are available for smooth company operations.
Appointing, supporting, and vetting the firm’s chief executive who may go by the titles of President, Executive Director, or Chief Executive Director.
Additionally, the company has the mandate of firing an incompetent chief executive.
Itis important to establish how the board’s strategic roles affect acompany’s financial and social performance. In regards to financialoperations, the board of directors is in charge of ensuring that thefirm has adequate financial resources at its disposal to carry outvarious business activities comfortably. In addition, the boardapproves the annual budget of the organization, ensuring that allfinancial assets of the company are used responsibly. In such amanner, the board members are important for improving the company’sfinancial performance. On the contrary, social performance entails afirm’s activities in line with expected social codes of conduct(Feld & Ramsinghani, 2013). Correspondingly, this entails actingwithin an acceptable ethical scope. In regards to this line ofthought, outside directors ensure a firm acts within morally acceptedstandards by ensuring that the management does not act solely in itsown interests while ignoring the needs of other shareholders as wellas the society.
Overall,the processes, structure, and strategic roles of a board of directorsare essential to upholding a firm’s financial and socialperformance. Financial performance refers to how well a companymanages its assets to achieve profitability. On the contrary, socialperformance encompasses achieving a firm’s mission with regard tosocietal ethics. The board process begins with the selection ofrepresentatives, and ends with the evaluation of board activities.Additionally, the number of board members varies between companiessome boards have as few as three members, while others have up to 30directors. However, the standard number for membership to the boardof directors is seven members. Correspondingly, the board is made upof both inside and outside directors. Inside directors are usuallyinvolved in the inner workings of the firm, and they are notcompensated for their service on the board. Conversely, outsidedirectors are involved with external firms, and they are reimbursedfor attending board meetings. Ideally, the numbers of inside andoutside representatives on the board should be balanced to avoidbiased decisions in favor of or against the management.
Theboard of directors is in charge of managing the firm’s financialassets, as well as creating the annual budget for the organization.In such a manner, its efficiency in meeting these goals is largely adeterminant of the firm’s financial performance. Contrarily, socialperformance deals with realizing the firm’s vision, but with aconsideration of the moral requirements of the society. The outsidemembers of the board serve the important role of balancing powerwithin the board of directors in order to promote fair and unbiaseddecisions by the board in such a manner, it allows the organizationto operate within morally accepted standards in the society.
Feld,B., & Ramsinghani, M. (2013). StartupBoards: Getting the Most Out of Your Board of Directors.New York, NY: John Wiley & Sons.
Roy,M. (2008). Building board expertise through key supportingprocesses. MeasuringBusiness Excellence, 12(4),38-49.
Van,d. W., Ingley, C., Shergill, G. S., & Townsend, A. (2006). Boardconfiguration: Are diverse boards better boards? CorporateGovernance, 6(2),129-147.
Williamson,I. (2016). Newcomers`guide to starting a business in Québec: How to find business ideas,research the market, prepare a business plan, calculate how muchstart-up money is needed, locate financing and begin operations.Toronto, ON: Productive Publications.