Board of Directors Definition

The Board of Directors is a group of individuals elected by shareholders to provide oversight, guidance, and make critical decisions on behalf of the company, including setting its strategic direction and appointing its executives.

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In this article, we’ll learn about the board of directors definition, what the board of directors does, and who elects a board of directors. 

What is the board of directors?

The board of directors definition is a group that oversees and makes important decisions about a corporation’s activities. The chairman of the board is like the board’s president. They preside over the board, lead meetings, and perform other essential company functions. 

Shareholders elect the board of directors. Shareholders can also nominate candidates for the board of directors. 

Other names for the board of directors

People who sit on the board can be referred to by a few different names. They can be called members, board members, and directors. The “board” is a shorter name for the board of directors.

Who can serve on the board of directors?

When discussing the board of directors’ business definition, it’s prudent to point out that the members of the board of directors need to be at least 18 years of age. Other qualifications are up to you, but it would be useful for them to be someone that you trust. Additionally, you want to pick someone with experience working in the business world. 

Members of the board of directors don’t have to work for the company. In fact, having outside members sitting on the board of directors benefits the company. The reason? Independent members don’t have a direct stake in the business decision, so they’re less likely to be biased. However, having outside members on the board of directors disadvantages the corporation if they aren’t familiar with the corporation.  

What does the board of directors do?

The board of directors has a range of management responsibilities, including:

  • Hiring and firing corporate officers (e.g., president, vice president)
  • Voting on important business transactions (like mergers)
  • Setting compensation for corporate officers
  • Deciding on the corporation’s short- and long-term goals
  • Determining the distribution of dividends
  • Overseeing the management and operations of the corporation

The board of directors may have additional responsibilities. The corporation’s bylaws and formation documents (e.g., articles of incorporation) set up the board’s responsibilities. When carrying out these responsibilities, the board of directors has ethical obligations. Let’s talk about those next.

What are the board’s obligations to the corporation?

Members of the board of directors have ethical obligations (called fiduciary duties) they must follow. The reason? They are in a position of trust in the corporation. By electing board members, the shareholders trust the board of directors to manage the corporation and maximize the shareholder’s return on their investments.

The board of directors owes these fiduciary duties to the shareholders and corporation:

  • Duty of care: They need to take care when making decisions and not act recklessly. 
  • Duty of loyalty: The decisions need to be in the best interests of the shareholders and corporation—not the board member’s own interests.
  • Duty of good faith: They must act in good faith in carrying out their responsibilities.
  • Duty of disclosure: The board of directors must be transparent and open with the shareholders and not keep things from them. 
  • Duty of confidentiality: They must keep corporate secrets and not share or exploit confidential information.

Some states (like Delaware) allow a business owner to expand, limit, or even eliminate some of these fiduciary duties. It’s important not to make this decision lightly, though. Not having these in place can open up your corporation to liability. 

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Does every business have a board of directors?

No, not every business has a board of directors. Only corporations (like an S Corp or C Corp) have a board of directors. Wondering what board of directors examples are for other businesses? If you have a limited liability company, the managers or members take on the role of the board of directors. State law provides default rules for:

  • Who elects the board of directors
  • How they are elected
  • What their responsibilities are
  • What ethical obligations they have towards the corporation and shareholders

Depending on which state you form your corporation in, you can modify these default rules to suit your situation. 

Summary

The definition of board of directors is a group of people who direct and control a company. We learned the board of directors provides advantages for companies because businesses need structured guidance to flourish. Finally, we learned that members of the board have many responsibilities and ethical obligations to the company. 

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Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.

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Written by Team ZenBusiness

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