Learn more about what a board of directors is in business.
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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.
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.
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.
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.
The board of directors has a range of management responsibilities, including:
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.
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:
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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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:
Depending on which state you form your corporation in, you can modify these default rules to suit your situation.
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 informational 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.