Duties and Structure of Corporate Boards
When it is reasonably possible, a corporate board should consist of at least five members, at least two of which, should be outside directors. It is preferable if a majority are outside directors. An outside director is a board member who is not employed by the corporation and has no meaningful connections to the organization. Directors are elected by the shareholders of the corporation.
Typical duties of corporate boards include:
- Establishing overall corporate policies and objectives;
- Approving annual budgets;
- Accounting to the shareholders for the firm's performance;
- Establishing salaries and other compensation for the officers and senior management;
- Selecting the Chief Executive Officer and other top executives, and reviewing each executive's performance;
- Establishing key committees including but not limited to audit, compensation, and nominating.
Boards generally select one of its members to be the chairman, who holds the title set forth in the corporate bylaws.
An inside director is a director who is also an officer, employee, major shareholder, or other stakeholder. A stakeholder can be an officer, employee, major customer or client, major supplier, creditor, trade union representative, or shareholder. When a director is also an executive of the corporation, he or she is commonly referred to as an executive director.
Outside directors are generally compensated by being paid a director's fee, stock, or stock options. Sometimes outside directors receive a combination of the above. Often outside directors serve on more than one corporate board. This results in an interlocking directorate, where a relatively small number of directors can have a substantial influence over several corporations.
While having outside directors is beneficial, it is not always possible for small, closely held corporations to attract and compensate outside directors.