Board of Directors Basics
By Rachel Gholston & Annie Cho
I. INTRODUCTION
Corporations are governed by a board of directors (the “Board”), which works with company management to make decisions in the best interest of the company and its stockholders. This article covers how Boards are formed, the general areas of responsibility of directors, and board compensation considerations.
II. ENGAGEMENT OF DIRECTORS
Unlike consultants and other advisors, board member service agreements, if any, have limited descriptions of the role and responsibilities and often reference custom and applicable corporation law. The ability of the Board to modify or abridge those duties is limited and must be set forth in the company’s certificate of incorporation or bylaws.
Additionally, a director is not awarded their role on the Board in the same way that an employee or independent contractor is hired for a position, particularly for independent directors. An individual becomes a director, and a member of the Board, when they are either elected by the stockholders or, if permitted by the charter documents, appointed by the then-sitting directors to fill an existing vacancy on the Board.
III. BOARD RESPONSIBILITIES
The Board is responsible for managing the business and affairs of a company, including:
defining the company’s mission and goals by establishing or approving strategic corporate plans;
hiring, firing, and supervising executive officers and other senior executives who are responsible for running the daily operations of the company and implementing corporate plans; and
making major company decisions in the best interests of the company and the stockholders.
Generally, any corporate action that is “material” to the business and affairs of the company requires Board approval.
Examples of actions that require Board approval include:
amendments to the Certificate of Incorporation or bylaws of the company;
equity issuances or transfers (whether stock, convertible securities, options or warrants);
budget approval;
borrowing or lending money;
executive compensation; and
distributions of the company’s capital (dividends).
The foregoing list is not exhaustive. Many companies agree with investors via contract that certain actions require Board consent or the consent of specific investors.
IV. BOARD APPROVAL MECHANICS
Generally, the bylaws of the company set forth the mechanics for Board approval. However, other corporate documents may have specific Board approval requirements for certain actions. For the Board to act in a meeting, there must first be a quorum (which is typically a majority of the total number of directors on the Board but can vary slightly per the terms of the bylaws). The act of a majority of the directors present at any meeting at which a quorum is present constitutes the act of the Board. If an action is taken at a regular or special meeting of the Board, the Secretary or other individual delegated by the Board will prepare a summary of the minutes of the meeting describing the discussions and actions that were approved. The Board may also act by unanimous written consent. Unlike at a meeting, a majority of directors is not sufficient to approve an action of a company by written consent – the consent must be unanimous.
For more information, listen to our podcast episode: From the Edge - In the Boardroom: Session 1 - Board Basics.
V. COMMITTEE DELEGATION
While public companies are required to establish and utilize Board committees, private companies do not have such an obligation. Many private companies, however, choose to implement committees for a variety of reasons. For example, a Board may establish a special committee to handle particular matters where there would otherwise be a conflict of interest on the full Board. A Board may consider implementing other committees as a way to prepare the company for future operation as a public company or to otherwise promote more efficient corporate governance. These committees generally include a compensation committee to set the compensation for executive level employees, an audit committee to monitor the company’s financial results and hire and work with the outside auditors, and/or a corporate governance committee to vet current and future directors and adopt and implement other corporate governance initiatives, such as training, diversity or environmental, social or governance goals.
Similar to the full Board, committees of the Board may act by meeting or unanimous written consent. Committees are governed by the bylaws of the company and committee charters adopted by the Board. However, there are limits on what the Board may delegate to these committees. In Delaware, Boards are not permitted to delegate (i) the election of officers, (ii) the approval, adoption or recommendation of any action that requires the approval of stockholders, (iii) the adoption, amendment, and/or repeal of any bylaw, (iv) the approval of a share exchange or merger, (v) the filling of a vacancy on the Board or Board committee, (vi) the authorization or declaration of dividend payments to stockholders, or (vii) the authorization of stock issuance.
For more information, listen to our podcast episode: From the Edge - In the Boardroom: Session 3 - Board Committees
VI. BOARD COMPENSATION
An important role of the Board is to determine whether a director will receive compensation for their role, and, if so, the form of compensation that the director will receive. The Board’s decision to grant compensation to a director for their service will likely depend on the type of company and reason for which the director is being appointed. For example, directors appointed by a larger or strategic investor as a condition of that investor’s investment in the company are typically not compensated by the company. Generally, compensation is only provided to independent, non-employee directors serving on the Board. Director compensation can take the form of equity grants (like options or restricted stock) and/or cash payments.
VII. CONCLUSION
Corporate directors play a key role in guiding company management and setting the direction of the company. Here, we have covered how directors are appointed, what decisions they are tasked with making, and other nuts and bolts related to serving on a Board. In addition to the podcast episodes referenced in this article, we suggest you listen to the entire “From the Edge – In the Boardroom” series if you would like to engage in a deep dive of Board considerations and best practices.
For information on how to be an effective director, please read our related article: “How to be an Effective Board Member for a Private Company.”