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In small private companies, the directors and shareholders will typically be the same people. However, in large public companies, the board has more of a supervisory role and more power. A director is an officer of the company who may be either an inside director or an independent outside director (who brings a wealth of experience to the table). Boards are usually comprised of a combination of both types. The leader of the group is the chairman of the board which is typically an elected office.
Various characteristics are essential for a board of directors. Some of the important ones include diverse, involved, knowledgeable, and effective. Each member should have differences in talents, skills, experience, interest and social background. They should each assume a proper and active role in the board’s function. Members need to be well-informed about the company and its operation. They must be able to act prudently and without conflict of interest.
There are a number of possible committees that may be created to focus on specific areas. Common committees are:
Most boards have three or four committees which are specific to their organization that meet several times a year. The number of directors should be sufficient to staff the various committees.
Boards have a number of key responsibilities. They are not created to develop a company’s strategy — but rather to review them. They are responsible for evaluating the performance of the CEO and submitting an annual “CEO report card.” They need to identify performance expectations as well as short-term and long–term incentive plans. Succession planning for the corporation is another vital duty. They must ensure that legal and ethical standards are maintained. Approval of the annual budget, organization policies and long-range planning fall under their scope. It is their responsibility to declare dividends, approve proxy materials, and determine the number of shares of company stock for issuance.
The board typically prepares an agenda for each meeting (usually several times per year) which focuses on strategic, operational, and reporting matters. A common practice is for a “board book” to be sent to the directors several days prior to the meeting. This allows them time to review the information and come to the meeting prepared to discuss it.
Following the annual meeting of shareholders, members are recommended for assignment on particular committees.
Remuneration paid to the board members will vary by company. It should be designed to attract and retain qualified directors to serve on the board. The form and amount of pay should be evaluated periodically to ensure that compensation and perquisites are in line with that of their peers. Often a combination of annual retainer and meeting fee is developed. Many companies also use stock options and/or stock awards to pay their outside directors.