Board Of Directors: Composition And Functions Of The BOD In An Organization
Whether you are associated with an organization or not, the term Board of Directors is relatively very common to the ears. Almost all of us have heard it at least once in our lives.
Precisely, we even know the meaning of the same.
The board of directors, or the BOD as it is commonly called, is the corporate body that comprises a team of elected individuals who are the representatives of the interests of a company’s stakeholders.
The board constitutes the topmost level of the hierarchy for the organization and focuses on making sure that the company is effectively achieving its goals. The members that are part of the board of directors are responsible for making the key decisions that work in the best interest of the company.
So, without any further delay, let us explore more about the board of directors of the company and see how it operates to make the company grow effectively.
- The board of directors in a company refers to an elected panel within the company itself that represents the shareholders of the company and only includes the higher levels of corporate positions.
- The composition of the board of directors varies from one organization to another. Generally, there is a CEO at the top, the chairman of the board, the directors, the non-executive director, the CFO, the vice president, the zonal heads, etc.
- By legal enforcement, a public company is bound to have a BOD; however, it stays optional for private or nonprofit organizations.
- The aim of the BOD is to take a stand for the interests and rights of the stakeholders and investors while at the same time dealing with the assets and investments in the business.
- The board of directors is the ultimate governing body within an organization that makes all the strategic corporate choices by participating in various board meetings.
Explanation Of The Board Of Directors
A board of directors is a group of corporate officials that the other stakeholders of the firm elect. State laws are responsible for obligating public corporations to keep a board of directors.
The same remains optional in the case of a private firm or a nonprofit organization.
The concept behind having a board of directors within an organization is to have a governing body that will safeguard the interests of the stakeholders as they, too, are the owners of the firm.
The relationship between the shareholders and the board of directors flows from the principal-agent relationship theory. Here, the stakeholders are the owners or the principals. The BOD acts as an agent that makes sure that the investments of the shareholders are safe and secured.
Additionally, the board also has to ensure efficiency within the organization to allow for profit maximization, which in turn will add to the wealth of the shareholders.
Within the process, the board of directors as a governing body is also required to work for the best interest of the other stakeholders and not just the shareholders. This is because a business is required to cater to the needs of its stakeholders to continue its existence.
For example, the board of directors also needs to make sure that the organization operates by maintaining legal obligations to make sure that the company does not draw any negative attention from the legal institutions.
These decisions are made at the board of directors meeting that is held at fairly regular intervals.
Structure Of The Board Of Directors In An Organization
The board of directors has different positions within the organizational panel. The board of directors may change based on the state or company laws.
For instance, the board of directors for Amazon comprises the higher official positions like the chairman, the directors, the CFOs, segmented CEOs, VPs, etc.
For a usual organization, the members of the board of directors may vary from 3 to 31. Some of the designations that may be included within the board of directors are as follows:
The chairman of an organization is the head of the board and thus leads all the board and committee meetings. The board of directors votes and elects a chairperson among the lot. In most cases, the chief executive officer of the organization is the acting chairman of the board of directors.
The Managing Director:
There are generally no restrictions on the total number of directors within an organization. For instance, in the BOD panel, Amazon had multiple directors who were looking over a definite segment. A managing director is a person who is elected by the executive directors of a company to guide, manage, and monitor all the business functions.
An executive director actively participates in the management of the company, its sales, business operations, and finances. Being in the corporate field, an executive director is a member of the board of directors and also receives a salary from the company. The director is a representation of the cause of the company.
Non Executive Director:
A non-executive director is not an official part of the organization but is a member of the board of directors. The non-executive director presents the company with an objective and the perspective of a third person. These directors give critical advice and opinions by charging a certain amount of fees. Additionally, they provide a voice to stakeholders outside the organization.
CFOs, Vice Presidents, vigilance chiefs, zonal heads, treasurer, audit chiefs, etc., are some of the corporate designations that also make up the board of directors panel.
Functions Of The Board Of Directors
The board of directors within an organization oversees and advises the company to operate as effectively as possible. The board makes sure that the organization is lawfully functioning and also in the best interests of the stakeholders and the shareholders of the company.
The BOD independently operates the management of the company and its daily functions.
Some of the precise functions of the board of directors may include:
- Helping the organization define its goals, objectives, and directions.
- Recruiting and dismissing the upper management and senior executives.
- Deciding on executive compensation.
- Advising the executive members while they plan and make decisions.
- Establishing the dividend policy of the organization.
- Announcing the dividends and payouts.
- Building and maintaining a solid and positive brand image for the organization.
The board of directors plays an essential role in deciding the significant steps of any organization. The BOD stands at the supreme authoritative position and thereby comprises only the senior and executive level employees from the organization.
Having a board of directors is compulsory for public organizations; however, it is optional for nonprofits and private companies.
A BOD is not only responsible for taking care of the shareholders of the company but also its stakeholders for its future benefit.