A Board of Directors (BOD) forms the highest level of authority in the governance of a company and includes elected individuals who represent the interest of the shareholders. They ensure that the strategic decisions of the Chief Executive Officer (CEO) best protect and benefit anyone who has equity ownership into the business. For nonprofit organizations, the BOD serves the interests of the public and the organization. Under the guidance and scrutiny of a BOD, the CEO strategically aligns resources to achieve the company objectives in the most efficient way.
The BOD becomes fiscally accountable. It sets the amount of dividends paid to the shareholders and how much fund is reinvested into the company. Furthermore, BOD members need to ensure that the financial disclosures are accurate and truly represent the state of the company. This accountability is enforced by the Sarbanes-Oxley Act of 2002 that created the Public Company Accounting Oversight Board (PCAOB) that can audit the financial reports of companies and flag accounting fraud that may result in penalty fines and sometimes imprisonment.
The BOD reviews the programs selected by the CEO that are most likely to achieve the financial objectives set for the company. This scrutiny includes the investment decisions made by the company's executive team, and the expenditures required to support the efforts. This power extends to choosing the Chief Executive Officer who can best perform the duties and set the compensation level for this position, according to Carter McNamara MBA, Ph.D., who specializes in coaching CEOs and organizations. The BOD protects the company's share values during transition times by ensuring continuity in leadership in times of CEO succession.
A Board member is trusted with fiduciary responsibilities which encompass three legal duties: care, loyalty and obedience. He must act in good faith and for the interest of the shareholders and the organization. He must also keep the good of the organization in mind and not base the decision on personal interests, and finally, he must obey the policies stated in the governing documents of the corporation (bylaws) and the regulation of the industry, as stated by Jeffrey S. Tenenbaum Esq., Venable LLP, 2006 recipient of the American Bar Association's Outstanding Nonprofit Lawyer of the Year Award.
In light of the accountability to the shareholders, the BOD frequently weighs company's risks of missing the corporate objectives and the consequences that this would have on dividend distribution, or financial return to the company. Mitigation measures developed by the CEO enter the portfolio of strategic decisions that the company pursues and are reviewed by the BOD, according to Martin Lipton, JD, a founding partner of Wachtell, Lipton, Rosen & Katz.
A seat on the BOD welcomes an elected 18 year or older individual and cannot be bestowed upon a business entity. The annual elections typically align persons with the leadership know-how or an expert in the industry space of the company. Investors with large ownership into the company may be elected on the board as they would most be keen to defend the interests of the shareholders.