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 in the business. For nonprofit organizations, the role of the board of directors is to serve the interests of the public and the organization.
Under the guidance and scrutiny of a board of directors, the role of the CEO in strategic management is to align resources to achieve the company objectives in the most efficient way.
The BOD is fiscally accountable for the company. It sets the amount of dividends paid to the shareholders and how much profit 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. This board can audit the financial reports of companies and flag accounting fraud that may result in penalty fines and sometimes imprisonment.
The role of the board of directors in corporate governance is to review 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. The board of directors also sets the compensation level for this position. 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, as opposed to in his own self interest. 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.
In light of the accountability to the shareholders, the BOD frequently weighs up a company's risk of missing the corporate objectives and the consequences that this would have on dividend distribution, or the financial return to the company. The Board will usually task the CEO to design a portfolio of risk-mitigation strategic decisions that the company might pursue, and the BOD will review these and ensure the business is not taking unnecessary risks.
A seat on the BOD welcomes an elected 18-year-or-older individual. Business entities cannot serve as board members. 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 in the company may be elected on the board as they would most be keen to defend the interests of the shareholders.