Does the Board of Directors Have to Approve an Asset Acquisition?

Boards of directors are not legally required to approve every asset purchase by their corporations, but some boards are more involved in the decision process than others. Depending on how involved a board of directors is in the management of a business, the CEO or executive director of the organization might have free rein in deciding whether or not to purchase an asset. In some instances, boards exercise strict control over their business manager, requiring approval of all asset purchases.

Some boards manage for-profit corporations, while others manage nonprofits. All nonprofits must incorporate, while not all for-profit businesses must. For-profit boards usually hire an employee to run the business affairs of the corporation. While board members have a fiduciary responsibility to keep themselves informed about the financial status of an organization, the reason they hire a manager is to free themselves of management responsibilities. Nonprofits with limited funds have boards that perform most or all of the management work themselves. The more money a nonprofit has, the more likely it will hire a contractor or employee to run the business side of the organization.

Some boards of directors steer their organizations, setting goals and strategies, and hiring experts to manage the corporation. Other boards take a more direct role in managing the business affairs of the corporation. Boards are usually less hands-on at for-profit corporations, relying on experts to run their business operations. The smaller the nonprofit, the more hands-on a board of directors is likely to be. When a board is more hands-on, it is more likely to exercise approval authority over asset purchases. Under this scenario, the CEO or executive director would present a budget to the board, getting approval in advance for expenditures. If new needs arise, the manager would need to get approval to fill these needs when they arise.

In some instances, boards create committees, made up of board members, staff or a combination to manage specific areas of the corporation. The board might give the committee a budget, allowing it to spend its budget as it sees fit. When the committee makes an asset purchase, it is doing so with the approval of the board. In some instances, a board will create an ad hoc committee, or one that has a limited function and exists only to handle a specific task. For example, the board of a trade association might create an ad hoc committee to look into buying a new membership software program for the organization. The board might ask the committee to present a report and recommendation, voting on the purchase of the software recommended by the committee. In other instances, the board might give the committee a budget to spend and let it purchase the software program it wants.

Much of the decisions regarding a board’s approval on asset purchases focus on the size of the asset purchased. Most boards don’t want to use their time approving purchases of office supplies, furniture, computers or copy machines. If the executive management of a business believes it’s in the best interest of the company to buy an expensive piece of machinery, acquire a new business or make an asset purchase that requires the business taking on debt or depleting a significant portion of its capital reserves, management usually notifies its board. This is especially true if the asset purchase is based on a strategic decision, rather than simply an operational asset purchase.

To help boards make better decisions about the approval of asset purchases, companies often use a formal bidding process in which bids are solicited from outside contractors for services to ensure the company gets the best deal. This not only helps the board determine the services, features, customer service, guarantees, warranties and costs associated with an asset purchase, but also helps reduce instances of fraud, nepotism and conflict of interest.