In any corporation, the ultimate decision makers are the shareholders, and their voice in the decision-making--and in the management and oversight of the corporation--is the board of directors.
A corporation is owned by shareholders, or those who own stock. This means that a group of people, whether a private, restricted group or the public at large, will have the option to buy "shares" of stock in the company. And when a person, member of the public, another company or investment group owns a percentage of stock in a company, they then own that percentage of the company and the corresponding voting rights on decisions made by shareholders. This includes deciding who will sit on the board of directors.
The Board of Directors
The board of directors for any a corporation is charged with making management decisions for the company on behalf of the shareholders (those who have purchased stock in the company). This body is often referred to as simply "the board." The board chooses a chief executive officer (CEO), President and other executives to run the company, and practices oversight on their performance. If a company or a company's stock performs poorly, the president and CEO must answer for this to the board. The board represents the shareholders and tries to ensure that the company makes the best decisions to maximize dividends (payments from the stocks to the stockholders) for the shareholders.
The board is responsible for many decisions, including the hiring and firing of executives, how to compensate executives, whether to distribute dividends to shareholders or reinvest them, what percentage of profits will be distributed as dividends and whether the mission and direction of the company is in line with shareholders' wishes. Specific duties of the board are outlined in a company's bylaws, which also specify how many board members there are and how they are chosen.
Who can sit on the board of directors?
The bylaws, which are adopted by the board of directors, dictates who can sit on the board. These bylaws, or operating rules for the company, dictate how many people can sit on the board, where board members can come from, and how they are chosen. Depending on the state in which the company is incorporated, there may also be laws pertaining to how many directors can or must sit on the board and who is eligible to sit on the board.
In general, most corporations have directors from both inside the company and outside the company. Often times prominent shareholders, members of the management, and outside parties selected for their expertise in a certain subject matter, competence in corporate governance, or potentially beneficial high profile in the public will sit on the board. Diversity on the board will ensure that all viewpoints are a part of decision-making, including management's viewpoint and the shareholders' viewpoint.
Who appoints the directors?
Directors are appointed in various ways, but almost universally are subject to a shareholder-wide vote, often held at a general shareholder meeting. In the meantime, should a vacancy on the board arise, some companies have bylaws that allow other directors to temporarily appoint a fellow director until a shareholder vote can be held. Potential directors can be nominated by directors, management, shareholders or a search committee formed by the shareholders for the purpose of finding directors for the board.
How are directors removed from the board?
Directors are removed by shareholder vote, in the same way they are selected. They may also retire, and in some situations--and according to some bylaws--be removed by other directors. However, this process is more difficult than electing a board member because often times there are legal provisions and required compensation packages designed to discourage the removal of board members.
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