Boardroom Best Practices

What Are the Board of Directors’ Responsibilities to Their Shareholders?

The structure of publicly listed corporations and the marketplace is strategically designed to benefit all parties and society in general. Board directors, managers, shareholders and stakeholders all play a specific role in the marketplace. Boards of directors have specific responsibilities to their shareholders.

Each group has specific duties and responsibilities that correspond to their role. Occasionally, there is a slight overlap in roles. For example, shareholders are demanding more say in issues that have traditionally been board matters. As their title suggests, board directors have many duties related to directing the operation, so it seems fitting that they have many responsibilities to their shareholders. As a rule, when everyone stays in their own lane, everyone stands to profit in one or more ways.

Private and public corporations offer shares of their companies to investors, which provides their companies with operating revenue. The relationship between private companies and their shareholders is most notably outlined in the corporate charter, shareholder agreements and other shareholder provisions.

In public and privately owned corporations, most shareholders have common rights and an established relationship with the company and its board related to their shareholder ownership.

Clarifying Roles and Ownership Perspectives Between Board Directors and Shareholders

To clarify roles in corporate partnerships in the most simplistic of terms, the board of directors is responsible for overseeing the affairs of the company and protecting the interests of the shareholders. Senior managers of the company are responsible for managing the day-to-day operations of the corporation. Shareholders are most interested in making a financial return on their investment.

Shareholders are often described as being “owners” of the corporations in which they invest. That is partially true, and perhaps wholly true, depending on how one defines “owner.” In the strictest sense of the word, shareholders are only partial owners of a company because they don’t solely retain full rights and responsibilities. Shareholder rights have been increasing as a way of ensuring good governance. For example, shareholder meetings provide a venue for shareholders to get in on the loop of pertinent issues and vote on them. Shareholders of private companies are even less entitled to information because private companies aren’t bound by the same rigid federal regulations that apply to publicly held companies.

While boards of directors maintain the bulk of control over corporations, shareholders of private and public companies can often vote out directors if they garner a majority and make a strong enough push for it. While shareholders lack director control over the corporations they invest in, their degree of ownership gives them some degree of power over board director nominees and compensation issues.

Board of Directors’ Responsibilities to Shareholders

The primary responsibilities of board directors to shareholders relate to their fiduciary duties, including the duty of care, duty of loyalty and duty of obedience. These duties require board directors to place the best interests of the company ahead of their own. They must make decisions for the company and act in a manner that an ordinary, prudent person would. The duty of obedience requires boards to ensure that the company remains in compliance with all laws and regulations. 

Another responsibility that board directors have to shareholders is to compose and maintain a diverse, independent and highly competent board. Sound decision-making only comes from a wide variety of perspectives. Shareholders are entitled to know that the board overseeing the company’s operations is well-qualified and up to the task.

Boards are required to take minutes of their meetings to detail the issues that they’re working on. Shareholders may request copies of board meeting minutes if they’re looking for assurance that the board is actively fulfilling their duties of oversight and strategic planning. This doesn’t mean that shareholders have any say in directing the issues the board chooses to tackle or the way they prioritize issues.

Shareholders look for assurance that companies are financially strong currently and will continue to grow and prosper. The board of directors has an explicit responsibility to form a short-term plan of one to two years to ensure sustainability. In addition, shareholders are interested in long-term growth for continued security and prosperity.

Board directors also have a responsibility to oversee all departments and aspects of the corporation. The responsibility includes making sure operations are running efficiently, company operations are in alignment with the organization’s purpose, there are no incidences of fraud, they communicate the corporate culture throughout the organization, and they conduct oversight over all departments and operations of the company.

The annual audit gives the shareholders a clear picture of the company’s financial status and outlook. Boards of directors are accountable to shareholders to conduct an annual audit by independent directors that is accurate, complete and timely. In today’s climate, shareholders also expect financial records that are concise, readable and easily understandable.

The board of directors is responsible for hiring, monitoring and firing the CEO and other senior management executives. Shareholders expect C-suite-level managers to be competent, knowledgeable and capable of carrying out the board’s strategic plans. Boards owe it to their shareholders to provide the necessary oversight of senior management.

The company’s reputation is an important concern for shareholders. They rely on the board of directors to protect the company from fraudulent practices, bad press and other issues that can harm a company’s reputation. Boards must work to identify reputational risks that could result in lost revenue, increased operating expense, capital or regulatory costs, and destruction of shareholder value.

In addition to shareholders having more say in board decisions, another place where roles become slightly blurred is that major shareholders are often also part of upper management. Shared roles can become problematic in the boardroom when boards and shareholders don’t share the same perspectives on short-term strategies, long-term strategies or both.

A board portal system by Diligent Corporation is the best way for boards to manage their many responsibilities to their shareholders. Governance Cloud is a suite of governance software tools that assist boards in governance activities and responsibilities with tools like board self-assessments, entity management tools, secure messaging, agenda and minutes software, D&O questionnaires and more. As governance best practices, laws and regulations continue to evolve, Diligent software designers are staying ahead of the curve with new features and products to fully support good governance at every stage.

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