Board of directors roles and responsibilities
Boards of directors can have enormous and far-reaching responsibilities, from approving organizations' budgets and financial statements to establishing big-picture human resources policies, to rigorously vetting CEOs about new and existing projects. The scope of these board responsibilities and functions are typically outlined in an organization's constitution or bylaws.
Board directors may be elected or appointed by either shareholders or the organization's membership. Fiduciary duties and company loyalty are chief among the roles and responsibilities of a board of directors — directors should serve the interests of the company above all else. But the directors, especially the chairperson, also have a responsibility to the public.
After the CEO or perhaps another C-suite executive, the chairperson of a board is next in line when it comes to the organization's public accountability. As we've seen with events such as the Volkswagen emissions scandal, the chairperson often bears the brunt of public gaffes and corporate scandals, as the Financial Times notes.
In the U.S., the Enron and WorldCom scandals — in which accounting was used to conceal debts and losses — that occurred around the turn of the millennium inspired the Sarbanes-Oxley Act of 2002. The then-new law expanded rules on oversight, independence and accountability for companies listed on the U.S. stock exchange.
But even for private or nonprofit organizations, applying some of this rigor can improve governance and help avoid crises of confidence.
In short, there is no one-size-fits-all approach to forming a board. The roles and responsibilities of each board member differ based on the mission, vision, and priorities of the organization. The following is a breakdown of the purpose and functions of a board of directors, and some important considerations regarding organization, communication, and diversity.
Board organization: Who's on the board of directors?
There's no magic number when it comes to how big a board of directors needs to be, as long as a few key roles are filled — namely, chairperson, vice-chair, secretary, and treasurer. The last two can be combined. Some organizations have tiny boards with just a few people, while others have upwards of three dozen directors. The average board size ranges from nine to 11 members.
Larger boards may offer greater diversity and with more directors it could be easier to attain a meeting quorum and establish special committees. But there are arguments that bigger is not always better.
The Wall Street Journal, reporting on a governance study released in 2014, writes that smaller boards tend to get things done faster. "Among companies with a market capitalization of at least $10 billion, typically those with the smallest boards produced substantially better shareholder returns over a three-year period [...] when compared with companies with the biggest boards," the newspaper notes.
Companies with small boards, like Apple and Netflix (which have eight and nine, respectively), "appear to be decisive, cohesive and hands-on. Such boards typically have informal meetings and few committees," the WSJ continues. Giving investors and shareholders more of a say at the table by way of a larger board could dilute or compromise the founders' or CEO's vision for the company, especially in an activist-shareholder situation.
When determining how big a board will be and who will get a board seat, an organization's leaders must establish the company goals, and have an understanding of what it will take to get there. For instance, many venture-capital firms like to get a board seat when investing in a company. If the CEO intends to scale the company quickly by taking on large amounts of venture-capital investment from multiple sources, that could lead to a bigger board. In situations like these, bringing in outside directors — that is, people who do not represent the interests of stakeholders, but rather lend their expertise to serve the interests of the company itself — could be a good strategy.
If an organization has the opportunity to start off with a small board, it could be a good way to go. The beautiful thing about a board is that it can grow as an organization does — as the company faces increasingly complex issues, the board can expand to address those complexities.
Communication and documentation
Once a board of directors has taken seats, the next move is establishing the lines of communication.
A board of directors is essentially a group of people who dedicate themselves to the well-being of an organization. They need to meet regularly — in person, on the phone or through video conferencing — to discuss the current state of the organization, delegate tasks, understand the current financial snapshot and work toward future goals. Meeting agendas need to be include various directors' talking points, and meeting minutes need to be diligently transcribed for institutional memory as well as legal requirements. As well, sensitive and confidential documentation such as financial statements or forecasts need to be shared and stored in a secure environment.
In years past, this documentation would have been done largely on paper and filed away in a cabinet — hardly an accessible and efficient way to keep an organization accountable and on-task. Today, board portals like Diligent offer board directors the opportunity to collaborate electronically. This portability caters to our increasingly mobile lives, allowing directors to stay on top of their board responsibilities while traveling or working from remote locations.
Roles of board committees
Research confirms that the larger and more diverse a group is, the longer it takes to find consensus. When large tasks loom, such as developing a workplace diversity strategy, the inclination may be to break off into committees — especially if there's a deadline attached.
Organizational-effectiveness firm Dorger Consulting notes some of the pros of forming committees: "First, by transferring much of the 'roll up the shirt sleeves' work to committees, the full board can keep its meetings shorter, more focused and aimed principally at the strategic and policy related matters that it needs to be working on. Second, important issues are often complex. They require research, consideration of alternatives, extensive discussion and even brainstorming. These activities are not routinely the type of things you want to have your full board engage in."
But committees can slow the normal functioning of a board and can distract directors from overseeing the company's executives. In a 2015 article entitled "Where Boards Fall Short," the Harvard Business Review notes, "Strategy is the fundamental challenge of the organization, and it should engage the entire board."
A board doesn't need most committees, especially if it is already small, agile and productive, and if the company the board represents isn't facing any particularly complex issues at the moment. There are, however, two standing committees that should exist on every board of directors regardless of size:
- Audit Committee: The Sarbanes-Oxley Act requires that publicly traded companies in the U.S. have an independent audit committee. Responsibilities include overseeing the company's financials, hiring external and independent auditors and monitoring internal-control processes. Regulations regarding the independence of audit committees are fast becoming the norm in other countries too, including the U.S.'s next-door neighbor. As the Canadian Public Accountability Board says, "Effective audit committees and auditors build confidence in the integrity of financial reporting." So even if it's not required by law, a finance committee is still a good idea for any organization.
- Nominating/Governance Committee: Responsible for overseeing the board of directors, the majority of this committee should consist of directors independent of management. Chief responsibilities include assessing the quality and effectiveness of the board, determining the board's composition and assists the organization in exercising its due-diligence function.
Other committees worth considering include executive, compensation, risk and fundraising or financial-resource committees. Being proactively transparent on financials and governance helps organizations anticipate and mitigate potential risks and damage to the organization's reputation.
Representation and diversity on boards
A major critique of many boards is that they are often homogenous, in both gender and race, as well as in the difference (or lack thereof) of opinion and experience.
The Alliance For Board Diversity's annual board-diversity census for 2016, compiled by Deloitte, notes that while some progress have been made by women and minorities, boards of the biggest U.S. companies are still primarily white men.
Board composition among Fortune 500 firms:
- 69.2 percent white men
- 16.4 percent white women
- 10.6 percent minority men
- 3.8 percent minority women
Many studies and articles, such as Grant Thornton's The Value of Diversity study and McKinsey article "Why Diversity Matters," suggest that companies that have women and members of ethnic communities on their boards perform better economically. Additionally, gender and racial diversity lead to a diversity of opinion and experience — traits that, as Harvard Business Review points out, can inspire greater innovation and creativity.
Anecdotal proof of this point can be found in the Volkswagen emissions scandal. Shortly after the news surfaced, London's The Financial Times wrote an article entitled "Boardroom politics at the heart of VW scandal" that quoted a former chair of a large German industrial company as saying the automaker's governance "has long been uniquely awful." The article went on to say that "A key weakness at VW remains the lack of diversity of opinion and expertise on the company's supervisory board." This assertion backs up reams of academic and industry research — such as an article on the influence of diversity on board dynamics published in Corporate Governance: An International Review ' that say diversity of experience is crucial on boards.
That weakness underlines a key message in today's economy and society: Having a diversity of people — and diversity of opinion — on a board of directors is fast becoming a requirement for companies that want to gain or maintain a competitive edge. "Board diversity can convey a commitment to equal opportunity, responsiveness to diverse stakeholders and a general message of progressive leadership, which can enhance the corporation's public image," write Deborah Rhode and Amanda Packel in a Delaware Journal Of Corporate Law article.
There aren't a lot of good reasons for organizations not to make greater diversity efforts. It's now part of the role of boards of directors — specifically its nomination/governance committee — to prioritize diversity and ensure it extends beyond tokenism.
Conclusion
The roles and responsibilities of boards of directors — and of the individual board members themselves — are as plentiful as they are diverse. From overseeing day-to-day operations to examining the big-picture stuff related to running a modern and forward-thinking business, a collaborative, inclusive and transparent board is essential to any successful organization.
