Investing Portfolio Management The Role and Duties of a Corporate Board of Directors By Joshua Kennon Joshua Kennon Twitter Website Joshua Kennon is an expert on investing, assets and markets, and retirement planning. He is the managing director and co-founder of Kennon-Green & Co., an asset management firm. learn about our editorial policies Updated on April 17, 2022 Reviewed by Charles Potters In This Article View All In This Article The Purpose of a Board of Directors The Structure and Makeup of the Board How Committees Work How Board Members Are Paid Structure and Its Impact Frequently Asked Questions (FAQs) Photo: Xavier Arnau / Getty Images A board of directors has many duties, but its first is to protect shareholder assets. Its primary goal is to ensure that shareholders receive a decent return on their investments. You should know the details about what a corporate board does if you're thinking about putting money in a company by buying either shares of stock or bonds. The Purpose of the Board The board is the highest authority within the structure of a corporation or a publicly traded business. It owes the shareholders the highest financial duty under corporation law in the U.S., known as a "fiduciary duty." It's the board's job to select and approve the right level of pay for the chief executive officer (CEO). It gauges the appeal of dividends and pays them. It may recommend stock splits. The board oversees share-repurchase programs and approves the financial statements. It may even recommend or strongly discourage acquisitions and mergers. Note This concept differs in some countries where many boards feel that their foremost goal is to protect the workers first, and the shareholders second. In that case, corporate profitability takes a back seat to the needs of the workers. The Structure and Makeup of the Board The board is made up of persons (the "directors") who are elected by the shareholders for multi-year terms. Many companies work on a rotating system so that only a fraction of these people are up for election each year. They do that because it makes it harder for a complete board change to take place due to a hostile takeover. Some directors have a vested interest in the company. They work in upper management. They're referred to as "inside directors." Other independent "outside directors" might not have any direct ties to the company, but they're often known for their business abilities, and may be paid for their services, sometimes in stock. Directors are often tied to major vendors to strengthen key relationships. You might expect to see a high-ranking employee of The Coca Cola Company on the board of McDonald's Corporation, or vice versa. They have a mutually beneficial relationship. Note The number of people on a board can vary a great deal. It can range from one to 30 or more. The statutory minimum ranges from one to three, depending on the state. While most state and federal laws do not generally stipulate that individual board members be independent, the boards of companies listed on the New York Stock Exchange and Nasdaq must have a majority of independent directors. Independent directors aren't linked with or employed by the company. In theory, at least, they won't be subject to pressure. They're more likely to act in the shareholders' best interests when those interests run counter to the goals of entrenched management. How Committees Work Setting up audit and compensation committees is also the duty of the board. The audit committee makes sure that all financial statements and reports are correct. They use fair estimates. The board members select, hire, and work with an outside firm that does the auditing. The compensation committee sets base pay, stock option awards, and incentive bonuses for the company's executives, including the CEO. Many boards came under fire in 2020 for letting these salaries reach very high levels. How Board Members Are Paid Directors are paid a yearly salary. They receive extra pay for each meeting they attend and for stock options, as well as other benefits in exchange for their services. The total amount of fees can vary. The compensation, along with any other benefits, can be found in a special issue known as the "proxy statement." This statement also includes a short bio, their age, and their level of ownership in the business. Note It's often a good sign when there are directors with large ownership stakes. It implies that they truly walk in the shoes of the outside shareholders. Structure and Its Impact The ownership structure of a firm has a huge impact on the effectiveness of the board. An entity or investor could more or less control the corporation if just one large shareholder existed. The directors could appeal to the controlling shareholder in that case. The directors often act as if a controlling shareholder does indeed exist, when in fact there isn't one. They attempt to protect this imaginary entity at all times, even if it means firing the CEO, making changes to the structure, or turning down acquisition opportunities. The controlling shareholder can also sometimes serve as the CEO and/or chairman of the board. A director serves at the will of the owner in that case and has no real way to override their decisions. Frequently Asked Questions (FAQs) Who elects the board of directors? The election process for a company's board of directors is outlined in a company's bylaws. However, publicly traded companies are typically required to allow shareholders to vote in the election of board members. How often does a board of directors meet? The board of directors usually holds a regular meeting in conjunction with the annual meeting of shareholders, and typically holds intermittent special meetings. The corporation bylaws determine the notice, quorum, location, and other requirements for board meetings. When does a corporation need a board of directors? A corporation's first directors are named either in the articles of incorporation or at the first organizational meeting, depending on state law. Shareholders subsequently elect the directors at their annual meetings. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Delaware.gov. "The Delaware Way: Deference to the Business Judgment of Directors Who Act Loyally and Carefully." American Bar Association. "Model Business Corporation Act (Updated Through September 2021)," Pages 165-168. FINRA. "Get on Board: Understanding the Role of Corporate Directors." American Bar Association. "Model Business Corporation Act (Updated Through September 2021)," Page 165. NYSE. "NYSE American LLC Company Guide Sec. 802. Board of Directors." Nasdaq. "5600. Corporate Governance Requirements." Code of Federal Regulations. "17 CFR § 229.407 (Item 407) Corporate Governance." Code of Federal Regulations. "17 CFR § 229.402 (Item 402) Executive Compensation." Economic Policy Institute. "CEO Pay Has Skyrocketed 1,322% Since 1978." Code of Federal Regulations. "17 CFR § 240.14a-101 Schedule 14A. Information Required in Proxy Statement." American Bar Association. "Model Business Corporation Act (Updated Through September 2021)," Pages 165-166. American Bar Association. "Model Business Corporation Act (Updated Through September 2021)," Pages 173-176. American Bar Association. "Model Business Corporation Act (Updated Through September 2021)," Pages 54-55.