Essentials of Corporate Governance

Chapter 4. Board of Directors

After reading this chapter, you will be able to

• Understand what the board of directors is and its primary functions

• Understand the duties of a corporation’s board of directors

• Understand the importance of independent outside directors

• Understand the process of electing the board of directors and important considerations in doing so

• Understand the issues surrounding director compensation and reprisals

• Understand the role of subcommittees within the board

Central to the functions of a corporation is the board of directors. These are the elected company members who have been delegated, by the shareholders, to oversee the corporation and the executive on their behalf.

At their best, boards serve as a governing body within the corporation and keep the executive on track in terms of meeting legal and financial obligations. Unfortunately, this is not always the case, and some boards neglect their duties, opting instead to function as “yes-sayers,” agreeing to all executive decisions without consideration of the outcomes.

Several factors can impact the efficacy of a corporation’s board of directors. Its size, the fairness of the election system, and the inclusion of independent members all have an impact on how well a board is able to govern. Other factors include the profiles of the members; the diversity of expertise that is represented by the board; and the commitment that the directors have to monitoring the corporation’s activities.

Overall, when an effective board ...