Board of directors’ act as shareholders’ monitoring tool. Many corporate governance frameworks require the board of directors to represent a diverse mix of expertise, backgrounds and competencies.
One-tier boards have executive and non-executive directors. Non-executive directors may be independent if they do not have any material relationship with the company. In the two-tier structure, supervisory and management boards are independent of each other, i.e. there are no overlapping members or there is a limit to the number of people who can serve on both boards.
While in many countries, particularly the US, CEOs typically were also chairpersons of the board of directors (CEO duality), there is a trend away from this practice recently.
Some boards are staggered in that some of the directors retire and are re-elected each year instead of all directors retiring and being re-elected at the same time.
A board is elected by shareholders to act on their behalf, but they have a responsibility to consider the interests of all stakeholders. They owe a duty of care and duty of loyalty to the company and its shareholders. The board’s main role is to provide strategic direction, oversee implementation of strategy, evaluation performance and compensation of senior management, review the company’s performance, ensure succession planning of management. They delegate the day to day operations to the management. They also play a central role in ensuring effectiveness of a company’s audit and control systems, reviewing reports by external and internal auditors, financial statements, etc. and checking compliance with corporate and other laws and regulations. They are also responsible for establishing an enterprise risk management system, reviewing proposals for corporate transactions such as mergers and acquisitions, restructuring, etc.
A company’s board of directors typically delegates some functions to committees constituted for the purpose, who report their recommendations to the board. But this does not absolve the board of its responsibilities. Popular committees include:
Different jurisdictions have different requirements/recommendations regarding committees and their composition. However, many frameworks require only independent directors to handle matters of conflict of interest. For example, LSE and NYSE require that audit and compensation committees be composed solely of independent directors.