A board of directors is a group of people who jointly supervise the activities of an organization, which can be either a for-profit business, nonprofit organization, or a government agency. Such a board's powers, duties, and responsibilities are determined by government regulations (including the jurisdiction's corporations law) and the organization's own constitution and bylaws. These authorities may specify the number of members of the board, how they are to be chosen, and how often they are to meet.
A meeting of a board of directors of the LeipzigâDresden Railway Company in 1852
In an organization with voting members, the board is accountable to, and might be subordinate to, the organization's full membership, which usually vote for the members of the board. In a stock corporation, non-executive directors are voted for by the shareholders, with the board having ultimate responsibility for the management of the corporation. The board of directors appoints the chief executive officer of the corporation and sets out the overall strategic direction. In corporations with dispersed ownership, the identification and nomination of directors (that shareholders vote for or against) are often done by the board itself, leading to a high degree of self-perpetuation. In a non-stock corporation with no general voting membership, the board is the supreme governing body of the institution, and its members are sometimes chosen by the board itself.[1][2][3]
Terminology[edit]
Other names include board of directors and advisors, board of governors, board of managers, board of regents, board of trustees, or board of visitors. It may also be called 'the executive board' and is often simply referred to as 'the board'.[4]
Roles[edit]
Typical duties of boards of directors include:[5][6]
The legal responsibilities of boards and board members vary with the nature of the organization, and between jurisdictions. For companies with publicly trading stock, these responsibilities are typically much more rigorous and complex than for those of other types.
Typically, the board chooses one of its members to be the chairman (often now called the 'chair' or 'chairperson'), who holds whatever title is specified in the by-laws or articles of association. However, in membership organizations, the members elect the president of the organization and the president becomes the board chair, unless the by-laws say otherwise.[7]
Directors[edit]
The directors of an organization are the persons who are members of its board. Several specific terms categorize directors by the presence or absence of their other relationships to the organization.[8]
Inside director[edit]
An inside director is a director who is also an employee, officer, chief executive, major shareholder, or someone similarly connected to the organization. Inside directors represent the interests of the entity's stakeholders, and often have special knowledge of its inner workings, its financial or market position, and so on.
Typical inside directors are:
An inside director who is employed as a manager or executive of the organization is sometimes referred to as an executive director (not to be confused with the title executive director sometimes used for the CEO position in some organizations). Executive directors often have a specified area of responsibility in the organization, such as finance, marketing, human resources, or production.[9]
Outside director[edit]
An outside director is a member of the board who is not otherwise employed by or engaged with the organization, and does not represent any of its stakeholders. A typical example is a director who is president of a firm in a different industry.[10] Outside directors are not employees of the company or affiliated with it in any other way.
Outside directors bring outside experience and perspectives to the board. For example, for a company that only serves a domestic market, the presence of CEOs from global multinational corporations as outside directors can help to provide insights on export and import opportunities and international trade options. One of the arguments for having outside directors is that they can keep a watchful eye on the inside directors and on the way the organization is run. Outside directors are unlikely to tolerate 'insider dealing' between insider directors, as outside directors do not benefit from the company or organization. Outside directors are often useful in handling disputes between inside directors, or between shareholders and the board. They are thought to be advantageous because they can be objective and present little risk of conflict of interest. On the other hand, they might lack familiarity with the specific issues connected to the organization's governance and they might not know about the industry or sector in which the organization is operating.
Terminology [edit]
Individual directors often serve on more than one board.[11] This practice results in an interlocking directorate, where a relatively small number of individuals have significant influence over a large number of important entities. This situation can have important corporate, social, economic, and legal consequences, and has been the subject of significant research.[citation needed]
Process and structure[edit]
The board room of Tetley's Brewery in Leeds, England.
The process for running a board, sometimes called the board process, includes the selection of board members, the setting of clear board objectives, the dissemination of documents or board package to the board members, the collaborative creation of an agenda for the meeting, the creation and follow-up of assigned action items, and the assessment of the board process through standardized assessments of board members, owners, and CEOs.[12] The science of this process has been slow to develop due to the secretive nature of the way most companies run their boards, however some standardization is beginning to develop. Some who are pushing for this standardization in the USA are the National Association of Corporate Directors, McKinsey and The Board Group.
Board meetings[edit]
Typical board room setting
A board of directors conducts its meetings according to the rules and procedures contained in its governing documents. These procedures may allow the board to conduct its business by conference call or other electronic means.[13] They may also specify how a quorum is to be determined.[13]
Most organizations have adopted Robert's Rules of Order as its guide to supplement its own rules[where?].[14] In this book, the rules for conducting board meetings may be less formal if there is no more than about a dozen board members present.[15] An example of the informality is that motions are not required if it's clear what is being discussed.[16]
Size[edit]
Historically, nonprofit boards have often had large boards with up to twenty-four members, but a modern trend is to have smaller boards as small as six or seven people.[17] Studies suggest that after seven people, each additional person reduces the effectiveness of group decision-making.[17]
Non-corporate boards[edit]
The role and responsibilities of a board of directors vary depending on the nature and type of business entity and the laws applying to the entity (see types of business entity). For example, the nature of the business entity may be one that is traded on a public market (public company), not traded on a public market (a private, limited or closely held company), owned by family members (a family business), or exempt from income taxes (a non-profit, not for profit, or tax-exempt entity). There are numerous types of business entities available throughout the world such as a corporation, limited liability company, cooperative, business trust, partnership, private limited company, and public limited company.
Much of what has been written about boards of directors relates to boards of directors of business entities actively traded on public markets.[18] More recently, however, material is becoming available for boards of private and closely held businesses including family businesses.[19]
A board-only organization is one whose board is self-appointed, rather than being accountable to a base of members through elections; or in which the powers of the membership are extremely limited.[citation needed]
Membership organizations[edit]
In membership organizations, such as a society made up of members of a certain profession or one advocating a certain cause, a board of directors may have the responsibility of running the organization in between meetings of the membership, especially if the membership meets infrequently, such as only at an annual general meeting.[20] The amount of powers and authority delegated to the board depend on the bylaws and rules of the particular organization. Some organizations place matters exclusively in the board's control while in others, the general membership retains full power and the board can only make recommendations.[4]
The setup of a board of directors vary widely across organizations and may include provisions that are applicable to corporations, in which the 'shareholders' are the members of the organization. A difference may be that the membership elects the officers of the organization, such as the president and the secretary, and the officers become members of the board in addition to the directors and retain those duties on the board.[7] The directors may also be classified as officers in this situation.[21] There may also be ex-officio members of the board, or persons who are members due to another position that they hold. These ex-officio members have all the same rights as the other board members.[22]
Members of the board may be removed before their term is complete. Details on how they can be removed are usually provided in the bylaws. If the bylaws do not contain such details, the section on disciplinary procedures in Robert's Rules of Order may be used.[23]
Corporations[edit]Private Company Board Of Directors Best Practices
In a publicly held company, directors are elected to represent and are legally obligated as fiduciaries to represent owners of the companyâthe shareholders/stockholders. In this capacity they establish policies and make decisions on issues such as whether there is dividend and how much it is, stock options distributed to employees, and the hiring/firing and compensation of upper management.
Governance[edit]
Theoretically, the control of a company is divided between two bodies: the board of directors, and the shareholders in general meeting. In practice, the amount of power exercised by the board varies with the type of company. In small private companies, the directors and the shareholders are normally the same people, and thus there is no real division of power. In large public companies, the board tends to exercise more of a supervisory role, and individual responsibility and management tends to be delegated downward to individual professional executives (such as a finance director or a marketing director) who deal with particular areas of the company's affairs.[24]
Another feature of boards of directors in large public companies is that the board tends to have more de facto power. Many shareholders grant proxies to the directors to vote their shares at general meetings and accept all recommendations of the board rather than try to get involved in management, since each shareholder's power, as well as interest and information is so small. Larger institutional investors also grant the board proxies. The large number of shareholders also makes it hard for them to organize. However, there have been moves recently to try to increase shareholder activism among both institutional investors and individuals with small shareholdings.[24]
A contrasting view is that in large public companies it is upper management and not boards that wield practical power, because boards delegate nearly all of their power to the top executive employees, adopting their recommendations almost without fail. As a practical matter, executives even choose the directors, with shareholders normally following management recommendations and voting for them.
In most cases, serving on a board is not a career unto itself. For major corporations, the board members are usually professionals or leaders in their field. In the case of outside directors, they are often senior leaders of other organizations. Nevertheless, board members often receive remunerations amounting to hundreds of thousands of dollars per year since they often sit on the boards of several companies. Inside directors are usually not paid for sitting on a board, but the duty is instead considered part of their larger job description. Outside directors are usually paid for their services. These remunerations vary between corporations, but usually consist of a yearly or monthly salary, additional compensation for each meeting attended, stock options, and various other benefits. such as travel, hotel and meal expenses for the board meetings. Tiffany & Co., for example, pays directors an annual retainer of $46,500, an additional annual retainer of $2,500 if the director is also a chairperson of a committee, a per-meeting-attended fee of $2,000 for meetings attended in person, a $500 fee for each meeting attended via telephone, in addition to stock options and retirement benefits.[25]
Two-tier system[edit]
In some European and Asian countries, there are two separate boards, an executive board for day-to-day business and a supervisory board (elected by the shareholders and employees) for supervising the executive board. In these countries, the CEO (chief executive or managing director) presides over the executive board and the chairman presides over the supervisory board, and these two roles will always be held by different people. This ensures a distinction between management by the executive board and governance by the supervisory board and allows for clear lines of authority. The aim is to prevent a conflict of interest and too much power being concentrated in the hands of one person. There is a strong parallel here with the structure of government, which tends to separate the political cabinet from the management civil service. In the United States, the board of directors (elected by the shareholders) is often equivalent to the supervisory board, while the executive board may often be known as the executive committee (operating committee or executive council), composed of the CEO and their direct reports (other C-level officers, division/subsidiary heads).
History[edit]
The meeting room of the Heren XVII [nl], the Dutch East India Company's board of directors, in the Oost-Indisch Huis (Amsterdam). The Dutch East India Company (VOC) is often considered by many to be an early pioneering model of the modern corporation.[26][27][28][29] In 1610, the company established its administrative center (the VOC's second headquarters) in Batavia with a Governor-General in charge, as the company's de factochief executive.
The development of a separate board of directors to manage/govern/oversee a company has occurred incrementally and indefinitely over legal history. Until the end of the 19th century, it seems to have been generally assumed that the general meeting (of all shareholders) was the supreme organ of a company, and that the board of directors merely acted as an agent of the company subject to the control of the shareholders in general meeting.[30]
However, by 1906, the English Court of Appeal had made it clear in the decision of Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34 that the division of powers between the board and the shareholders in general meaning depended on the construction of the articles of association and that, where the powers of management were vested in the board, the general meeting could not interfere with their lawful exercise. The articles were held to constitute a contract by which the members had agreed that 'the directors and the directors alone shall manage.'[31]
The new approach did not secure immediate approval, but it was endorsed by the House of Lords in Quin & Axtens v Salmon [1909] AC 442 and has since received general acceptance. Under English law, successive versions of Table A have reinforced the norm that, unless the directors are acting contrary to the law or the provisions of the Articles, the powers of conducting the management and affairs of the company are vested in them.
The modern doctrine was expressed in John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113 by Greer LJ as follows:
A company is an entity distinct alike from its shareholders and its directors. Some of its powers may, according to its articles, be exercised by directors, certain other powers may be reserved for the shareholders in general meeting. If powers of management are vested in the directors, they and they alone can exercise these powers. The only way in which the general body of shareholders can control the exercise of powers by the articles in the directors is by altering the articles, or, if opportunity arises under the articles, by refusing to re-elect the directors of whose actions they disapprove. They cannot themselves usurp the powers which by the articles are vested in the directors any more than the directors can usurp the powers vested by the articles in the general body of shareholders.
It has been remarked[by whom?] that this development in the law was somewhat surprising at the time, as the relevant provisions in Table A (as it was then) seemed to contradict this approach rather than to endorse it.[32]
Election and removal[edit]
In most legal systems, the appointment and removal of directors is voted upon by the shareholders in general meeting[a] or through a proxy statement. For publicly traded companies in the U.S., the directors which are available to vote on are largely selected by either the board as a whole or a nominating committee.[33] Although in 2002 the New York Stock Exchange and the NASDAQ required that nominating committees consist of independent directors as a condition of listing,[34] nomination committees have historically received input from management in their selections even when the CEO does not have a position on the board.[33] Shareholder nominations can only occur at the general meeting itself or through the prohibitively expensive process of mailing out ballots separately; in May 2009 the SEC proposed a new rule allowing shareholders meeting certain criteria to add nominees to the proxy statement.[35] In practice for publicly traded companies, the managers (inside directors) who are purportedly accountable to the board of directors have historically played a major role in selecting and nominating the directors who are voted on by the shareholders, in which case more 'gray outsider directors' (independent directors with conflicts of interest) are nominated and elected.[33]
Directors may also leave office by resignation or death. In some legal systems, directors may also be removed by a resolution of the remaining directors (in some countries they may only do so 'with cause'; in others the power is unrestricted).
Some jurisdictions also permit the board of directors to appoint directors, either to fill a vacancy which arises on resignation or death, or as an addition to the existing directors.[citation needed]
In practice, it can be quite difficult to remove a director by a resolution in general meeting. In many legal systems, the director has a right to receive special notice of any resolution to remove him or her;[b] the company must often supply a copy of the proposal to the director, who is usually entitled to be heard by the meeting.[c] The director may require the company to circulate any representations that he wishes to make.[d] Furthermore, the director's contract of service will usually entitle him to compensation if he is removed, and may often include a generous 'golden parachute' which also acts as a deterrent to removal.[citation needed]
A recent study examines how corporate shareholders voted in director elections in the United States.[36] It found that directors received fewer votes from shareholders when their companies performed poorly, had excess CEO compensation, or had poor shareholder protection. Also, directors received fewer votes when they did not regularly attend board meetings or received negative recommendations from a proxy advisory firm. The study also shows that companies often improve their corporate governance by removing poison pills or classified boards and by reducing excessive CEO pay after their directors receive low shareholder support.[37]
Board accountability to shareholders is a recurring issue. In 2010, the New York Times noted that several directors who had overseen companies which had failed in the financial crisis of 2007â2010 had found new positions as directors.[38] The SEC sometimes imposes a ban (a 'D&O bar') on serving on a board as part of its fraud cases, and one of these was upheld in 2013.[39]
Exercise of powers[edit]
The exercise by the board of directors of its powers usually occurs in board meetings. Most legal systems require sufficient notice to be given to all directors of these meetings, and that a quorum must be present before any business may be conducted. Usually, a meeting which is held without notice having been given is still valid if all of the directors attend, but it has been held that a failure to give notice may negate resolutions passed at a meeting, because the persuasive oratory of a minority of directors might have persuaded the majority to change their minds and vote otherwise.[40]
In most common law countries, the powers of the board are vested in the board as a whole, and not in the individual directors.[41] However, in instances an individual director may still bind the company by his acts by virtue of his ostensible authority (see also: the rule in Turquand's Case).
Duties[edit]
Because directors exercise control and management over the organization, but organizations are (in theory) run for the benefit of the shareholders, the law imposes strict duties on directors in relation to the exercise of their duties. The duties imposed on directors are fiduciary duties, similar to those that the law imposes on those in similar positions of trust: agents and trustees.
The duties apply to each director separately, while the powers apply to the board jointly. Also, the duties are owed to the company itself, and not to any other entity.[42] This does not mean that directors can never stand in a fiduciary relationship to the individual shareholders; they may well have such a duty in certain circumstances.[43]
'Proper purpose'[edit]
Directors must exercise their powers for a proper purpose. While in many instances an improper purpose is readily evident, such as a director looking to feather his or her own nest or divert an investment opportunity to a relative, such breaches usually involve a breach of the director's duty to act in good faith. Greater difficulties arise where the director, while acting in good faith, is serving a purpose that is not regarded by the law as proper.
The seminal authority in relation to what amounts to a proper purpose is the Supreme Court decision in Eclairs Group Ltd v JKX Oil & Gas plc (2015).[44] The case concerned the powers of directors under the articles of association of the company to disenfranchise voting rights attached to shares for failure to properly comply with notice served on the shareholders. Prior to that case the leading authority was Howard Smith Ltd v Ampol Ltd [1974] AC 821. The case concerned the power of the directors to issue new shares.[45] It was alleged that the directors had issued a large number of new shares purely to deprive a particular shareholder of his voting majority. An argument that the power to issue shares could only be properly exercised to raise new capital was rejected as too narrow, and it was held that it would be a proper exercise of the director's powers to issue shares to a larger company to ensure the financial stability of the company, or as part of an agreement to exploit mineral rights owned by the company.[46] If so, the mere fact that an incidental result (even if it was a desired consequence) was that a shareholder lost his majority, or a takeover bid was defeated, this would not itself make the share issue improper. But if the sole purpose was to destroy a voting majority, or block a takeover bid, that would be an improper purpose.
Not all jurisdictions recognised the 'proper purpose' duty as separate from the 'good faith' duty however.[e]
'Unfettered discretion'[edit]
Directors cannot, without the consent of the company, fetter their discretion in relation to the exercise of their powers, and cannot bind themselves to vote in a particular way at future board meetings.[f] This is so even if there is no improper motive or purpose, and no personal advantage to the director.
This does not mean, however, that the board cannot agree to the company entering into a contract which binds the company to a certain course, even if certain actions in that course will require further board approval. The company remains bound, but the directors retain the discretion to vote against taking the future actions (although that may involve a breach by the company of the contract that the board previously approved).
'Conflict of duty and interest'[edit]
As fiduciaries, the directors may not put themselves in a position where their interests and duties conflict with the duties that they owe to the company. The law takes the view that good faith must not only be done, but must be manifestly seen to be done, and zealously patrols the conduct of directors in this regard; and will not allow directors to escape liability by asserting that his decision was in fact well founded. Traditionally, the law has divided conflicts of duty and interest into three sub-categories.
Transactions with the company[edit]
By definition, where a director enters into a transaction with a company, there is a conflict between the director's interest (to do well for himself out of the transaction) and his duty to the company (to ensure that the company gets as much as it can out of the transaction). This rule is so strictly enforced that, even where the conflict of interest or conflict of duty is purely hypothetical, the directors can be forced to disgorge all personal gains arising from it. In Aberdeen Ry v Blaikie (1854) 1 Macq HL 461 Lord Cranworth stated in his judgment that:
However, in many jurisdictions the members of the company are permitted to ratify transactions which would otherwise fall foul of this principle. It is also largely accepted in most jurisdictions that this principle can be overridden in the company's constitution.
In many countries, there is also a statutory duty to declare interests in relation to any transactions, and the director can be fined for failing to make disclosure.[g]
Use of corporate property, opportunity, or information[edit]
Directors must not, without the informed consent of the company, use for their own profit the company's assets, opportunities, or information. This prohibition is much less flexible than the prohibition against the transactions with the company, and attempts to circumvent it using provisions in the articles have met with limited success.
In Regal (Hastings) Ltd v Gulliver [1942] All ER 378 the House of Lords, in upholding what was regarded as a wholly unmeritorious claim by the shareholders,[h] held that:
And accordingly, the directors were required to disgorge the profits that they made, and the shareholders received their windfall.
The decision has been followed in several subsequent cases,[47] and is now regarded as settled law.
Competing with the company[edit]
Directors cannot compete directly with the company without a conflict of interest arising. Similarly, they should not act as directors of competing companies, as their duties to each company would then conflict with each other.
Common law duties of care and skill[edit]
Traditionally, the level of care and skill which has to be demonstrated by a director has been framed largely with reference to the non-executive director. In Re City Equitable Fire Insurance Co [1925] Ch 407, it was expressed in purely subjective terms, where the court held that:
However, this decision was based firmly in the older notions (see above) that prevailed at the time as to the mode of corporate decision making, and effective control residing in the shareholders; if they elected and put up with an incompetent decision maker, they should not have recourse to complain.
However, a more modern approach has since developed, and in Dorchester Finance Co Ltd v Stebbing [1989] BCLC 498 the court held that the rule in Equitable Fire related only to skill, and not to diligence. With respect to diligence, what was required was:
This was a dual subjective and objective test, and one deliberately pitched at a higher level.
More recently, it has been suggested that both the tests of skill and diligence should be assessed objectively and subjectively; in the United Kingdom, the statutory provisions relating to directors' duties in the new Companies Act 2006 have been codified on this basis.[48]
Remedies for breach of duty[edit]
In most jurisdictions, the law provides for a variety of remedies in the event of a breach by the directors of their duties:
Current trends[edit]
Historically, directors' duties have been owed almost exclusively to the company and its members, and the board was expected to exercise its powers for the financial benefit of the company. However, more recently there have been attempts to 'soften' the position, and provide for more scope for directors to act as good corporate citizens. For example, in the United Kingdom, the Companies Act 2006 requires directors of companies 'to promote the success of the company for the benefit of its members as a whole' and sets out the following six factors regarding a director's duty to promote success:
This represents a considerable departure from the traditional notion that directors' duties are owed only to the company. Previously in the United Kingdom, under the Companies Act 1985, protections for non-member stakeholders were considerably more limited (see, for example, s.309 which permitted directors to take into account the interests of employees but which could only be enforced by the shareholders and not by the employees themselves). The changes have therefore been the subject of some criticism.[49]
The Board and Society[edit]
Most companies have weak mechanisms for bringing the voice of society into the board room. They rely on personalities who weren't appointed for their understanding of societal issues. Often they give limited focus (both through time and financial resource) to issues of corporate responsibility and sustainability. A Social Board [50] has society designed into its structure. It elevates the voice of society through specialist appointments to the board and mechanisms that empower innovation from within the organisation. Social Boards align themselves with themes that are important to society.These may include measuring worker pay ratios, linking personal social and environmental objectives to remuneration, integrated reporting, fair tax and B-Corp Certification.
Social Boards recognise that they are part of society and that they require more than a licence to operate to succeed.They balance short-term shareholder pressure against long-term value creation, managing the business for a plurality of stakeholders including employees, shareholders, supply chains and civil society.
United States[edit]SarbanesâOxley Act[edit]
The SarbanesâOxley Act of 2002 has introduced new standards of accountability on boards of U.S. companies or companies listed on U.S. stock exchanges. Under the Act, directors risk large fines and prison sentences in the case of accounting crimes. Internal control is now the direct responsibility of directors. The vast majority of companies covered by the Act have hired internal auditors to ensure that the company adheres to required standards of internal control. The internal auditors are required by law to report directly to an audit board, consisting of directors more than half of whom are outside directors, one of whom is a 'financial expert.'
The law requires companies listed on the major stock exchanges (NYSE, NASDAQ) to have a majority of independent directorsâdirectors who are not otherwise employed by the firm or in a business relationship with it.
Size[edit]
According to the Corporate Library's study, the average size of publicly traded company's board is 9.2 members, and most boards range from 3 to 31 members. According to Investopedia, some analysts think the ideal size is seven.[51] State law may specify a minimum number of directors, maximum number of directors, and qualifications for directors (e.g. whether board members must be individuals or may be business entities).[52][53]
Committees[edit]
While a board may have several committees, twoâthe compensation committee and audit committeeâare critical and must be made up of at least three independent directors and no inside directors. Other common committees in boards are nominating and governance.[51][54]
Compensation[edit]
Directors of Fortune 500 companies received median pay of $234,000 in 2011. Directorship is a part-time job. A recent National Association of Corporate Directors study found directors averaging just 4.3 hours a week on board work.[55] Surveys indicate that about 20% of nonprofit foundations pay their board members,[56] and 2% of American nonprofit organizations do.[57][58] 80% of nonprofit organizations require board members to personally contribute to the organization,[59] as BoardSource recommends.[60] This percentage has increased in recent years.[61][62][63]
Criticism[edit]
According to John Gillespie, a former investment banker and co-author of a book critical of boards,[64] 'Far too much of their time has been for check-the-box and cover-your-behind activities rather than real monitoring of executives and providing strategic advice on behalf of shareholders'.[55] At the same time, scholars have found that individual directors have a large effect on major corporate initiatives such as mergers and acquisitions[65] and cross-border investments.[66]
The issue of gender representation on corporate boards of directors has been the subject of much criticism in recent years. Governments and corporations have responded with measures such as legislation mandating gender quotas and comply or explain systems to address the disproportionality of gender representation on corporate boards.[67] A study of the French corporate elite has found that certain social classes are also disproportionately represented on boards, with those from the upper and, especially, upper-middle classes tending to dominate.[68]
See also[edit]
Notes[edit]
References[edit]Citations[edit]
Sources[edit]
External links[edit]
Retrieved from 'https://en.wikipedia.org/w/index.php?title=Board_of_directors&oldid=905281592'
Contact [email protected] for latest 2019 Private Company Board Compensation data.
See our latest compensation Forbes article here:
How Much Should You Pay Your Private Company Directors in 2019
In this article we examine recent data that highlights how much you should compensate your board members.
Private companies continue to struggle with the question âHow much should we pay our directors?â There are many variables that determine director compensation: number of yearly meetings, industry, business size, business structure and more. The challenge private companiesâ face is that there are few data points against which private companies can benchmark their Board compensation plans.
Lodestone Global recently published their 6th Annual 2016 Private Company Board Compensation Survey. The survey included 331 companies across 33 different industries and 39 countries to analyze current board practices and compensation around the world. All the respondents were members of the Young Presidentsâ Organization (YPO), an international group of Presidents and CEOs. The organization unites approximately 24,000 business leaders in more than 130 countries. The 331 respondents were all CEOs of companies ranging from $10m to over $1bn in revenues.
2016 Compensation Survey Highlights
Of note, 50% of the survey respondents were family owned companies. The high participation rate of family majority owned respondents highlights the importance of professional corporate governance to family companies. The median number of board members was 6, with 3 independent directors. This has not changed over the six years the survey has been running. A significantly larger board leads to inefficiencies, while a smaller board risks limiting diversity of perspective so essential to driving effective strategy.
Interestingly, 85% of respondents say board compensation is not linked to performance, roughly in-line with 2015. Without the pressure of public scrutiny, private companies seem immune to this trend.
Historical Compensation Data
*Note: All figures in $USD unless indicated otherwise
*Data represents the median results. Total compensation assumes 4 in-person and 2 teleconference meetings.
Median Annual Retainer By Revenue
*Note: All figures in $USD unless indicated otherwise
Median Per Meeting Fees By Revenue
*Note: All figures in $USD unless indicated otherwise
One would expect total compensation to rise in line with company revenue size. For the past five years our data set has generally shown this trend. We believe the one outlier in the 2016 data, the $0-10m category, can be explained by a number of financial services companies that tended to pay directors more than peers (this happened in 2015 as well). Our sample included a higher percentage of P/E or V/C backed companies at 13% vs. 7% in 2015.
Historically, a statistically insignificant number of companies in the survey have used equity to compensate their board members. In 2016, however, the number of companies that used equity retainers more than doubled to 21% (meeting fees were still nearly all cash). We believe this is due to the increased number of PE/VC-backed companies mentioned above that pay their directors purely in equity or with cash and equity above market rates. These companies are investing in great governance early, to propel substantial growth. We continue to hold the thesis that mature private companies do not use equity as a key element of their board compensation programs.
If you have additional questions on Compensation or Governance issues â please comment below!
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Tune in to our next article that explores how to pick the perfect board member.
Lodestone Globalis a specialized consulting firm providing strategic guidance to chief executives of private and family controlled enterprises, who are considering forming or refreshing a board of directors. Lodestone Global also offers custom tailored board compensation analysis.
Related Articles
The phrase 'board of directors' is often used interchangeably with 'board of governors,' 'board of regents,' or 'board of trustees.' Regardless of the title, the function of this executive body is to oversee the activities of a company or organization. Whether serving a private or publicly held corporation, the board operates according to powers and responsibilities conferred by a separate authority, often the bylaws which were created when the company officially incorporated. Though specific responsibilities may vary according to institution, there are general tasks a board of directors usually attends to.
Private Corporation
A private corporation is one that does not issue general stock for public purchase and maintains all duties and responsibilities in-house. With this sort of arrangement, the board of directors is the supreme governing body of the company. A private board member is chosen by the board itself. Together, this body sets annual budgets, operational goals, ensures funds are available for those operations, and evaluates the job performance of the chief executive officer (CEO).
Public Corporation
A public corporation is one that sells shares of the ownership to the general public. The primary difference between a private board of directors is that public corporate boards are responsible to the shareholders for the overall direction of the company. A public board is actually subordinate to the approval of the body of members, in this case anyone who owns a share of stock. Public corporations hold regular shareholders meeting where voting helps establish the future direction of the company.
Board Positions
Most board of directors have several top-level positions that are responsible for various aspects of the overall operation of the company. The CEO is the highest-ranking member of the board and often has the final say in company matters. The chief financial officer, as the title implies, is responsible for all matters relating to finances. The position of chief operating officer is usually designated as the second in command of the board and often handles the day-to-day activities of the corporation.
Personality
The bottom line is that corporate direction, whether public or private, stems from the personalities and beliefs inherent in the board of directors. Microsoft would likely have been a very different company were it not for the hand of CEO and founder Bill Gates on the tiller for two decades. The same could be said for Apple, which released a dizzying succession of ultra-popular electronic devices under the tutelage of former CEO Steve Jobs. Though the board might have begun life as simple words on paper, the life it takes on under the direction of real, live human beings is exciting and sometimes unpredictable.
References (3)About the Author
Derek Dowell has ghostwritten dozens of projects and thousands of blogs in the real estate, Internet marketing and travel industry, as well as completed the novel 'Chrome Sombrero.' He holds a Bachelor of Science in environmental legal studies from Missouri State University.
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Dowell, Derek. 'The Responsibilities of a Board of Directors for Privately Held & Publicly Held Companies.' Small Business - Chron.com, http://smallbusiness.chron.com/responsibilities-board-directors-privately-held-publicly-held-companies-22267.html. Accessed 08 July 2019.
Dowell, Derek. (n.d.). The Responsibilities of a Board of Directors for Privately Held & Publicly Held Companies. Small Business - Chron.com. Retrieved from http://smallbusiness.chron.com/responsibilities-board-directors-privately-held-publicly-held-companies-22267.html
Dowell, Derek. 'The Responsibilities of a Board of Directors for Privately Held & Publicly Held Companies' accessed July 08, 2019. http://smallbusiness.chron.com/responsibilities-board-directors-privately-held-publicly-held-companies-22267.html
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A limited partnership is a distinctly different business form than a general partnership. Limited partners have no voice in how the business is managed. The management of a limited partnership business may or may not have officers and a board of directors. The level of management structure depends on the size and purpose of the limited partnership.
Two Types of Partners
A limited partnership must have at least one general partner and one limited partner. The general partners run the business of the partnership have unlimited liability. A limited partner is not involved in business operations or management. Limited partners can be viewed as investors in the business, entitled to receive a proportionate share of the partnership profits. A limited partnership does not pay income taxes, so all income and deductible expenses pass through proportionately to the general and limited partners.
GP Structure
The general partner of a limited partnership business can be a single individual who runs the business or it may be a separate company that owns the general partnership interest in the company. If the general partner is structured as its own business, that business may be set up with company officers and a board of directors. If the general partner does have a board, it is possible for to have board members that are limited partners.
Publicly Traded LPs
The limited partnership structure allows a company to be run like more like a corporation, with limited partner units trading on the stock exchanges. A publicly traded LP will have officers and a board of directors for the general partner. A completely separate publicly traded company that is a corporation or another limited partnership may own the general partner interests of a publicly traded limited partnership. You will know if a stock is a partnership if it has 'partners' in the name or an LP at the end of the name instead of an inc. or corp.
Small Business Limited Partnership
You can organize a small business as a limited partnership, using the partnership as a way to bring in investors without giving up any control of how your business is run. As the general partner of a closely held limited partnership, you can decide if your business needs a board of directors or other officers besides yourself. It is possible to just be the general partner yourself or you can have multiple general partners who run the business together while the limited partners just receive a portion of the profits.
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Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.
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Plaehn, Tim. 'Does a Limited Partnership Have Directors & Officers?' Small Business - Chron.com, http://smallbusiness.chron.com/limited-partnership-directors-officers-63801.html. Accessed 08 July 2019.
Plaehn, Tim. (n.d.). Does a Limited Partnership Have Directors & Officers? Small Business - Chron.com. Retrieved from http://smallbusiness.chron.com/limited-partnership-directors-officers-63801.html
Plaehn, Tim. 'Does a Limited Partnership Have Directors & Officers?' accessed July 08, 2019. http://smallbusiness.chron.com/limited-partnership-directors-officers-63801.html
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Forming a corporation and electing a board of directors is a legal process stipulated by the state where you incorporate. Different states have different rules for the organization of their S corporations and C corporations, but all for-profit and nonprofit corporations are required by law to have boards of directors. The rules of the state in which you incorporate determine when they must be named and how many directors are required.
Nonprofit and For-Profit
Nonprofit boards normally take active roles in the running of their organizations. Members are often the founders of the organization, with a hired executive director and staff to manage the daily operations. A board of directors works on behalf of the shareholders in a for-profit corporation, so the board is created by a vote of the shareholders. Nonprofits do not have shareholders, so the board appoints or elects new board members.
Small Private Corporations
Many corporations consist only of the founders and a few employees. In this case, the founders are the shareholders, and state rules generally require only one or two directors, who are usually the founders. When outside investment is brought in, the situation changes. Venture investors normally require board seats so they can monitor the operations of the company. Although such investment is not always in the form of stock ownership, the terms of the investment generally include at least one seat on the board. Until your company receives such investment, the only reason for additional board members is the expertise they bring to running the company.
Larger Private Corporations
Expertise becomes more important if you are trying to build your small company into a large one. Even though the state requirements don't call for a large board, your own plans for the company might be better served by adding directors. A board of directors can represent a storehouse of the type of experience you need when growing a company if you are selective about who you put on your board. As always, the shareholders vote to approve all board appointments, but board members don't necessarily have to be shareholders.
The Value of a Board
When you spend every day running a company, you can get too close to it to see its faults. Putting outsiders -- such as an attorney, an accountant, a banker and a successful business owner -- on your board can bring an outside view of how your company is operating and ideas of how to improve its performance. Board directors also are good sources of business contacts. In most cases, paying for basic expenses and giving your directors shares of stock are adequate compensation until your company is large and successful enough to pay a director's fee, which can range from a few thousand dollars up to $30,000 or more -- but this latter fee is more typical in public companies. Many boards require that the company carry liability insurance for its officers and directors. If you are not ready to pay the price for such insurance, consider establishing an advisory board.
References (5)About the Author
Victoria Duff specializes in entrepreneurial subjects, drawing on her experience as an acclaimed start-up facilitator, venture catalyst and investor relations manager. Since 1995 she has written many articles for e-zines and was a regular columnist for 'Digital Coast Reporter' and 'Developments Magazine.' She holds a Bachelor of Arts in public administration from the University of California at Berkeley.
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Duff, Victoria. 'When Does a Corporation Need to Require a Board of Directors?' Small Business - Chron.com, http://smallbusiness.chron.com/corporation-need-require-board-directors-67764.html. Accessed 08 July 2019.
Duff, Victoria. (n.d.). When Does a Corporation Need to Require a Board of Directors? Small Business - Chron.com. Retrieved from http://smallbusiness.chron.com/corporation-need-require-board-directors-67764.html
Duff, Victoria. 'When Does a Corporation Need to Require a Board of Directors?' accessed July 08, 2019. http://smallbusiness.chron.com/corporation-need-require-board-directors-67764.html
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