Boards of directors are governing committees that provide oversight of an organisation’s financial, legal and compliance obligations. The most effective boards also help management teams to set corporate policies, manage risk and advise on the organisation’s strategic direction.
In this post we will cover how boards of directors work and are structured to help carry out these critical tasks, including:
This information will be useful for shareholders or organisational functions seeking clarity on how a board operates. It is also a quick reference guide for individuals that aspire to join a board.
Boards of directors for organisations that are listed on stock exchanges are appointed by shareholders. They are predominantly responsible for representing shareholder interests and ensuring that the business is operating safely, competitively, with sufficient resources and within legal and regulatory compliance requirements. Boards are a legal requirement for listed companies.
Boards of directors for organisations that are not listed (i.e. private companies) are appointed by the executive management team or the board itself. They play a similar oversight and governance role but are not required to deliver the same level of transparency or disclosure as boards for publicly listed organisations. Private companies are also not legally required to appoint board directors – it is their choice whether to have a board or not.
Two types of directors that sit on boards: executive directors and non-executive directors. Executive directors are drawn from the organisation's executive management team and are likely to be the Chief Executive Officer (CEO), Chief Financial Officer (CFO) and Chief Operating Officer (COO). Non-executive directors do not participate in the day-to-day management of the organisation and exist to provide advice and monitor executive management. They are chosen for their experience in relevant industries, managing or governing similar organisations, or for their knowledge of specialist technical areas that are impacting the business – for example, digital transformation or cybersecurity.
In many cases, boards also need to include both male and female directors. In some regions this is a legal requirement. In Norway, for instance, there is a regulation that requires at least 40 percent of each gender on company boards.
There are four main roles that are key to how boards of directors work: the board chair, executive directors, non-executive directors and the board secretary (sometimes also known as company secretary).
The board chair
The board chair runs board meetings, provides leadership to the rest of the board and is responsible for setting high governance standards. The chair may also be required to provide strategic counsel to the CEO in the event of disruption and report to shareholders as necessary.
Executive directors
Executive directors are responsible for leading areas such as the hiring and dismissal of senior executives, pay and compensation, new investments and exploring mergers and acquisitions. Sometimes the CEO of the business is also the board chair. This is not common however, especially in larger organisations.
Non-executives directors
Non-executives directors act as critical sounding boards and offer specialist expertise in areas they have knowledge and experience of. They are valued by shareholders in particular because they offer independent oversight over the dealings of the management team, are focussed on mitigating risk and offer fresh perspectives that those involved in the day-to-day running of the business may not be able to see.
The board secretary
Board or company secretaries are responsible for planning and convening board meetings, compiling board packs, keeping records, ensuring that meeting minutes are properly recorded, onboarding new directors and managing sign-off on decisions made by the board. They are critical to how boards of directors work. Increasingly they are also responsible for ensuring the organisation is compliant with relevant laws. There are regional differences that define requirements for secretaries. In the US, all corporations must have a company secretary by law. In the UK this is only the case for publicly listed companies. In the Nordic region however the role is not defined by any law.
There is a general consensus that a board of directors should have between 5-10 directors sitting at any one time. Larger businesses sometimes have boards consisting of 15 individuals or more. Smaller organisations tend to have between 5-7 directors.
Board members typically work for any one board for around 10 days a year. This time is spent preparing for and attending board meetings and one Annual General Meeting per year. Boards also need to be flexible depending on unusual disruption or events - such as a major cybersecurity breach, a crash in financial markets or an environmental incident that poses a risk to communities.
Some board members also spend additional time on board work by joining board committees that are made up of a small subsection of the board of directors and have a specific area of responsibility. Examples of board committees include audit, performance and remuneration committees.
A quorum is the percentage of people that need to be present at a board meeting for official business to take place or for decisions to be binding. What constitutes a quorum varies and is usually denied by the by policy of the organisation, the country it operates from, or whether it is a private or listed company. In general though a quorum is considered to be between and a third to 50% of the board.
The number of board meetings held each year depends on what the organisation deems necessary. There is no statutory requirement for private limited companies in the UK to hold board meetings. The same is true for countries like Denmark, Finland, Netherlands, Norway and Sweden. In practice, meetings are usually held at least annually, more often at least four times a year, and also in connection with annual shareholder meetings.
Before each meeting the company secretary prepares a package of information for directors known as a board pack. Board packs typically contain the board meeting agenda, minutes of previous meetings, C Level leadership reports, financial reports, HR updates, board committee reports and any other points for discussion that the executive leadership team has identified as important.
Each board member reviews the information in detail so they are prepared for the meeting and ready to add value and insight.
The agenda for the meeting usually runs as follows:
Call to order
The board chair announces that it is time to deal with the items on the agenda (otherwise known as ‘orders’).
Changes to / approval of the agenda
The chair asks directors present for any changes needed in the agenda before moving forward – this can include deleting orders or agenda items no longer seen as relevant.
Approval of minutes
The chair asks if members of the board have any corrections or amendments to the previous minutes.
Executive reports
Executive directors (usually the CEO or CFO) provide reports and updates on strategic direction, new initiatives, the latest financials and emerging trends or threats.
Old business
The board revisits ‘open’ items that have been discussed at previous meetings that have not yet been resolved and still require sign-off and approval.
New business
The chair, executive directors or non-executive directors introduce new items of business for consideration which will require discussion and assignment of responsibility for further development and decision-making.
Adjournment
The chair thanks the board, announces the time and date of the next meeting and calls the meeting to a close.
After the board meeting it is the board secretary’s responsibility to distribute minutes and documents relating to decisions that require approval for sign-off.
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With ongoing geopolitical risk likely to make the next 12 months another challenging period for boards, you may also be interested in our Ebook on The Boardroom in 2023: 5 trends you need to respond to now.