How do Corporate Boards worK?

[.Shane.]

I realize I could probably do some reading on wiki or such about this, but we have a few people who are qualified to expound on this and do so w/ some insight that might make for better reading and (obviously) give and take than by reading a wiki.

That said, what I really don't get about corporations... sort of a black hole to me... are the ubiqitous "boards". You know there's the "Chairman of the Board". And the "Board of Directors".

WTH does a Board of Directors do?

The thing that is striking (and overlaps with troubling at times) is that from my layman's seat it seems these Boards are basically massive CJ's. Basically, people get on each other's boards and then have little disincentive to not over-reward and compensate each other.

I realize that executive compensation has become a bit of a boogeyman, so this thread is not to argue that its the worst thing or not. Rather, I just want to better understand who Boards of Directors exist, what their role is, what the limits or checks on their power are, etc...

If anyone has a historical viewpoint on their evolution, etc... that would be interesting as well.

 

[mrt144]

Very poorly sometimes.


But from another perspective, sometimes they can be a force of good for the company when an agitator gets on board, not only for their own personal gain but for other shareholders. The whole Yahoo, Microsoft debacle comes to mind.

The point you make about it being a massive CJ and there being no incentive to reign in excess or pointless cash flow matters rings true for the public financial companies. As was recently said; once Lehman went public, the writing was on the wall for them and investment banks in general.

It is perplexing though that companies that remain private get criticism too, for keeping the profits all to themselves.

 

[.Shane.]

So, do Boards need to have better regulations/governance?

 

[mrt144]

So, do Boards need to have better regulations/governance?

Absolutely.

While this idea has many problems and issues that would need to be resolved, having two different boards of voting, one by share amount, one by merely owning a share and having one vote. The one vote for merely being an owner would be a corporate governance board which, while not having the ability to control or approve many aspects of the business would have veto power over specific actions as chartered in the corporate charter. Think of it as a Senate for shareholders.

A government mandated Senate Share Class might work better than some government bureaucrat in the pocket of a company approving of poor actions. The ability to overwhelm Senate Share Class investors or diluting them wouldn't be hard to do depending on how one defines shareholder (I imagine tons of Senate Share Class accumulator LLC agents to pop up to dilute the impact that the class of shares have overall.)

There is also the idea of forbidding executive officers sitting on the boards of their company or other companies but the outcome could lead to more people being on boards who would just be as bad. In effect you'd just be elevating more people into greedy positions.

I'm actually really interested in working on plausible solutions to this question.

 

[.Shane.]

There is also the idea of forbidding executive officers sitting on the boards of their company or other companies but the outcome could lead to more people being on boards who would just be as bad. In effect you'd just be elevating more people into greedy positions.

Something along this line seems like the best entry point. Have some way of preventing conflicting interest.

I'm actually really interested in working on plausible solutions to this question.

In what sense? I mean are you in a profession where you can somehow work toward this, or do you mean this is something you'd like to see tackled by our leaders?

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As to my original question, what value do Boards provide? Why are they necessary in the first place?

 

[Formaldehyde]

WTH does a Board of Directors do?

Basically, they appoint the CEO and set the general direction for the company. They are typically executives of other corporations as well as members of other boards, and they typically receive little compensation for their efforts unless they also serve some other role that actually takes much time and effort, like being the CFO. They are in large part a figurehead organization that frequently rubber-stamps whatever the major stockholders want. Typically one of the biggest stockholders in smaller corporations is the CEO himself. Or in some really unusual cases, he is Bill Gates.

http://en.wikipedia.org/wiki/Board_of_Directors

The thing that is striking (and overlaps with troubling at times) is that from my layman's seat it seems these Boards are basically massive CJ's. Basically, people get on each other's boards and then have little disincentive to not over-reward and compensate each other.

In rare cases that's what happens. But those companies typically go out of business very quickly or the shareholders replace them.

So, do Boards need to have better regulations/governance?

Not at all. If you want a real disappointment, go to an annual meeting something. You will swear you must have gotten caught in a chronosynclastic infundibulum, or at least slept through the important part.

 

[mrt144]

Something along this line seems like the best entry point. Have some way of preventing conflicting interest.

In what sense? I mean are you in a profession where you can somehow work toward this, or do you mean this is something you'd like to see tackled by our leaders?

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As to my original question, what value do Boards provide? Why are they necessary in the first place?

I think it's something I'd like explored and discussed by interested people. How can you enforce good BoD governance in novel ways? While I'm not in a position to enact them, I think merely exploring possible solutions is worth our time.

 

[Newbunkle]

The hooded and cloaked men sit in ornate chairs around an oval table carved from the bones of orphans. Small lanterns illuminate only the lower portions of their faces, while a wench stands nearby with a jug of wine, ready to fill their goblets. A man opens up a scroll with his pale withered hands, and reads out the performance report. His claw traces the words as he reads them off in his deep raspy voice. Then follows much whispering and cursing, before a man with a booming voice demands that the organization generates more profit, even at the cost of his wage slave's lives. Nearby a thin, awkward looking man clears his throat, and presents an idea for forced overtime, a relaxed health and safety policy, and floggings for the 10 most inefficient staff. The whispering starts anew, before the man with the booming voice declares he is pleased with the plan. He bashes a hammer on the table to signify the meeting is ajourned, and the men retire to swim naked in their vaults filled with gold coins and ancient treasures.

At least, that's the impression I get from some corners.

 

[really]

My experience of boards of directors is that they are concerned about the business overall, whether they are complainant with laws, taxes etc. Whether the firm has sufficient funds to succeed. Whether there are opportunities for saving money or increasing income. The good running of the business in general.

My experience is with small companies. (11 to 64 employees)

 

[.Shane.]

So... they exist to make sure business is conducted legally, etc... and deal w/ executive compensation issues? I think the problem is that at the upper echelons of business the boards become very inbred.

Let me ask it this way, if this was a business pre-req class and you were trying to teach the undergrads about why they exist, what they do, how they came into existance, what would you say? Are they legally required? Meaning, does a business HAVE to have a B of D?

Who do they report to? How are they compensated?

 

[Whomp]

They come into existence so that shareholders are represented at the table with management. With large public companies, the board tends to have a supervisory role and delegates down to management. Good boards will help keep focus on the vision, mission statement and objectives laid out by the company. The CEO should act as a liaison between the board and the companies employees.

As you've said some companies boards have become inbred and people should vote poor board members out. Some can help enormously to get capital, relationships, leadership etc.

 

[Maimonides]

I just need to add to Whomp's reply which was correct.

So... they exist to make sure business is conducted legally, etc... and deal w/ executive compensation issues?

The board sets the compensation of top executives such as the CEO, COO & CFO.

Are they legally required? Meaning, does a business HAVE to have a B of D?

A business doesn't need a board unless it incorporates. In the U.S., the identities & signatures of three board members are required for incorporation. Some permits & licenses also require the identities & signatures of board members.

Who do they report to?

The stockholders. The stockholders elect the board.

How are they compensated?

This varies from company to company. Some companies pay their board members a salary to compensate them for their time & the responsibilities they are shouldering. Some companies don't compensate board members. The larger the company, the more likely the board members are drawing a salary. Walmart's board members receive a nice salary.

The thing to remember is that board members are also stockholders so it's in their best interest to oversee a well-run, profitable company as this can result in a higher stock price & higher dividends.

I've been on the board of three corporations, but they were relatively small companies & privately held. I've never experienced the boardroom of a large, publicly traded company.

 

[Formaldehyde]

At least, that's the impression I get from some corners.

Most excellent. This one is ripe for harvesting.

 

[warmonger]

I've sat on the Board of many companies in quite a few different countries, private and public, big and small. Earlier in my career I would spend a large part of my time preparing and giving presentations to various Boards.

The laws vary by country but the responsibilities are essentially the same. Primary concern is that all activities undertaken are legal and documentation meets the appropriate laws.

Secondary concern is the running of the business - not the day to day stuff - that's for the CEO and / COO. The long term stuff - which businesses do we want to be in; which investments to make given there's always more choice than money no matter how big you are.

Board members are rarely major stockholders except in the case of small, private companies and public companies where the founder(s) or their descendants are still on the share registry.

In my "training" to be a board member, there was one important lesson that I've never forgotten. A board member can be personally liable for losses incurred through negligence, but not for incompetence - there's a big difference.

Being on a board can be very lucrative. For a public company, 2 days a month should earn you around $50,000 to $100,000 pa as a starter salary. The bigger companies pay much more than this - in most countries director payments have to be reported in the company's annual report so it's all public info. If you sit on 4 - 5 boards, it's not hard to be paid over $500,000 pa for 10 days / month "work"

Basically - it's good fun.

 

[Mise]

How do I get to become a board member.......?

 

[BSmith1068]

Others have done a good job of responding, but I found this list to be fairly comprehensive:

http://managementhelp.org/boards/brdrspon.htm

Major Duties of Board of Directors

Brenda Hanlon, in In Boards We Trust, suggests the following duties (as slightly modified by Carter McNamara to be "nonprofit/for-profit neutral").

1. Provide continuity for the organization by setting up a corporation or legal existence, and to represent the organization's point of view through interpretation of its products and services, and advocacy for them

2. Select and appoint a chief executive to whom responsibility for the administration of the organization is delegated, including:

- to review and evaluate his/her performance regularly on the basis of a specific job description, including executive relations with the board, leadership in the organization, in program planning and implementation, and in management of the organization and its personnel

- to offer administrative guidance and determine whether to retain or dismiss the executive

3. Govern the organization by broad policies and objectives, formulated and agreed upon by the chief executive and employees, including to assign priorities and ensure the organization's capacity to carry out programs by continually reviewing its work

4. Acquire sufficient resources for the organization's operations and to finance the products and services adequately

5. Account to the public for the products and services of the organization and expenditures of its funds, including:

- to provide for fiscal accountability, approve the budget, and formulate policies related to contracts from public or private resources

- to accept responsibility for all conditions and policies attached to new, innovative, or experimental programs.

Major Responsibilities of Board of Directors

BoardSource, in their booklet "Ten Basic Responsibilities of Nonprofit Boards", itemize the following 10 responsibilities for nonprofit boards. (However, these responsibilities are also arelevant to for-profit boards.)

1. Determine the Organization's Mission and Purpose

2. Select the Executive

3. Support the Executive and Review His or Her Performance

4. Ensure Effective Organizational Planning

5. Ensure Adequate Resources

6. Manage Resources Effectively

7. Determine and Monitor the Organization's Programs and Services

8. Enhance the Organization's Public Image

9. Serve as a Court of Appeal

10. Assess Its Own Performance