When I was growing up, one of my father’s favorite expressions, intended to teach me accountability, was “the buck stops here”. I think I heard about President Truman and his blasted sign at least a trillion times.
In a company, the buck stops not with the CEO, but with the Board of Directors. The Board of Directors, often referred to as “the Board” or “the BOD” for short, has the ultimate decision-making authority in a company. The Board is a group of individuals who have been selected by the shareholders of a company to act as their representatives and look after their interests. The Board is charged with setting the company’s strategy, direction and policies and overseeing a company’s activities.
What the hell does that even mean?
Well first, maybe we should consider another question
And that question would be: why does a company even need a Board of Directors? And to understand this, it helps to take a step back and consider company structure. Instead of thinking of your own startup and your modest and manageable group of investors, think of a giant corporation. Say…Apple. Apple is owned by thousands of shareholders. Imagine if they all wanted to come into the office, review product development strategy with Tim Cook, tell him what they think of the VP R&D, give him instructions on how to manage the budget and so on. Because, hey, they are owners!
I think you would agree that it would be a disaster. Poor Tim Cook would be running around like a madman, trying to make each one of these people happy, redoing the product development roadmap and the budget several thousand times to incorporate everyone’s changes and not sure if he should be giving the VP R&D a raise or whopping him upside the head. And this is before we get to the point that a lot of these people have no head for business, save for knowing enough to buy stock in Apple.
To avoid this type of gridlock, we do two things:
- The shareholders select representatives whose job it is to provide leadership, oversight, guidance, etc., on their behalf. These representatives make up the Board of Directors and may include both inside and outside directors.
- Company roles, decisions and activities are allocated between the Board and company management.
And now, what the Board actually does
Now that we have a bit more background, what the Board does should be a bit more intuitive. Let’s go back to our original description.
The Board is a group of individuals who have been selected by the shareholders of a company to act as their representatives and look after their interests. The Board is charged with setting the company’s strategy, direction and policies and overseeing a company’s activities.
Here is that translated into actual stuff to do:
Setting the Company’s strategies and direction
- Hiring (and firing) the CEO or other key employees
- Reviewing the company’s plans with company management and offering feedback, requesting modifications, rejecting elements, etc.
- Receiving regular updates on the company’s progress, financial situation and general status from company management
- Reviewing and approving the annual budget (e.g. in light of the company’s plans and current status)
- Entering into decisions regarding company financing (e.g. loan financing versus equity)
Setting Company policies
- Establishing the company share option plan and approving all grants
- Establishing company signature rights (e.g. for payments, contracts or government submissions)
- Setting a compensation structure for the CEO and other senior members of the management team
- Establishing a carve-out plan for employees
- Setting company dividend policies and declaring dividends
- Establishing the level and extent of indemnification to be provided to company officers
- Appointing an external auditor and reviewing and approving the company’s financial statements
- Reporting on the state of the company to the shareholders
- Approval of major transactions such as:
- transactions involving the granting of a security interest or pledge in company assets (e.g. a secured loan or placing software code in escrow as part of a service contract)
- transactions over a certain threshold (e.g. any single purchase in excess of $200,000)
- joint ventures
- opening new bank accounts
- related party transactions
The above list is not exhaustive and is intended to give you a better feel for how the Board’s mandate translates into real life activity.
In practice, the specific breakout of roles between management and the Board will vary from company to company. This may be based on where the company is incorporated and the laws and regulations in place there. The law in one country may dictate that a certain decision requires board or shareholder approval while in another country, that same decision may be made by management alone. In addition, the allocation of duties will vary based on how the owners themselves decide to structure their company, giving management more or less autonomy. For example, one company might require Board approval on all payments in excess of $100,000; another might have a limit of $500,000. The allocation of duties to the Board will be detailed in the company’s Articles of Association.