A board of directors is a group of elected or appointed people who are given the task of overseeing and governing the activities of an organization. Ideally, it has only the best interests of the organization at heart because it has a fiduciary obligation to fulfill.
Small businesses and private companies can choose to do without a board, but they stand to gain a lot from having direct access to the insights of industry experts. On the other hand, public companies are required by law to form a board to protect the interests of shareholders. Once a company has gone public, it’s no longer the sole property of its founders; rather, ownership is distributed among shareholders. In fact, there have been cases where the board ousted the founder of a company in an attempt to improve financial performance. A well-known example is Andrew Mason. He founded Groupon, yet the board fired him from the CEO post when the company performed badly under his tenure.
Such power is given to a board of directors. But just how many of them wield that power? According to a study by Corporate Library as cited in this Investopedia article, a board can have as few as three and as many as 31 members, though the average falls at 9.2. However, there are only two kinds of directors, executive and non-executive:
These directors are part of the company’s top management team as C-level managers or executives. They hold specific areas of responsibility, such as human resources, finance, engineering, etc. They can also be the CEO or founder of the company. They are sometimes referred to as inside directors. Former C-level managers and executives also fall under this category.
A major advantage of having executive directors is that they are fully aware of the company’s issues, given that they are involved in different aspects of its day-to-day activities. Being in this position gives these directors a deeper insight into what their company needs to move forward in the right direction.
But if the company has too many executive directors, there’s a chance that the board’s decisions will be aligned with management’s wishes without enough regard for shareholders’ interests. In this case, the representative of a major investor can be appointed as a board member, who will also be considered as an inside director.
These directors are not employed by the organization and don’t represent any stakeholders. They’re invited to join the board of the company for their expertise. They are sometimes referred to as outside directors or independent directors.
Non-executive directors give objective advice from the point of view of an outsider. They see the big picture in a way that executive directors can’t. Also, their years of experience can help them identify and address a problem in its early stage.
Non-executive directors also handle conflicts among executive board members, manage disputes between the board and shareholders, monitor management’s progress with achieving goals the board has previously agreed upon, review the accuracy of financial information, determining the remuneration for top management, etc.
But because non-executive directors don’t have much stake in the company, there’s a chance that they won’t be as engaged as they should be in their board duties. Also, problems will arise if a non-executive director sits in multiple boards within the same industry, leading to a conflict of interest. It’s critical that you choose your non-executive directors wisely to make sure that they are adequately engaged with the affairs for your company, and that they are not serving on a competitor’s board.
An effective board should have a more or less equal mix of executive and non-executive directors. The balance between the two kinds of directors will put the interests of the shareholders and management in the right perspective.
Also, executive and non-executive directors need to learn how to collaborate with each other in spite of their differences. Board portal software like Boardbooks, BoardVantage, BoardPad, and Convene will enable directors to access and work on meeting documents wherever they are and whenever they want as long as they have Internet connection and a mobile device. When given the opportunity to work closely together, directors will have better chances to align their goals with one another’s.