Composition of the Board of Directors
A board of directors is the central pillar of the governance structure, serves as the link between shareholders and managers, and acts as the shareholders' internal monitoring tool within the company.
The structure and composition of a board of directors vary across countries and companies. The number of directors may vary, and the board typically includes a mix of expertise levels, backgrounds, and competencies. Board members must have extensive experience in business, education, the professions and/or public service so they can make informed decisions about the company's future. If directors lack the skills, knowledge and expertise to conduct a meaningful review of the company's activities, and are unable to conduct in-depth evaluations of the issues affecting the company's business, they are more likely to defer to management when making decisions.
Executive (internal) directors are employed by the company and are typically members of senior management. Non-executive (external) directors have limited involvement in daily operations but serve an important oversight role.
In a classified or staggered board, directors are typically elected in two or more classes, serving terms greater than one year. Proponents argue that by staggering the election of directors, a certain level of continuity and skill is maintained. However, staggered terms make it more difficult for shareholders to make fundamental changes to the composition and behavior of the board and could result in a permanent impairment of long-term shareholder value.
Functions and Responsibilities of the Board
Two primary duties of a board of directors are duty of care and duty of loyalty. Among other responsibilities, the board is to:
Board of Directors Committees
A company's board of directors typically has several committees that are responsible for specific functions and report to the board.