Effective Corporate Governance: The Roles and Responsibilities of a Board of Directors

As Milton Friedman, the famous economist and prominent business advocate said over 50 years ago in a New York Times Magazine article, corporate directors and executives are agents of the shareholders and their “primary responsibility is to them”. In any professional organization or business, from family-owned closely held companies to large publicly traded entities, the board of directors has many important roles and responsibilities. The primary role of the board of directors is to assess the strategy or “big-picture” approach of the organization for the benefit of shareholders.

Another key responsibility the board has is to oversee the hiring process for elevated corporate positions. These positions might include general managers and Chief Executive Officers (CEOs).

In turn, the general manager or CEO will often oversee hiring for the organization, as well as daily business operations. 

Across businesses and organizations, there are several common roles and responsibilities of board members, which we’ll explore in-depth below.

Oversee the CEO or Manager

The board of directors should enact the following functions regarding the role of CEO:

  • Recruiting applicants for the position of CEO
  • Supervising the acting CEO
  • Evaluating the CEO’s job performance
  • Determining compensation and benefits for the CEO position

When a managerial opening arises, the board of directors should search within the industry for qualified candidates. They’ll also need to research adequate compensation models for managers and CEOs to craft enticing offers.

This will help to retain employees who have the skills that are necessary to effectively run the organization long-term. 

Provide Guidance and Direction for the Business

The board of directors should work to define the mission, vision, and goals of the organization. These values and goals are usually developed in conjunction with the CEO or manager.

Govern the Professional Organization

The board of directors has the responsibility to govern the business. Typically, board members are charged with drafting a document known as the “articles of governance.” These policies will provide rules and protocols for different scenarios that may arise. 

The policies developed by the board should be used to guide the professional actions of:

  • The board chairperson
  • Board members
  • General managers
  • CEOs

Managers should be given plenty of flexibility with regard to these policies. Attempting to govern an organization too rigidly will make professional problem-solving difficult. 

The board of directors will also have regular meetings with the manager or CEO. This can help to ensure that the vision of the organization is being carried out appropriately.

The interval at which board meetings occur will differ from business to business. Board meetings with the CEO may occur:

  • Weekly
  • Monthly
  • Quarterly

Between gatherings, the CEO should inform board members about any important decisions they are making. The manager can contact board members via email, teleconferences, or phone calls.

Fiduciary Duties of the Board of Directors

Aside from managerial duties, the board of directors also has fiduciary responsibilities. Board members are charged with protecting the financial interests of members and investors. 

This fiduciary role involves making sure that the company’s financial and material assets are kept in good order. But a fiduciary responsibility is not only about the money that the business holds. It also involves overseeing the company’s facilities, equipment, and employees. 

The board of directors should understand the status of all these assets and work to ensure that the company’s best interests are always served.

Explaining the Organization’s Long-Term Plans

Another key function of the board of directors is to clearly explain the company’s long-term trajectory to relevant parties. This includes shareholders and stakeholders.

Managing an organization’s long-term goals also requires contingency planning. The board must account for actions that will occur when less-than-ideal situations arise. 

A competent business strategy will help to reassure investors that their assets are being put to good use. 

Overall Stewardship

Ultimately, the role of board members is to provide a professional organization with ongoing stewardship and direction. This includes risk assessment and guidance in the following areas:

  • Company finances
  • Branding and reputation
  • Litigation
  • Business ethics
  • Health and safety
  • Environmental impact

Successful corporate governance is only possible when the board of directors fulfills each of these important roles and responsibilities. 

For more information about the corporate governance of your company or family-owned business, please reach out to our team of skilled corporate attorneys in our New York City office for an initial complimentary consultation.