A high-quality corporate governance system and an efficient board of directors are the most important conditions for the long-term sustainable development of a modern company. Unfortunately, not all companies follow the recommendations of the best practice. So, they approach the organization of the work of the board of directors formally, automatically approving the decisions of the shareholders, or fully following the decisions made by the management.
Company Management Levels
There are two levels of management in a public company, namely:
- Operational;
- Strategic.
At the operational level, issues related to current activities are resolved: production, sales, purchases, personnel management, and other working moments. Operational activities are carried out by management headed by the general (executive) director.
At the strategic level, questions are resolved about how the company will develop: invest in production or use profits for dividends, absorb a competitor or develop its production, sell non-core assets or expand the business in a new direction. All these and many other issues are decided by the Board of Directors.
Why Is a Board of Directors Needed?
Unlike a company with one or more shareholders, which may be directly controlled by the owners, a public company has hundreds or even thousands of shareholders. To take into account the interests of all, a special board of directors is formed. Sometimes, it is also called the supervisory board.
The main task of the council is to ensure the growth of the company’s value in the interests of all owners. Council members are elected at the annual general meeting of shareholders. Typically, the board of a public company consists of 7 to 12 people.
The Board of Directors makes the following decisions:
- Recommendation of dividends and buyback programs;
- Coordination of major transactions, including M&A and related party transactions;
- Disposition of treasury blocks of shares, as well as approval of SPOs and additional issues;
- Approval of the company’s strategy.
The board of directors can appoint and dismiss management, and monitor its work, the company’s transparency, and reporting. It also can take other actions aimed at ensuring benefits for shareholders and preventing possible abuses by management and individual owners.
Not all important decisions can be made by the board of directors on their own. Several decisions can only be approved by the general meeting of shareholders. For instance, the board cannot decide how much dividends the company will pay out. It can only recommend a certain amount, and the final decision will be made by a general vote of the shareholders.
Can Outsiders Join the Board?
Not only shareholders and managers of the company but also specialists invited from outside can be elected to the board of directors. Such board members are called independent. A board member who is not related to the company’s operations, its shareholders, counterparties, competitors, and the state can be considered independent.
At the same time, the same person can be a member of the boards of directors of different companies. The format of the council’s work makes it possible to combine such activities. The Board of Directors meets for periodic meetings and its members are not required to be involved daily.
Experts with experience serving on the boards of various enterprises can bring great value to the company by implementing tools and solutions that work successfully in other businesses. A large number of independent directors on the board are considered good practice, although it is not required by law.