12 Important Board of Directors Functions
A company's board of directors ensures there are several people from different roles
involved in decision-making. Each board member likely has their own role and
expertise at the executive level to help a company succeed. Knowing the functions of
a board can help you better understand what they do and why they're useful. In this
article, we discuss what a board of directors is and 12 common functions of company
boards.
What is a Board of Directors?
A board of directors is a group of people who collectively decide how a company can
operate and supervise its current activities. The board usually comprises company
members like the chief executive officer (CEO), chief financial officer (CFO) and
other executive leaders, along with large shareholders. The board makes many
decisions for a company, including the election of new members or new CEOs.
12 Board of Directors Functions
As the primary governing group for a company, the board has several important
responsibilities. Here's a list of the board's primary functions:
1. Hiring and evaluating the CEO
The board decides who the CEO of a company is, when they might replace one and
how they might measure the CEO's success. When hiring a new CEO, board members
may analyze the company's current performance and goals to determine their most
important needs. This can help them design the job description and solicit applications
for other executives within the industry. For example, if a company hopes to increase
its digital presence, the board may seek a CEO with a background in technology or
digital marketing.
Once the company hires a new CEO, the board oversees their responsibilities, team
and success metrics. The board determines what initiatives they want the CEO to
accomplish within their first years of service. If the CEO doesn't meet their
expectations, the board can select a new CEO to better achieve their goals.
2. Creating the company’s vision
Board members can define a company's values and its plans for the future. This
includes short- and long-term goal setting, strategic planning and work environment.
For example, an educational technology company might have a goal to implement its
course platform in 50% of schools nationwide.
Team members might also draft different goals for their visions and hold meetings to
decide which goals to pursue. The leadership team, including the CFO and CEO, can
then communicate the vision to their teams. The board might have monthly meetings
to review this vision and ensure employees understand and agree with the plans and
have the tools to execute them.
1
3. Defining strategies
Strategy setting is another primary function of a board of directors. Once the board
establishes its mission and purpose, it can decide how to achieve its goals. For
example, a technology company may choose between outsourcing or hiring new
internal employees. The board for this company may consider the positives and
negatives of both options before deciding which may help the company best achieve
its goals.
4. Allocating and protecting resources
Allocating resources can mean determining where to place financial resources,
employees or tools to best serve a business. Whether executives or shareholders, all
members on the board must determine which departments or teams will receive
additional or fewer resources in response to their strategic goals and mission. For
example, if a company's primary goal is to increase revenue generated from social
media engagement, its board may agree on additional funding for advertising and new
algorithm tools that can target customers more accurately.
Besides the allocation of resources, the board may also establish security measures to
ensure they can protect their data, employees and intellectual property. Since board
members have a legal responsibility to be transparent about how they're managing and
protecting assets, they may communicate risks and responsibilities that employees
should consider, such as password-changing requirements.
5. Ensuring legal compliance
Companies often ensure their employees and organizations comply with local, state
and federal laws. They can achieve compliance with behavioral requirements, like
ethics training, proper recording of financial records and appropriate documentation
for conflicts. For example, if a photo department frequently uses proprietary images
for marketing, the board may decide to invest in technology that can identify rights or
permissions quickly or invest in training to ensure they're compliant.
6. Overseeing finances
A board determines the company's budget and sales goals and may meet regularly to
discuss current financial figures and future predictions. Companies may also establish
automated controls or manual checks to ensure all team members are following proper
financial protocol. Besides these controls, some companies also create internal
auditing teams or hire external ones to review their financial activity and reports to
ensure compliance.
7. Making financial decisions
Beyond general financial oversight, the board makes some of the largest financial
decisions for a company. This can include if a company merges with or acquires
another company, divests from certain assets or moves to a new office building. A
company may benefit from a board with a diverse group of individuals that must
agree on these financial decisions.
2
8. Managing board members
The directors also share responsibility for managing each other. When a board
chooses a CEO, they may hire or release board members in response to the business
needs. For example, the board may notice they need additional support in a specific
area and consider candidates who are currently executives from an internal
department or outside investors with specific expertise. The board can write the job
description, monitor performance and evaluate new board members. Sometimes, the
board might perform self-evaluations to find opportunities for change.
9. Improving public opinion
Since a company's board may have outside stakeholders on the team, it's important
that they're transparent with one another and with the public. For example, a company
might communicate earnings publicly throughout the year, and the board might
communicate if the company met its expectations and what its outlook is. This might
influence new shareholders to purchase stocks and help build trust in the organization.
10. Investing in company programs
Having a clear mission may influence what kind of programs the company invests in
or provides to the community. This requires the board to decide what's most
beneficial to the company's employees. This can involve specialized training,
community programs or volunteer opportunities. Determining which programs can
best uphold the company's culture may also require the board to research the value,
overall satisfaction and outcomes of each program.
11. Setting company goals
Board members often align company goals with the company's mission and determine
how to accomplish these goals. For example, a company might want to be an industry
leader in publishing, so the board may discuss its strategy and goals. Their strategy
might be to use new digital reader technology and accessibility resources, and their
goal might be to sell 500,000 e-books a year or have 50,000 new people sign up for
their mailing list. These plans align with the company's purpose and can contribute to
the higher sales goal.
12. Establishing governance rules
The board decides how they govern one another and the decisions affecting the
organization. This includes establishing meeting times with the CEO and the board,
holding individual status meetings, creating a process for adding or removing board
members and determining the cast votes. Governance can ensure a smooth transition
between members and CEOs and provide each board member with an equal
opportunity for participation.
