The board of directors, including the general manager or CEO (chief executive officer), has

very defined roles and responsibilities within the business organization. Essentially it is the
role of the board of directors to hire the CEO or general manager of the business and assess
the overall direction and strategy of the business. The CEO or general manager is responsible
for hiring all of the other employees and overseeing the day-to-day operation of the business.
Problems usually arise when these guidelines are not followed. Conflict occurs when the
directors begin to meddle in the day-to-day operation of the business. Conversely,
management is not responsible for the overall policy decisions of the business.
The board of directors selects officers for the board. The major office is the president or
chair of the board. Next there is a vice-president of vice-chair who serves in the absence of
the president. These positions are filled by board members. Next you usually have a secretary
and treasurer or combined secretary/treasurer. These positions focus on very specific
activities and may be filled by electing someone who is serving on the board of directors or
appointing someone who is not a member of the board of directors. The selection process is
often based on who is willing and who is the most qualified, although seniority may come
into play. Each board may have their own ways of handling those issues.
The six points below outline the major responsibilities of the board of directors.
1) Recruit, supervise, retain, evaluate and compensate the manager. Recruiting, supervising,
retaining, evaluating and compensating the CEO or general manager are probably the most
important functions of the board of directors. Value-added business boards need to
aggressively search for the best possible candidate for this position. Actively searching
within your industry can lead to the identification of very capable people. Dont fall into the
trap of hiring someone to manage the business because he/she is out of work and needs a job.
Another major error of value-added businesses is under-compensating the manager.
Managerial compensation can provide a good financial payoff in terms of attracting top
candidates who will bring financial success to the value-added business.
2) Provide direction for the organization. The board has a strategic function in providing the
vision, mission and goals of the organization. These are often determined in combination
with the CEO or general manager of the business.
3) Establish a policy based governance system. The board has the responsibility of
developing a governance system for the business. The articles of governance provide a
framework but the board develops a series of policies. This refers to the board as a group and
focuses on defining the rules of the group and how it will function. In a sense, its no
different than a club. The rules that the board establishes for the company should be policy
based. In other words, the board develops policies to guide it own actions and the actions of
the manager. The policies should be broad and not rigidly defined as to allow the board and
manager leeway in achieving the goals of the business.
4) Govern the organization and the relationship with the CEO. Another responsibility of the
board is to develop a governance system. The governance system involves how the board
interacts with the general manager or CEO. Periodically the board interacts with the CEO
during meetings of the board of directors. Typically that is done with a monthly board
meeting, although some boards have switched to meetings three to four times a year, or
maybe eight times a year. In the interim between these meetings, the board is kept informed
through phone conferences or postal mail.

5) Fiduciary duty to protect the organizations assets and members investment. The board
has a fiduciary responsibility to represent and protect the members/investors interest in the
company. So the board has to make sure the assets of the company are kept in good order.
This includes the companys plant, equipment and facilities, including the human capital
(people who work for the company.)
6) Monitor and control function. The board of directors has a monitoring and control
function. The board is in charge of the auditing process and hires the auditor. It is in charge
of making sure the audit is done in a timely manner each year.
Governance Models
A board of directors is a collection of individuals trying to operate as a group. Functioning as
a group is something many people are not comfortable with. So each board evolves with its
own culture. Each culture is dictated by the backgrounds of the individuals on the board.
However, there are several governance models of how a board of directors can function.
Examining and choosing the right model is important because it will impact the success of
the value-added business.
Below are four governance models. The board of directors must decide which model is best
for them.
1) Manager Focus With this model, the manager dominates the board. We can all think of
situations where we have had one dominant individual in a group. In this case the board
functions are an advisory board and reacts to the views of the manager. It is essentially a
rubber stamp for the CEO. This model often emerges when you have a charismatic CEO
who is very dominant and proactive in running the organization. In most cases this is not a
good model for a value-added business.
2) Proactive Board This model is of a proactive board that speaks as one voice. It speaks as
one voice for the board and often has a proactive manager that also speaks with one
combined voice for the organization. This is a good model because the manager and the
board are on the same page and speak with a single voice. This model is proactive in taking
advantage of emerging opportunities and is especially valuable for entrepreneurial
businesses.
3) Geographic Representation This model focuses on the members/investors whom the
board member represents. With this model, the board member feels that he/she has been
elected to the board to represent individuals in a geographic location or special interest group.
To better understand this model, think of an individual running for a political office and then
representing the interests of the individuals located in that geography. This is often found in
large boards, typically of 24 to 50 individuals. With a large group like this there is a
temptation for the directors to represent the interests of the members/investors in their
geographic area or special interest group rather than the best interests of the company. This is
not a model that works well for most value-added businesses.
4) Community Representation In this situation the board member is representing the
community rather than the organization. An example of this is a school board where an
individual is elected to represent certain interests within the community.
These four models are ways in which the board and its organization function. Often you have
directors who have previously been on boards where they have been chosen to represent a

certain group or have been a rubber stamp for the manager. So it is natural for a director to
think that this is how all boards function. But it is a good practice for boards to actively
investigate and discuss the models presented above and choose the right one for their
situation. This is usually a model where the directors are all active and present a single voice
of what is best for the organization. What is best for the organization will usually also be
good for the various members/investors and the stakeholders in the community.
The primary responsibility of the board of directors is to protect the shareholders' assets and
ensure they receive a decent return on their investment. In some European countries, the
sentiment is much different; many directors there feel that it is their primary responsibility to
protect the employees of a company first, the shareholders second. In these social and
political climates, corporate profitability takes a back seat the needs of workers.
The board of directors is the highest governing authority within the management structure at
any publicly traded company. It is the board's job to select, evaluate, and approve appropriate
compensation for the company's chief executive officer (CEO), evaluate the attractiveness of
and pay dividends, recommend stock splits, oversee share repurchase programs, approve the
company's financial statements, and recommend or strongly discourage acquisitions and
mergers.
The board of directors has a dual mandate:
1. Advisory: consult with management regarding strategic and operational direction of the
company.
2. Oversight: monitor company performance and reduce agency costs.

Effective boards satisfy both functions.

The responsibilities of the board are separate and distinct from those of management.
The board does not manage the company.

Selected advisory and oversight responsibilities:

Approve the corporate strategy

Test business model and identify key performance measures
Identify risk areas and oversee risk management
Plan for and select new executives
Design executive compensation packages
Ensure the integrity of published financial statements
Approve major asset purchases
Protect company assets and reputation
Represent the interest of shareholders
Ensure the company complies with laws and codes

Independence
Boards are expected to be independent:
- Act solely in the interest of the firm.

- Free from conflicts that compromise judgment.

- Able to take positions in opposition to management.

Independence is defined according to regulatory standards.

However, independence standards may not be correlated with true independence.
Requires a careful evaluation of board members biography, experience, previous
behaviour, and relation to management.

Operations
Presided over by chairman: sets agenda, schedules meetings, coordinates actions of
committees.

Decisions made by majority rule.

To inform decisions, board relies on materials prepared by management.
Periodically, independent directors meet outside presence of management (executive
sessions).

Board Committees
Not all matters are deliberated by the full board. Some are delegated to subcommittees.

Committees may be standing or ad hoc, depending on the issue at hand.

All boards are required to have audit, compensation, nominating and governing
committees.
On important matters, the recommendations of the committee are brought before the
full board for a vote.

Audit Committee
Responsibilities of the audit committee include:

Oversight of financial reporting and disclosure

Monitor the choice of accounting policies
Oversight of external auditor
Oversight of regulatory compliance
Monitor internal control processes
Oversight of performance of internal audit function
Discuss risk management policies

Compensation Committee
Responsibilities of the compensation committee include:

Set the compensation for the CEO

Advise the CEO on compensation for other executive officers
Set performance-related goals for the CEO
Determine the appropriate structure of compensation

Monitor the performance of the CEO relative to targets

Hire consultants as necessary

Nominating and Governance Committee

Responsibilities of the nominating/governance committee include:

Identification of qualified individuals to serve on the board

Selection of nominees to be voted on by shareholders
Hiring consultants as necessary
Determine governance standards for the company
Manage the board evaluation process
Manage the CEO evaluation process

Specialized Committees

Executive
Finance
Corporate social responsibility
Strategic planning
Investment
Risk
Environmental policy
Science & technology
Legal
Ethics / compliance
Mergers & acquisitions
Employee benefits
Human resources / management development

Directors Terms
Two main election regimes:
1. Annual election: Directors are elected to one-year terms.
2. Staggered board: Directors are elected to three-year terms, with one-third of board standing
for election each year.

Staggered boards are an effective antitakeover protection.

Staggered boards may also insulate or entrench management

Director Elections

In most companies, directors are elected on a one-share, one-vote basis.

Shareholders may withhold votes but not vote against.
Four main voting regimes:

1. Plurality: directors who receives most votes is elected, even if a majority is not obtained.
2. Majority: director must achieve majority to be elected, otherwise must tender resignation.
3. Cumulative: shareholders can pool votes, and apply to selected candidates (rather than one
vote each).
4. Dual class: different classes of shares carry different voting rights (disproportionate to
economic interest).

Typically, only one slate of directors is put forth for election; in a contested election, a
dissident slate is also put forth.

Structure and Makeup of the Board of Directors

The board is made up of individual men and women (the "directors") who are elected by the
shareholders for multiple-year terms. Many companies operate on a rotating system so that
only a fraction of the directors are up for election each year; this makes it much more difficult
for a complete board change to take place due to a hostile takeover. In most cases, directors
either,
1.) Have a vested interest in the company
2.) Work in the upper management of the company, or
3.) Are independent from the company but are known for their business abilities.
The number of directors can vary substantially between companies. Walt Disney, for
example, has sixteen directors, each of whom are elected at the same time for one year terms.
Tiffany & Company, on the other hand, has only eight directors on its board. In the United
States, at least fifty percent of the directors must meet the requirements of "independence",
meaning they are not associated with or employed by the company. In theory, independent
directors will not be subject to pressure, and therefore are more likely to act in the
shareholders' interests when those interests run counter to those of entrenched management.
Committees on the Board of Directors
The board of directors responsibilities include the establishment of the audit and
compensation committees. The audit committee is responsible for ensuring that the
company's financial statements and reports are accurate and use fair and reasonable estimates.
The board members select, hire, and work with an outside auditing firm. The firm is the
entity that actually does the auditing.
The compensation committee sets base compensation, stock option awards, and incentive
bonuses for the company's executives, including the CEO. In recent years, many board of
directors have come under fire for allowing executives salaries to reach unjustifiably absurd
levels.

In exchange for providing their services, corporate directors are paid a yearly salary,
additional compensation for each meeting they attend, stock options, and various other
benefits. The total amount of directorship fees various from company to company. Tiffany &
Company, for example, pays directors an annual retainer of $46,500, an additional annual
retainer of $2,500 if the director is also a chairperson of a committee, a per-meeting-attended
fee of $2,000 for meetings attended in person, a $500 fee for each meeting attended via
telephone, stock options, and retirement benefits. When you consider that many executives sit
on multiple boards, it's easy to understanding how their directorship fees can reach into the
hundreds of thousands of dollars per year.
Ownership Structure and Its Impact on the Board of Directors
The particular ownership structure of a corporation has a huge impact on the effectiveness of
the board of directors to govern. In a company where a large, single shareholder exists, that
entity or individual investor can effectively control the corporation. If the director has a
problem, he or she can appeal to the controlling shareholder. In a company where no
controlling shareholder exists, the directors should act as if one did exist and attempt to
protect this imaginary entity at all times (even if it means firing the CEO, making changes to
the structure that are unpopular with management, or turning down acquisitions because they
are too pricey). In a relatively few number of companies, the controlling shareholder also
serves as the CEO and / or Chairman of the Board. In this case, a director is completely at the
will of the owner and has no effective way to override his or her decisions.