If a director feels that he has any basis for doubt and disapproval, most of the presidents interviewed believe that he should resign. The lack of active discussion of major issues at typical board meetings and the absence of discerning questions by board members result in most board meetings resembling the performance of traditional and well-established, almost religious, rituals.
In most companies, it would be possible to write the minutes of a board meeting in advance. The format is always the same, and the behavior and involvement of directors are completely predictable—only the financial figures are different.
My research disclosed few exceptions to this routine. In a handful of instances, presidents said that they do in fact want discerning, challenging questions and active discussions of important issues at their board meetings. There are also a few directors who do in fact ask discerning questions, the desires of the president notwithstanding.
Typical garden-variety outside directors, selected by the president and generally members of a peer group, do not ask questions inside or outside board meetings. However, directors who serve on corporate boards of companies because they own or represent the ownership of substantial shares of stock generally do in fact ask discerning questions. Their willingness to query presidents is, in part, a manifestation of the split in the de facto powers of control of those companies.
The large stockholder-directors are not usually on the board because the president wants them there, but because through cumulative voting procedures they can force their way onto the board. Directors, as described in the literature, represent the stockholders.
Yet, typically, they are actually selected by the president and not by the stockholders. Accordingly, the directors are on the board because the president wants them there. Implicitly, and frequently explicitly, the directors in point of fact represent the president. But a large stockholder-director is not selected by the president and does not therefore represent the president; rather, he represents himself and an interest more likely to be consistent with that of the other stockholders.
These differing attitudes with regard to stock ownership often are manifested in the extent to which discerning questions are asked of the president by the directors. A third classic role usually regarded as a responsibility of the board of directors is the selection of the president. Yet I found that in most companies directors do not in fact select the president, except under the two crisis situations cited earlier. The board does not select the management; the management selects the board.
In some situations, formal or informal committees of outside members of boards are charged with the responsibility of evaluating candidates inside the management for the presidency. But, generally, these committees have no more control over the naming of the president than do similar committees charged with identifying and recommending the names of candidates for board membership. In both committee situations, the president with de facto powers of control essentially makes the decisions. The administrative use by the president of board committees to evaluate candidates for his successor in the presidency gives the selection process an appearance of careful evaluation and objectivity.
But in most cases the decision as to who should succeed the president is made by the president himself. Certainly, the president knows the key members of his organization better than anyone else. He has worked with them closely and, typically, over a considerable period of time.
Board members with relatively brief exposure to company executives—whether on the board or not—base their appraisals necessarily on very inadequate evidence. When insiders appear before the board for presentations of their divisional operations, for example, or to explain a request for a large capital appropriation, the setting is artificial and synthetic.
Executives, aware that the process of evaluation is going on, rehearse their appearances to communicate to the board that they have the capacities and skills needed for the presidency. Boards of directors, I found, do serve in an advisory role in the selection of a new president—in their capacity as a sort of corporate conscience. The process of electing a new president requires a vote by the board, and the president generally observes the amenities of corporate good manners by discussing his choice with individual members prior to the meeting.
Rarely does a board of directors reject a candidate for the presidency who is recommended by the president. In the small family company, the ownership of the stock and the management are identical. In an earlier study, I found that the powers of control are in the family owners, and what the board of directors does is determined by the owners.
The owner-managers of some small companies add outside directors to multiply the inputs to policy making, policy implementation, and day-to-day operating problems.
The primary function of the outside directors is to provide a source of advice and counsel to the family owner-managers, and they do not serve in a decision-making role, except in the case of the unforeseen death of the dominant family owner-manager. They have the authority to manage the enterprise, and the board is at most a legally required body which can be used for advice and counsel on management or family problems. The family owners determine what the board does or does not do.
At the opposite end of the spectrum is the large, widely held corporation in which typically the president and members of the board own little stock. Here, the de jure powers of control are dispersed among thousands of stockholders who are generally both unorganized as owners and essentially unorganizable. With this absence of control or influence by the corporate owners, the president typically does have the de facto powers to control the enterprise, and with these powers of control it is the president who, like the family owner-managers in the small company, determines in large part what the board of directors does or does not do.
Between the two corporate situations just cited, there are many variations and combinations of centers of control, or ownership influences on control, of the company.
Complete de facto control by the professional manager-president may be diminished or influenced by the presence on the board of a person who owns, or represents ownership of, a substantial block of stock. This may constitute a challenge to the president. My research findings show that many directors who own, or who represent the ownership of, substantial numbers of shares of stock take a deep interest in the operations of the company, spend considerable time in learning the business, and insist on being involved in major company decisions.
My analysis of the situations where substantial stockholdings are represented on the board has produced no factors which make possible any reliable prediction of whether the stockholder-director will take an active and involved question-asking role. There is some evidence that if the owner of the stock had come into possession of it through his own efforts, such as an entrepreneur developing his own business and then selling it to a larger company for its shares, the acquired entrepreneur will take a very active role as a director of the acquiring company.
If the outside director with large stockholdings is a second or third generation heir of an entrepreneur, his involvement as an active director is less likely. Another situation in which the president of a large-or medium-sized company does not possess the full and complete de facto powers of control is that of a retired president who stays on as a member of the board.
Then, typically, the outside board members have been selected and invited to the board by the retired president, not the new president. A similar complication of relationships exists in the situation following the sudden death of the president where his successor is designated by the board of directors. The new president holds his position because the directors selected him—directors who were themselves selected by his predecessor.
While the new president is demonstrating his capacities to head the enterprise, the outside directors generally share the powers of control of the company. In both cases, with the passage of time, and with the designation by the new president of new directors who are his directors, the complete powers of control will flow back into the office of the president. Generally, when the president and the directors own only a little stock, the president possesses and exercises the complete powers of control of the enterprise.
But, here again, it should be noted that the president with complete powers of control could determine that the directors will, to the extent he wishes, serve primarily as sources of advice and counsel. The controlling influence of the president in determining what the directors will or will not do was illustrated by many of the discussions during my field research. The top executive of one company said:. If he wants to use the board, he will use them. Basically, the board can be made just about as useful as the president wishes it to be.
Most presidents are completely aware of their powers of control, but they choose to exercise them in a moderate manner acceptable to their peers on the board. Many of them, as presidents of their own companies with board members of their own, thoroughly understand the existence and location of the powers of control.
The president, with powers of control, generally selects and invites directors to serve on the board. In some instances, a nominating committee of the board is created to identify, screen, and recommend candidates for board membership.
Even with the presumed objectivity of a committee of outside directors, though, the president makes the decision as to new members. In these cases, the stock-owning directors are interested in adding new directors of their choice, and the president is interested in new directors of his choice.
Discussion and negotiation inevitably result in some sort of agreement on who should be added, and the balance of power issue continues. My interview discussions on the topic of who makes a good director indicate that presidents, in selecting directors for their companies, regard the titles and prestige of candidates as of primary importance.
Candidates are usually chosen who are a in positions equal to those of the other board members or b in companies of prestige equivalent to that of the company being served.
If existing board members are chairmen and presidents of companies or senior partners of leading financial or legal firms, potential board members with lesser titles are rarely considered.
In addition to the qualifications of prestige titles in prestige institutions—both business and academic—outside directors are selected because they are noncontroversial, friendly, sympathetic, congenial, and because they understand the system. Boat-rockers and wave-makers generally are not the choice of presidents with de facto powers of control and with freedom of choice as to who should serve on their boards. While most presidents prefer to include on their boards only those who have appropriate titles and positions, there are a few but not many presidents who believe that the requirement of prestigious titles is not important.
They want board members who will participate in the management of the company. Not surprisingly, these presidents are the same few who want board members who will help establish corporate objectives, ask discerning questions, and evaluate the performance of the president. Today, many business leaders are concerned about the workings of boards of directors. In recent corporate disasters, hindsight suggests that it would not have been meddling in the management if the directors had in fact asked some discerning questions and had been involved in the allocation and appropriation of company capital resources.
If what I have reported is what boards of directors in fact do—is it enough? I suggest it is not. During my research interviews, many plausible reasons were given for having insiders on the boards—e. I believe that these seemingly plausible reasons for having insiders on boards of directors are essentially fallacious and specious. The objectives of the reasons cited for having insiders on boards could be accomplished through other means. The specific functions of the board should be discussed and agreed on by the chairman, the president, and the outside board members, and reduced to writing as a charter to board activities.
A model for the process of defining appropriate board functions through discussion is provided here by John D. This duty includes expecting and encouraging all board members to be actively engaged. The board chair also typically participates in annual board member orientation, onboarding and development. The bulk of board work happens in committees. The board chair makes recommendations for committee chairs and seeks approval from fellow board directors.
To stay in the loop on committee work, the board chair typically serves as ex-officio member of all committees. The responsibility here is for the board chair to align committee work with the vision and mission of the company.
Board directors of today are expected to represent independent and diverse perspectives. Their main role is to perform the duties of strategic planning and oversight. Board directors are much more than iconic figureheads. Boards typically look for specific qualities in choosing board members to fill vacant seats. Board members expect their fellow board directors to be willing to ask tough and probing questions to vet all sides of an issue.
Board directors need to be well-informed and fully engaged with all major issues that affect the corporation. Identifying risks has become an integral part of board work because risks are becoming increasingly numerous and complex. When corporations hit bumps in the road, all fingers typically point back to the board of directors.
Board directors must be willing to act quickly and responsibly when they need to take action to comply with fiduciary responsibilities or to uphold good governance standards. A crisis may occur at any time.
One of the busiest and well-known people in an organization is the corporate secretary. Corporation laws in every state require corporations to appoint a corporate secretary. Corporate secretaries are now considered senior positions with major governance responsibilities. Corporate secretaries are considered to be legal representatives of the corporation. Many corporations prefer to choose candidates for corporate secretary that have expertise in accounting or law.
In fact, some corporations require that the role be filled by a lawyer. Some boards also expect the corporate secretary to belong to a body of professional accountants or association of corporate chartered secretaries. Corporations describe the powers and duties of the corporate secretary in their bylaws. One of the most prominent duties of the corporate secretary is to set the agenda and to make sure that all board members and other board meeting guests have the proper reports and other materials in time to review them for the board meeting.
The corporate secretary also records minutes during board meetings and prepares a final copy of the minutes for the board to approve at the next board meeting.
The secretary needs to know which reports need to be filed with regulatory authorities and when they are due. The corporate secretary signs legal documents and bears custody of the corporate seal. This position also requires the corporate secretary to participate in regular legal discussions with the CEO, board, chair, general counsel and other corporate attorneys about legal matters.
Your Money. Personal Finance. Your Practice. Popular Courses. Fundamental Analysis Tools for Fundamental Analysis. Table of Contents Expand. The Checklist. Size of the Board. The Degree of Independence. Other Commitments. Related Transactions. The Bottom Line. Key Takeaways Look at the size of the board and whether it has enough members to function properly, including keeping conflicts of interest at bay, or whether it's too cumbersome and therefore less effective.
See if the board includes independent outsiders—experienced business leaders who have no direct connection to the company, such as a retired former employee or a relative of a current executive. Consider the structure and effectiveness of the four most critical board committees—executive, audit, compensation and nominating.
Understand what time constraints and other responsibilities board members have beyond the board and determine if there are inherent issues as a result of these other commitments. Finally, look at any transactions between the company, and the executives and directors, and see if anything raises any red flags by suggesting a conflict of interest or other problems. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation.
This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Articles. President: What's the Difference? Business Leaders 10 Top Women Investors. Stocks Who is Responsible for Shareholders Interests? Partner Links. Related Terms Board of Directors B of D A board of directors B of D is a group of individuals elected to represent shareholders and establish and support the execution of management policies.
What Are Interlocking Directorates? The practice of interlocking directorates may affect more than one company's board of directors, find out when this can happen and when it's illegal. Chair of the Board COB The chair of the board COB is the most powerful member on the board of directors and provides leadership to the firm's officers and executives.
Boardroom Definition A boardroom is where a group of people conducts meetings, often the board of a company. Learn about virtual boardrooms and how to hold a meeting. Proxy Statement Definition A proxy statement is a document the SEC requires companies to provide shareholders that includes information needed to make decisions at shareholder meetings.
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