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20 Key Definitions for Board of Directors, and Executive Management
What Every Board Member, Board Chair, and CEO/Executive Director Must Know
1. What is a Board of Directors? Governing body (called the board) of an incorporated firm. Its members (directors) are elected normally by the subscribers (stockholders) of the firm (generally at an annual general meeting or AGM) to govern the firm and look after the subscribers’ interests. The board has the ultimate decision-making authority and, in general, is empowered to (1) set the company’s policy, objectives, and overall direction, (2) adopt bylaws, (3) name members of the advisory, executive, finance, and other committees, (4) hire, monitor, evaluate, and fire the managing director and senior executives, (5) determine and pay the dividend, and (6) issue additional shares.
Though all its members might not be engaged in the company’s day-to-day operations, the entire board is held liable (under the doctrine of collective responsibility) for the consequences of the firm’s policies, actions, and failures to act. Members of the board usually include senior-most executives (called ‘inside directors’ or ‘executive directors’) as well as experts or respected persons chosen from the wider community (called ‘outside directors’ or ‘non-executive directors’).
2. What is an Independent Director? Independent Directors are defined as directors who, among other things, are not part of management and who do not otherwise have a role or relationship with the corporation that has a potential of creating any conflict of interest.
3. What is a Board of Trustees? Board of directors of a non-profit organization (NPO) such as a charity, trust, or university. Members of the board are appointed (not elected) to set the policies of the organization, and appoint (and fire) senior management personnel. Under the doctrine of collective responsibility, the entire board is liable for the financial and other consequences of the organization’s activities.
4. What is a Board Chair? The chairman (also chairperson, chairwoman or chair) is the highest officer of an organized group such as a board, a committee, or a deliberative assembly. The person holding the office is typically elected or appointed by the members of the group. The chair presides over meetings of the assembled group and conducts its business in an orderly fashion. When the group is not in session, the officer’s duties often include acting as its head, its representative to the outside world and its spokesperson.
5. What is a Lead Director? A lead director offers an alternative to splitting the combined chairman-CEO role. The lead director serves as an independent chief among all board members and thereby helps ensure board relations run smoothly. But since the introduction of the new position to corporate America, there’s been little consensus regarding the responsibilities a lead director should assume. A recent survey sheds light on lead directors, having found that they excel in improving board performance, in strengthening relationships with the CEO, and in providing leadership in crisis.1
Lead directors drive high-performance boards. Many lead directors improve board performance by facilitating board discussions, by helping directors reach consensus, and by keeping board matters on track. In fact, all of the lead directors surveyed said they had the authority to call executive sessions and to preside over them. They may help deal with difficult or underperforming directors as well—a task that has traditionally fallen to the chairman or CEO.
6. What is a Board Secretary? The secretary of the board of directors has overall responsibility to create and maintain corporate records and other important corporation documents. Included in this responsibility: (1) Record minutes of all board meetings and minutes of all committees as needed. (2) Minutes must be taken in a specific form and all board and committee actions must be recorded. (3) Keep records of all policies approved by the board. (4) Maintain a calendar of events, including the date of the annual meeting and budget approval dates. (5) Maintain personnel and payroll records for executive employees reporting directly to the board of directors. (6) Keep all records in a safe place and make sure all documents are in good order in case of audits.
7. What is a Board Treasurer? The treasurer of the board of directors has primary responsibility for the financial well-being of the corporation but does not take day-to-day responsibility. Included in the board treasurer’s duties are: (1) Creating and maintaining the organization’s annual budget for each fiscal (financial) year. This responsibility includes presenting the budget to the board for approval. (2) Creating, implementing and reviewing financial policies for the corporation. (3) Reviewing investment activities of the corporation. (4) Overseeing the annual financial audit of the corporation (if public) and other audits of corporate records and finances. (5) Chairing the board’s finance committee
8. What is a Quorum? A quorum is the minimum number of voting members who must be present at a properly called meeting in order to conduct business in the name of the group.
The primary requirements for a board quorum are found in state law and can be further modified by an organization’s controlling documents such as bylaws or articles of incorporation. For example, the basic definition under California corporate law for a board quorum is a simple majority of board members. Although an organization’s bylaws can specify a smaller number of members for a quorum, the law sets the minimum number at one-third of the authorized number of members or two members, whichever is greater. The only exception to this requirement is a corporation with only one member who is the sole authorized board member.
9. What is a Meeting Agenda? A meeting agenda is the list of items that participants hope to accomplish at a meeting. The agenda should be distributed to participants several days in advance of a meeting, minimally 24 hours so that participants have the opportunity to prepare for the meeting.
In combination with meeting minutes, the documentation that participants receive following a meeting, the agenda is the plan for the meeting and the reported follow-up for the prior meeting.
When you develop an agenda for a meeting that is not regularly scheduled, the following steps will assist you. Later in this article, you will see a template for a regularly scheduled meeting. The two types of meetings share similar agenda items but are not exactly the same.
10. What are Meeting Minutes? Meeting minutes are the written or recorded documentation that is used to inform attendees and non-attendees about what was discussed and what happened during a meeting. The meeting minutes are generally taken or recorded during the meeting so that participants have a record of what happened during the meeting.
A proper set of meeting minutes includes the name of the person taking the minutes, the names of the people who attended the meeting, detailed mentions of what each person had to offer to each topic being discussed in the meeting, who called the meeting to order, and the name of the person who adjourned the meeting.
11. What is Call to Order? To formally signal the start of a board or committee meeting.
12. What is Fiduciary Duty? A fiduciary duty is the highest standard of care. The person who has a fiduciary duty is called the fiduciary, and the person to whom he owes the duty, is typically referred to as the principal or the beneficiary. If an individual breaches the fiduciary duties, he or she would need to account for the ill-gotten profit. His or her beneficiaries are entitled to damages, even if they suffered no harm.
Fiduciary duties exist to encourage specialization and induce people to enter into a fiduciary relationship. By imposing these duties, the law reduces the risk of abuse of a beneficiary by the fiduciary. As a result, potential beneficiaries can have greater confidence in seeking out a fiduciary.
13. What is Duty of Care? Duty of Care requires that directors inform themselves “prior to making a business decision, of all material information reasonably available to them.” Whether the directors were informed of all material information depends on the quality of the information, the advice available, and whether the directors had “sufficient opportunity to acquire knowledge concerning the problem before action.” Moreover, a director may not simply accept the information presented. Rather, the director must assess the information with a “critical eye,” so as to protect the interests of the corporations and its stockholders.
14. What is Duty of Loyalty? Duty of Loyalty requires corporate officers and directors are not permitted to use their position of trust and confidence to further their private interests. . . . A public policy, existing through the years, and derived from a profound knowledge of human characteristics and motives, has established a rule that demands of a corporate officer or director, peremptorily and inexorably, the most scrupulous observance of his duty, not only affirmatively to protect the interests of the corporation committed to his charge, but to refrain from doing anything that would work injury to the corporation, or to deprive it of profit or advantage which his skill and ability might properly bring to it, or to enable it to make in the reasonable and lawful exercise of its power.”
15. What is Duty of Good Faith? Duty of Good Faith requires the director to advance interests of the corporation, not violate the law, and fulfill his or her duties.
16. What is Duty of Good Confidentiality? Duty of Confidentiality requires directors to keep corporate information confidential and not disclose it for their own benefit.
17. What is Duty of Good Prudence? Duty of Prudence requires a trustee to administer a trust with a degree of care, skill, and caution that a prudent trustee would exercise.
18. What is Duty of Disclosure? Duty of Disclosure requires directors to act with “complete candor.” In certain circumstances, this requires the directors to disclose to the stockholders “all of the facts and circumstances” relevant to the directors’ decision.
19. What is Business Judgment Rule? The Business Judgment Rule is a legal principle that makes officers, directors, managers, and other agents of a corporation immune from liability to the corporation for loss incurred in corporate transactions that are within their authority and power to make when sufficient evidence demonstrates that the transactions were made in Good Faith.
The directors and officers of a corporation are responsible for managing and directing the business and affairs of the corporation. They often face difficult questions concerning whether to acquire other businesses, sell assets, expand into other areas of business, or issue stocks and dividends. They may also face potential hostile takeovers by other businesses. To help directors and officers meet these challenges without fear of liability, courts have given substantial deference to the decisions the directors and officers must make. Under the business judgment rule, the officers and directors of a corporation are immune from liability to the corporation for losses incurred in corporate transactions within their authority, so long as the transactions are made in good faith and with reasonable skill and prudence.
20. What is Conflict of Interest? A conflict of interest is a transaction or arrangement that might benefit the private interest of an officer, board member, or employee. Conflicts of interest in a board of directors can take several forms. Related parties on the board, board members related to employees, certain transactions, and dual-capacity individuals all present a conflict of interest. While it might not be possible to avoid a conflict of interest in every situation, it is best practice to avoid or minimize them.