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What is the Board of Directors?

Definition: A board of directors represents an elected or an appointed body of members who are responsible for overseeing a firmís activities to the benefit of its stockholders.

What Does Board of Directors Mean?

What is the definition of board of directors? The board is mandatory for all organizations - private, nonprofit, or governmental because it is held accountable for the firmís policies and actions. For instance, if an organization acts in an irresponsible manner that harms consumers and the public benefit, the board members are held responsible for the consequences of the organizationsí actions.

Generally, a board is acting within the framework of corporate governance, which includes the explicit and implicit contracts between the board and the companyís stakeholders concerning their responsibilities and rights and the procedures for monitoring and controlling the companyís operations to ensure that there are no conflicting interests between the stakeholders (management, employees, customers, government, community).

Letís look at an example.

Example

The board attends board meetings to evaluate managerial performance, decide on executive compensation, assess the prospect of an acquisition or merger, decide on the dividend policy and create a stock-option policy. The board is acting as a fiduciary on behalf of the companyís shareholders and is seeking to protect their rights.

Additional duties of a board member include assisting an organization to set its goals and objectives, support executive management in executing their duties, and ensuring that the organization has adequate resources to achieve effective operations. Often, the board of directors organizes separate committees, which are dedicated to specific decision-making projects. For example, issues of executive compensation are handled by the compensation committee; issues about potential merger and acquisitions are handled by the finance committee and so on.

Corporate governance is fundamental for a firm to maintain good standards and an ethical code of doing business. Ineffective governance may compromise effective management and cause great problems to an organization. Effective governance, on the other hand, can greatly assist organizational performance, allowing room for exchanging ideas, suggesting new policies and working in a synergistic manner.

Summary Definition

Define Board of Directors: Board of directors means a group of people elected by the shareholders of the company to oversee the corporation and appoint officers.

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