To be effective, boards must take steps, both in their structures and in their nominating procedures, to ensure that insiders and executive owners are unable to exercise undue control over the board’s activities and decisions.
To ensure shareowners’ interests are served, boards must be appropriately independent so as to provide a variety of views, including those of investors, on strategy, governance, and financial performance. In doing so, boards should seek competent professionals while refraining from nominating individuals with a large number of existing board memberships.
The primary responsibility of a corporate board of directors is to protect the assets of shareholders and ensure they receive a positive return their investment. The board of directors has a fiduciary responsibility under U.S. law to the company’s shareholders.
The board of directors is the highest governing authority within the management structure at a corporation or publicly traded business. It is the board's job to select, evaluate, and approve compensation for the company's chief executive officer (CEO), evaluate the attractiveness of and pay dividend, recommend stock splits, oversee share repurchase, approve the company's financial statements, and recommend or reject merger and acquisition opportunities, and the like.
Boards are composed of individual men and women who are elected by the company’s 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. They do this because it makes it much more difficult for a complete board change to take place due to a hostile takeover. In most cases, directors either:
- Have a vested interest in the company
- Work in the upper management of the company (so-called "executive directors")
- Are independent from the company but are known for their business abilities
In the U.S., at least 50 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.
CFA Institute Viewpoint
Company boards should have an independent majority. An independent majority on the board is more likely to consider the best interests of shareowners first. It also is likely to foster independent decision-making and to mitigate conflicts of interest that may arise.
Board Composition
- Position: The board should strive for a diversity of backgrounds, expertise, and perspectives, including an increased investor focus.
- Rationale: Board composition with these attributes will:
- Improve the likelihood that the board will act independently of management and in the best interests of shareowners
- Reduce the influence of board members who are executive or financial officers of other companies who might have a natural inclination to support management’s perspectives
- Ensure that board members are able to understand the many complicated financial transactions and activities
- Ensure that company activities are presented properly in the financial statements
- Ensure that shareowner and investor views are considered along with the perspectives of CPAs.
Board Mandates
- Position: Board members should limit the number of board memberships they accept at any one time.
- Rationale: Limiting the number of board mandates provides board members with more time to adequately consider the issues affecting a company and to decide on matters in a manner that serves shareowners’ best long-term interests.
Term of Service
- Position: Board members should limit their length of service on a specific company’s board to no more than 15 years.
- Rationale: This would enable new board members with fresh insights and ideas and renewed independence to be elected