The Board s Functions

The Board's Functions

What are directors supposed to do? In general, the board of directors is charged with four broad functions:

1. Board members hire, evaluate, and perhaps even fire top management, with the CEO being the most important. While they are evaluating management, they must also monitor the firm's performance.

2. Members vote on major operating proposals (e.g., large capital expenditures, acquisitions, etc.).

3. Members vote on major financial decisions (e.g., issuance of stocks and bonds , dividend payments, stock repurchases, etc.).

4. Members offer their expert advice to management. In executing these functions, they are supposed to represent the interests of the shareholders. Given the immense importance of the responsibilities that the board members bear, it would seem that the shareholders have powerful agents working on their behalf .

Further, the board has subcommittees. In fact, a lot of the important board work gets done at the subcommittee level, which subsequently goes to the full board for approval. Some boards have an executive committee, a finance committee, a community relations committee, and so forth. Perhaps the subcommittees most common to all boards are the audit committee (according to the Korn/Ferry study, 100 percent of all boards have this subcommittee), the compensation committee (99 percent of all boards have this), and the nomination committee (73 percent of all boards have this). ^[13]

The audit committee is charged with the responsibility of finding an outside independent auditor for a firm's accounting statements. It must make sure that the auditor will do its job objectively. The compensation committee is supposed to design the executives' compensation package. The most common procedure used by a compensation committee to design compensation contracts is to benchmark its firm and its CEO against other firms and CEOs, and offer a comparable or slightly better compensation package for its own CEO. The nomination committee is charged with the task of searching for and nominating potential directors to run for an impending vacant board seat in the annual shareholder elections . Finally, we should also mention that a separate stock options subcommittee has gained popularity with boards in recent years , probably due to the controversy surrounding the incentive.

While a board's roles in a corporation seem ideal, especially to ensure that shareholder interests are being met, there are some potentially serious problems with boards. Some reasons include a lack of board independence from the CEO, directors who don't have the time or expertise to adequately serve their roles, and even members who do not have a real vested interest in the firm.