Definition: The group of people who are elected by a corporation’s shareholders to oversee it. The Board hires, supervises, and fires the upper executives. It makes other important decisions such as how much in dividends the company should pay to its shareholders each quarter. Boards can have different numbers of members and different terms that members are elected for.
Example: Wal-Mart Stores, Inc. has a Board of Directors consisting of 15 individuals. Their names and professional biographies can be found here.
Investeach explains: That shareholders elect Board members who then oversee the corporation makes corporate governance similar to that of the United States. Citizens elect members of Congress who then manage the country by passing and modifying its laws. Citizens do not vote directly to pass laws. Shareholders do not vote on normal daily corporate decisions. However, shareholders do vote directly on the most significant of corporate actions. These include whether to buy out or merge with another corporation, whether to issue more stock, and of course, which people should be elected to the Board.
The top executive (ie, Chief Executive Officer, or CEO) of the corporation is usually a Board member. Every Board has a Chairperson who schedules and runs the meetings. Corporations have received a lot of criticism for allowing the CEO to also be the Board Chairperson. With the CEO scheduling and running the Board meetings, it may create the impression that the Board is working for him or her, not the other way around. In addition, potential Board members themselves have often been identified and suggested by the CEO. They may have a prior relationship with the CEO and if elected be thankful enough to him or her that they’re not objective enough to effectively judge the CEO’s performance.
The Enron bankruptcy in 2001 and the Worldcom bankruptcy in 2002 laid bare what can happen when Boards get too cozy with the CEO. In one spectacular example of Board failure, the Board of Directors of Worldcom loaned or guaranteed personal loans of more than $400 million to then-CEO Bernie Ebbers. Why would a highly paid executive need to borrow so much money? Good question. This was a complete misuse of corporate funds because the money was loaned for Mr. Ebbers’ personal use. It would in no way benefit the shareholders of Worldcom. In fact, if Ebbers refused or was unable to repay the loans, it would do the company tremendous harm. Another common criticism is that Boards granted the CEO various forms of compensation (ie: ‘pay package’) that often resulted in the CEO getting rich even though neither the corporation nor its shareholders did well.
Because too many Boards just could not be trusted to do the right thing, Congress passed, and on July 30, 2002 President Bush signed into law, the Sarbanes Oxley Act. Among its many new rules is one which states that Boards can no longer loan the corporation’s money to its executives.
Most public corporations make the roster of Board members available on their web sites. When visiting a company’s site, look for a link to the company’s ‘corporate’ web site. Next, look for a link such as ‘investor relations’. If a link to the Board isn’t available there, look for a link named ‘corporate governance’.
Riddle me this:
1. How do individuals get on a corporation’s Board of Directors?
2. In what way is a corporation’s Board of Directors role similar to that of Congress?
3. Identify two types of potential corporate actions that shareholders vote on directly.
3. What is the maximum number of members who can serve on a corporation’s Board at any one time?
4. What is the problem with the corporation’s CEO also serving as the Chairperson of the Board?
5. Identify two examples of Board actions involving CEOs that have upset the investing public.
6. What law was passed by Congress in an attempt to correct these complaints?