Board of Directors

A board of directors is a group of people elected by the shareholders of a corporation to oversee the management of the corporation. Directors are elected at annual general meetings. At this meeting shareholders have the ultimate power to control both their investment and their board of directors. The board of directors delegates authority for day-to-day operations to a group of managers called officers. The primary duty of directors is to act in the best interest of the company and its shareholders.

There are three types of director: executive director, nonexecutive director, and independent nonexecutive director. An executive director is also an employee of the company, whereas a nonexecutive director is not an employee. The standard practice is for the executive director to have an appointment letter, rather than a contract of employment, and to be paid an agreed fee for services rendered. A nonexecutive director usually provides his or her services part-time and is not expected to be involved in the day-to-day running of the company. There is no legal distinction between executive and nonexecutive directors. Independent nonexecutive directors are nonexecutive directors who are free from any connection with the company that might affect their opinions and behavior. An example of a connection is an executive director who manages the same business in which they serve on the board of directors.

A board of directors normally has three committees: nominating, compensation, and audit. The nominating committee selects new candidates to be reviewed for positions on the board. The compensation committee reviews the executives' remuneration. The audit committee examines internal audits and reports from independent audit firms.

The United Kingdom's Financial Reporting Council set up its Combined Code on Corporate Governance in 2003. The code sets out its own view of the role of the board of directors: provide entrepreneurial leadership; set strategy; ensure human and financial resources are available to achieve objectives; review management performance; set the company's values and standards; and satisfy themselves as to the integrity of financial information and robustness of financial controls and risk management. The code also describes the role of chairman of the board of directors: the chairman leads the board, ensures there is a good relationship between the executive and nonexecutive directors, and bears primary responsibility for communications and liaison with shareholders. The code adds that the roles of chairman and chief executive should not be held by the same person. The chief executive is responsible for the day-to-day management of the company and carries out the decisions of the board. The code also requires there to be a balance between the number of executive and nonexecutive directors so that no individual or small group can dominate the board's decision making.

The Sarbanes-Oxley Act is a wide-ranging U.S. corporate reform legislation, coauthored by the Democrat in charge of the Senate Banking Committee, Paul Sar-banes, and Republican Congressman Michael Oxley. The act, which became law in July 2002, lays down stringent procedures regarding the accuracy and reliability of corporate disclosures, places restrictions on auditors providing nonaudit services, and obliges top executives to verify their accounts personally. Under the act, companies should establish an audit committee comprised solely of independent board members.

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