What Does a Board of Directors Do?

What is a board of directors?

In a public company, a board of directors is a panel of people elected by shareholders to represent their interests. The board carries out various functions to both guide and assist senior management and often includes people proposed by management. Still, it’s important to remember that their purpose is to stand up for the interests of the owners of the company, i.e., the shareholders.

What are the functions of the board of directors?

In representing the shareholders, the board carries out various functions critical to management running the company. These include:

• Authorizing dividends, share buybacks, and capital allocation strategy in general.
• Establishing an audit committee (a subcommittee of the board of directors) responsible for choosing and overseeing the company’s auditor.
• The recruitment, supervision, evaluation, and compensation relating to the senior management of the company.
• Assisting with the strategic direction of the company.
• Establishing a working relationship with the chief executive officer (CEO) via a governance system, usually through a monthly board meeting.

These roles are extremely important to shareholders. If you are a shareholder who is unhappy with a company’s senior management or their compensation, the board is there to represent you in getting rid of management or adjusting their pay. If the company's strategic direction isn’t to your taste, then the board is there to take action.

Who is on the board?

Given the importance of their function, who gets to sit on the board is always a closely watched item. Usually, companies propose candidates, but a separate individual can also run, and shareholders can propose their own directors. This often occurs when an activist investor wants to shake up a poorly performing company by proposing directors of its own selection.

An example of this comes from an activist investor like Starboard Value and its agreement with agriscience company Corteva (CTVA +0.56%), which agreed to propose three independent directors of Starboard’s choice in 2021. Indeed, retail investors can follow activist investors' machinations if they believe the case for appointing new directors to improve company performance is a good one.