The basic structure of a board of directors varies depending on the needs of the organisation and any specialties within a specific industry, such as its regulatory environment. You can have boards as large as 30 members (non-profit boards) or as small as nine members (typical for a Russell 3000 company).
The number of directors on any organisation’s board depends on the needs of the organisation and is mandated within the bylaws. If a board is too small, members are stretched thin. If it’s too large, it can be challenging for the board to operate as a group. This means that every organisation needs to determine what’s optima in order to ensure that the board serves to help – not hinder – performance.
What Are Bylaws?
At the top line level, the bylaws of an organisation outline:
- How many board members are required
- The method for electing new members
- Frequency of board meetings and meeting rules
- Specific voting rights
- Officer positions and responsibilities
As boards represent the shareholders and owners of the organisation, it is understood that their role is to act within the best interests of these stakeholders. If you are going to serve on a board, you should consider what size of team you are comfortable working with. Do you prefer a small knit team or a larger board where you have greater exposure?
To strike a balance between the internal requirements and external expectations, it is usual for a board to have both internal organisation members and external members – the latter being brought in for their skills and/or specific industry expertise. To be able to effectively guide the board on decision-making, a well-managed board will have a board skills matrix in place.
What Is a Board Skills Matrix?
This matrix lays out the skill requirements that the board believes it should have, and helps in the recruitment process by managing the required skills, characteristics, and capabilities when a board is replacing a member or expanding the organisation’s board structure. In recent years, many boards have been tasked to develop new parameters aimed at developing more diversity and attracting participation from people who represent the wider customer base served by the organisation.
Diversity is bigger than just gender and race. It includes culture, age, education, socio-economic status, and especially mindset. With rich and relevant board dynamics, boards will be better able to meet the needs of their customers, relate to their pain points, and support improved performance. In general, boards benefit from including individuals with a broad mix of leadership skills, backgrounds, experiences, and perspectives.
Why Do Boards Require Team Effort?
Serving on a board of directors is a team effort. It takes the right attitude, the right level of commitment, and the right mix of personalities. As a collective effort, everyone has a vital role in getting it right. Good board governance includes having clearly defined roles and responsibilities, usually through a job description.
It also involves regularly scheduled reviews of member recruitment and activity to ensure the board is running smoothly and staying focused on tasks, and that every member is living up to their fiduciary duties (i.e. their commitment to act in the organisation’s best interests). Directors who hold particular roles on the board also carry additional responsibilities. There are a number of common board roles, with specific responsibilities associated with each. Examples include:
- The President or Chairperson is responsible for leading the board and usually works most closely with the CEO of the organisation.
- The Vice President of the board is responsible for specific assignments from the board chair and will assume the role of President when he/she isn’t available.
- The Secretary prepares and maintains important records, such as meeting minutes and committee reports.
- The Treasurer has the responsibility of monitoring finances, and may work with other board members to develop financial plans.
Why Is It Important for Directors to Know Their Fiduciary Duties?
Many at times, when appointed to a directorship of an organisation, people are taken up with their director responsibilities and are often unaware of their fiduciary duty obligations. On a high level, fiduciary duties require board members to stay objective, unselfish, responsible, honest, trustworthy, and efficient.
Any breach of fiduciary responsibilities could have devastating implications – including both collective and personal liabilities for the board directors. It is very important, therefore, that directors know what their duties are and what is expected of them at all times throughout the decision-making process during their time as board members, as there are possible legal ramifications.
A board director who is diligent about their fiduciary duties helps to protect the organisation’s reputation. The word ‘fiduciary’ is all about trust and, under corporate governance law, that is what’s required of directors. Specifically, there are three key duties that every board member must adhere to:
- Duty of Care
- Duty of Loyalty
- Duty of Good Faith
They may sound pretty simple, but each carries its own legal requirements.
1. Duty of Care
The duty of care refers to the process and manner in which boards make decisions concerning the future of the organisation. This duty focuses on the need to be thorough, with a need to investigate and research any potential impact of decisions made. It seems straightforward, but given that an organisation has a responsibility of continuity – and a duty to take future strategy, goals, and vision into account – it could prove disastrous if the decision made today is short-sighted.
2. Duty of Loyalty
This is the duty to never let any outside interests, personal affiliations, or allegiances interfere with their responsibility as a director. Board members are expected to not engage with personal or professional dealings that put their self-interest or that of another person/business above the interest of the organisation.
To shed some light on what this could look like, some of the ways this has burned directors in the past include gaining secret profit that belongs to the organisation, competing directly with the organisation, or using their position to deal directly with the organisation as a vendor or partner.
3. Duty of Good Faith
The duty of good faith implies that after members have explored all options related to a decision, they must choose the one that they believe best serves the interests of shareholders. According to Cornell Law School: “A violation of the duty of good faith may include an intentional derelict in the usual duties of a director or officer, intentionally acting for a purpose other than the benefit of the corporation or intentionally violating the law.”
These duties sound clear enough, but they are generally based on law, and if a director chose to follow a path that they truly believed was the best option for the business, the law protects them from liability. There are circumstances that make a director liable to the corporation and, sometimes, to its creditors, shareholders, or other people for any losses caused by their inability or failure to exercise due care. A director typically breaches their duty in one of two ways: they may commit overt acts that constitute mismanagement or simply just not to act on important topics, which can also be construed as a failure to direct.
These legal responsibilities are also why a number of people shy away from board service. Yet, if you are acting with good faith and fulfilling your duties, there’s nothing to shy away from. It is also another key reason to stay on top of reviewing the minutes of every board meeting. If you are absent, you want to be aware of what happened in your absence. And if you were there, you want your input and objections officially noted. Serving on a board is a privilege – and with every privilege, comes responsibilities.