Mastering Board of Directors and Committees | CFA Level I Corporate Issuers
Glad you’re back! Today, we’ll explore the world of the board of directors, learn about different board structures, their responsibilities, and the various committees directors sit on. So buckle up and let’s get started!
Types of Board Structures
The board of directors is a central component of a company’s governance structure, acting as the link between shareholders and the management. The structure and composition of a board of directors vary by company and geography. Most corporate governance codes require companies to have a diverse mix of expertise, backgrounds, and competencies.
There are two main types of board structures:
- One-tier board: A single board of directors with both internal (executive) and external (non-executive) directors. Independent directors are non-executive directors with no other relationship with the company. Employee board representatives are elected by the company’s employees.
- Two-tier board: The non-executive directors form the supervisory board, while the executive directors form the management board. The two boards operate independently.
CEO duality is when the chairman is also the CEO, a situation that has become less common in recent years. To address potential issues, a lead independent director is often appointed.
Staggered boards are when only a few board positions are up for election each year on a rotational basis. This structure is becoming less prevalent.
Responsibilities of the Board of Directors
The board of directors is elected by shareholders to act in their best interest. The board’s duties include:
- Selecting senior management and planning for succession.
- Evaluating management performance and setting compensation.
- Setting the strategic direction for the company and ensuring implementation.
- Reviewing company performance and recommending corrective steps.
- Approving significant acquisitions and large investment expenditures.
- Establishing, monitoring, and overseeing internal controls and risk management.
- Ensuring the quality of financial reporting and internal/external audits.
Based on their responsibilities, the board typically establishes committees that focus on specific functions. Such committees include:
- Nominations committee: Proposes qualified candidates for board elections and aligns board composition with corporate governance policies.
- Compensation/remuneration committee: Recommends compensation for directors and senior managers, and oversees employee benefit plans and performance evaluations.
- Investment committee: Reviews and reports on large acquisitions, asset sales, and capital expenditures.
- Governance committee: Oversees corporate governance, ethics, and compliance with laws and regulations.
- Risk committee: Oversees risk management processes and recommends risk policies.
- Audit committee: Ensures financial reporting, internal controls, and audits are effective. This committee is often made up of only non-executive or independent directors.
That’s it for this lesson on the board of directors! Next, we’ll examine factors that affect corporate governance.