Crucial Considerations For The Composition of The Board of Directors

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In a corporate context the Board of Directors (the “Board”) is the most important governing body for the corporation. The Board holds ultimate responsibility for the business and affairs of a company. Other than items also requiring the vote of the shareholders, the business and affairs of the corporation are managed, and all corporate powers are exercised by or under the direction of the Board. The Board discharges its duties in a number of ways, including the following:

  • It appoints the officers who run the day-to-day operations of the company, including key officers such as the CEO and CFO and other officers and supervises those officers. 
  • The Board makes major decisions for the corporation putting into effect and generally driving the business plan for the corporation. 
  • The Board first approves key transactions before recommending to the shareholders actions or matters required to be approved by shareholders under law- for example, the Board will approve major sale transactions involving the corporation (e.g. mergers and acquisitions and sales of significant assets of the company);
  • The Board approves other major decisions to record the business approval of major actions that might impact the company and in order to reflect their agreement and discharge of fiduciary duties to the company and the company shareholders; 
  • The Board should approve major commercial transactions; large debt transactions; joint venture transactions; executive compensation; and interested party transactions, recommending also disinterested votes to approve such transactions, as applicable;
  • The Board approves amendments to governing documents such as bylaws amendments, amendments to articles of incorporation (e.g. to authorize more or different classes or series of capital stock of the corporation, or to otherwise adjust the rights, preferences and privileges of the existing stock), or other relevant documents;
  • The Board declares and approves dividends or distributions to the shareholders;
  • Board decisions reflect a decision of the company.  If an instrument requires “company” approval for changes or amendments to that instrument, the Board should document its approval in minutes or resolutions rather than just having an officer sign such amendments or changes on behalf of the company to show that the company/Board actually did approve the same.

The Board members owe duties of care and loyalty to the corporation and the corporation’s shareholders. It’s important that in discharging such duties the board members are not conflicted and do not put their personal interests above the interests of the corporation and the shareholders and that they act in good faith to promote the corporation’s and shareholders’ interests. It’s also important to document decision-making by the Board because of these duties and have an ability to therefore demonstrate through minutes or resolutions that board members received all necessary information to make informed decisions and did make such informed decisions (e.g. related materials were circulated to the Board, the Board understood the decision before it and fulfilled its obligations of care and loyalty having been duly informed, performed necessary diligence and having considering the interests of the corporation).  Because of the importance of the Board to the business of a corporation, the Board should be appointed very carefully by shareholders and the composition of the Board should be carefully maintained. Certain challenges arise as to decision-making efficiency and fiduciary duties obligations, among in other circumstances, when:

  • There is an even number of directors and board members reach impasse because they cannot agree (e.g. there is no tie-breaker vote);
  • There are too many directors (too many cooks in the kitchen to make decisions);
  • There is a conflict of interest (e.g. there is only one board member and that board member is approving his or her own compensation package);
  • When the board reflects an imbalance of interests (e.g. too many representatives of a particular group verses another particular group); and
  • When there are too many non-voting board observers in the room (e.g. slowing down voting board members).

The above issues and responsibilities should be considered in appointing the Board and in maintaining the Board on an ongoing basis. Companies should be cautious to grow their boards of directors too quickly and at an early stage since over-sized or improperly composed boards of directors can cause the company to be inefficiently or improperly administered and managed. 

At Rogoway Law Group, we assist our clients with governance issues and concerns that arise at all life stages of a company. We are aware of the common pitfalls and difficult politics that arise at the board level and are ready and equipped to be of assistance in navigating these difficult governance matters. We additionally understand the pressures founders encounter when considering how to comprise their boards of directors and can help provide business-legal advice as companies undergo this challenging process.

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