The Importance of a Board of Directors in the Formation of a Company

To build a successful venture, CEOs and other management involved in forming a company need to know it takes teamwork and good communication. The board of directors in a company are responsible for its ultimate success or demise. Unfortunately, a board of directors may collaborate together, but each are individually accountable for anything that goes wrong.

Board of Directors having a meeting

Image Credit: Maryland/Flickr

Directors UK company formation agent have to come together before any new corporation is set up. A corporation’s board of directors have the responsibility of steering the company through the rough waters to appease shareholders. In addition, a board of directors also have other duties to perform such as satisfying legal obligations and others, such as those discussed below.

Duties

The activities of any company are entrusted to the board of directors. A company’s board is not entirely responsible for the daily decision-making, as day-to-day decisions are left to the company’s managers and executives. In other words, those who lead departments, who are responsible for daily running of the business and its employees.

Consider the following scenario…

Directors operate like a pilot at 30,000 feet jumbo jet level. They oversee everything — the big picture — and make the adjustments needed to get there. In contrast, executives operate at the 2,000 feet Cessna level, and the employees operate on the ground, driving transport trucks around to make deliveries and do pick ups.

Shareholders

The board of directors work on behalf of the company’s shareholders, making overall decisions on policies as well as providing oversight. They also have fiduciary duties to company shareholders. This means that the directors are responsible for financial control, and other crucial responsibilities which help to maintain the efficient running of the corporation. Their ultimate job is to make shareholders money.

Corporate Bylaws

Directors forming a company have great power as well as great responsibility. Corporate bylaws are responsible for setting specific duties of the directors, committees, individual board members, and officers. These bylaws establish specific duties of the directors, and also rules of rules for management operations down the chain of command. This may sound merely procedural, but the operations of company directors are key to running of the company. For instance, the board can vote moving to a new location, or change in major services or products.

Shareholder meeting

Image Credit: ITF/Flickr

Primary Duties of Directors

Fiduciary responsibility

A board of directors have a fiduciary responsibility in caring for the legal requirements and finances of the corporation. Therefore, they have to act in good faith, and with a very reasonable degree of care. The company’s interests have to take precedence over the any of the board members’ personal interests.

Vision and Mission

The board of directors in a company are solely responsible for setting the company’s vision and mission, as they ensure that all actions being performed adhere to, and are related to that mission. The directors may also change the vision or mission as needed. All large companies have vision and mission statements, and both are the very first things directors forming a company tend to work on.

Oversight

A board of directors in a corporation do not participate in daily decision-making. They instead delegate to lower management and focus on the big picture. They are also involved in oversight functions, as they regularly review the actions of corporate executives and officers.

Annual Meeting

At the corporation’s annual meeting, the directors do announce the annual dividend, amend corporate bylaws, oversee the election of new board members, and appoint key executives and officers.

Liability

Directors in most cases do have a fair bit of latitude in duties they perform as the company board members. They must always be free to act in the best interest of the company shareholders, running the corporation as best as they can to maintain profits and maintain the company image. More often than not, they end up taking big risks to assist company growth. Most companies have director and officer liability insurance. However, it should be noted that this insurance does not provide protection against certain lawsuits against board members.

Important Point to Note…

A renowned Business Insurance Expert known as Gregory Boop says that “Directors and executives can be individually sued for errors or acts they commit during their service to the corporation”. Additionally, if an officer or director is found to be guilty of a wrongful act, their personal assets may be used to pay for damages to the particular plaintiff.”

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