The Board of Directors 511company has problems, the owners need to know about these problems so that
they can take any necessary remedial action.
A corporation may have many shareholders; American Telephone & Tele-
graph Corporation has 2.6 million. Individual shareholders obviously can’t gov-
ern the company directly; moreover, most of them are engaged in their own
pursuits and will not give much, if any, time to governance. They elect people
to act for them. This is the board of directors.
SIZE AND COMPOSITION OF THE BOARD
The typical board has about 11 members. Some boards, especially those in
banks, are much larger. Large boards must delegate much of their work to an
executive committee for overall matters and to several committees for specific
topics.
Most board members typically are “outside directors”; that is, they are
not employees of the corporation. At one time, most board members were “in-
side directors,” and this is still the case in a few boards. The trend toward out-
side directors results from the shareholders’ recognition that the board should
have a significant degree of independence from the company’s management.
The board is responsible for selecting, appraising, and compensating manage-
ment. If the board and management are the same people, the board can hardly
perform its governance role in an objective manner.
Many outside board members are CEOs or senior officers of other corpo-
rations (but not competitors). Other outsiders are lawyers, bankers, physicians
(on health-care boards), scientists and engineers (on high-tech boards), retired
government officials, and academics. A few people are professional board
members; that is, their principal occupation is serving on boards. The number
of female and minority board members has increased substantially in recent
years. The CEO and perhaps one or two senior members of management typi-
cally are members of the board.
Board members are compensated. Generally, they receive an annual re-
tainer plus a fee for meetings attended. In addition, many companies offer
some form of stock compensation and retirement benefits. According to a
Conference Board survey, the median basic annual compensation in manu-
facturing companies for 1999 (not including stock components) was $35,000.
When the value of the stock component was added, compensation totaled
$46,000.
Board members are elected at the annual meeting of shareholders. The
shareholders almost always elect the slate proposed by the incumbent board;
thus, as a practical matter, the board is self-perpetuating. The process of se-
lecting candidates for filling board vacancies is an important board function.
Many have staggered terms; that is, one-third of the board members are
elected each year for a three-year term. This practice is intended to make it
more difficult for corporate raiders to obtain control of the company.