Board of directors
Also known as: corporate board, the board
A board of directors is the group of individuals elected by a corporation's shareholders to oversee management and represent shareholder interests. The board sets strategy, hires and monitors executives, and declares dividends.
A board of directors is the governing body of a corporation, elected by the common shareholders to represent their interests. Because shareholders own the company but do not run it day to day, the board sits between owners and management: it hires and evaluates senior executives, approves major strategic decisions, and monitors how the company is run.
Boards exercise several concrete powers. They declare dividends (shareholders do not vote on dividends), approve stock splits and major transactions, and set executive compensation. Shareholders elect directors through either statutory voting, where each share carries one vote per open seat, or cumulative voting, which lets a shareholder concentrate all votes on a single candidate — a structure that benefits smaller shareholders.
Good corporate governance depends on board structure. Independent directors — those without management or material business ties to the company — provide objective oversight, and key committees such as audit, compensation, and nominating are typically composed of them. Investment companies face their own requirement: a mutual fund's board must include a minimum proportion of directors independent of the fund's adviser.
The topic spans several exams. The SIE tests the shareholder's right to elect the board and the board's role in declaring dividends, while the CMA Part 1 and ACCA Financial Accounting exams test the board's corporate governance responsibilities, including oversight of financial reporting and internal control.
Key takeaways
- The board of directors is elected by common shareholders to oversee management on their behalf.
- Boards declare dividends, approve major corporate actions, and hire and monitor senior executives — shareholders do not vote on dividends.
- Statutory voting gives one vote per share per seat; cumulative voting lets shareholders concentrate votes and favors smaller investors.
- Independent directors and committees like audit and compensation are central to sound corporate governance.
- The SIE tests shareholder voting rights, while CMA and ACCA exams test the board's governance and financial reporting oversight.