A few types of folks, such as shareholders, directors and officers, are involved in making decisions for businesses. When you run a small business that is also a corporation, it is very possible to set up the business so that only one or two people make all of the decisions. Shareholders are the people who own stock, and they have the power to retain and remove directors, to amend bylaws and to dissolve the business, among other powers. Officers, such as the chief operating officer, manage a corporation day to day, and the board of directors is the group that, for better or for worse, sets the vision of the corporation by voting on financial and policy matters. Thus, it is important for anyone involved in a corporation, large or small, to understand factors that influence the effectiveness of a board of directors.
Background of the Directors
To provide the best balance and range of perspectives for a corporation, it is common for its directors to hail from a diverse assortment of backgrounds. For example, one director may be well versed in international relations, another in financial matters and another in legal matters, while yet another director is skilled in overall long-range planning. Because of time and travel constraints, a board of directors might opt to make some decisions via telephone, but in the wake of embarrassments such as what happened to Enron, there has been a trend toward more transparency with directors, and directors are required to have more of a personal stake in the decisions they make. Typical board decisions involve stock issuance, loan approvals, selection of corporate officers and what to do with real estate.
Dissents From Objectionable Decisions
As the world learned from matters such as Enron, corporate boards are capable of making shady or outright illegal decisions. Directors who allow such practices to happen face personal liability unless they lodge a dissent when the board vote occurs or in a limited time frame afterward. In addition to protecting himself or herself, the dissent of a director signals to other directors that they might want to rethink their actions. It also notifies shareholders that there are potential problems on the horizon. The overall aim of the requirement that directors must dissent to avoid liability is to urge more ethical business practices.
Time and peer pressure, whether subtle or overt, are some of the constraints that directors face. It is somewhat unusual for board meetings to allot ample time for critical discussions, meaning that directors must find the time on their own for these communications, and they cannot always do that. Directors may also fear a bounce back from other directors or corporate players if they make unpopular decisions. They must also be able to trust one another’s expertise to a certain degree since each person brings different skills to the table. This trust does not always happen, however.
Understanding of Strengths and Weaknesses
A board of directors made up of members who are aware of common pitfalls such boards face is in a good position to be proactive. For example, a board might recognize that strategies such as using consultants and pro/con charts lead to better decisions versus enabling a talkative member to take over discussions. Common traps that reduce the efficiency of boards include wasting time, not differentiating between productive and unproductive dissent and lacking enough sound information on which to make an informed decision. Self-aware boards ideally are able to correct for many of these traps.When you are a small business owner and wear several hats such as director, officer and shareholder, you still need to follow legal requirements. One occasion may call for you to sign as a director, while another has you acting in your capacity as a shareholder. It is critical for anyone on a board of directors to understand their responsibilities in that role as well as in any other roles.
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