Corporate Boards 102: Public, Private & Nonprofit Board Structure
Because board members have an enormous responsibility to their organization, I wondered what the makeup of these boards is. What I have learned is the size of a board of directors can be anywhere from a handful of people to a large number and is made up of individual men and women who are elected by the shareholders for multiple-year terms.
A company's shareholders vote at annual general meetings on the formation of the board of directors. Many companies operate on a rotating system so that only a fraction of the directors are up for election each year. Many public companies require that at least 50% of their directors meet the requirements of "independence," meaning they are not associated with or employed by the company.
The responsibilities of the board of directors include the establishment of the audit and compensation committees. The audit committee is responsible for ensuring that the company's financial statements and reports are accurate and use fair and reasonable estimates. The compensation committee sets base compensation, stock option awards, and incentive bonuses for the company's executives, including the CEO.
Established public and private company formal board of directors are compensated for providing their services, with the amount dependent on the company. Advisory boards, especially for start-up or smaller companies, are not generally paid for their services but are an excellent starting place if you’re interested in becoming a corporate board director.
As anyone with a background in business knows, there are two general categories of organizations: stock corporations and non-stock corporations. Public corporations are large companies that actively trade on exchange markets such as the New York Stock Exchange. They must adhere to strict rules, and their revenue must reach the multimillion-dollar range. Private corporations are companies that don't participate in exchange markets and have fewer rules and requirements.
The differences in the specific requirements for the board of directors for both companies are considerable. Public corporations usually request that their board members hold a wide range of expertise in different areas and often ask that they commit to a large number of hours per year of meeting time.
Conversely, private corporations are family-owned businesses, private equity-owned portfolio companies, solo entrepreneurs, ESOPs (employee-owned), or partnerships, with their board of directors usually viewed as primarily strategic advisors since they do not have to adhere to as many government regulations. In other words, generally public corporations’ boards focus more on regulation and compliance whereas private company boards are about mostly providing the owner(s) with strategic direction and advice.
What about nonprofit boards? The duties of every nonprofit board member need to adhere to many different categories, including complying with all federal, state and local regulations, ensuring that every decision they make and every vote they take falls squarely within their vision and mission, ensure the organization has a strong and effective leader, and oversee all financial matters, including participating in fundraising. Large nonprofits are excellent grooming places for future corporate board consideration.
It is now clear to me that being a board director for any company is an enormous responsibility that can be very fulfilling, especially when the board member’s values align with the culture and mission of the organization.
Next week’s topic in this Corporate Boards 101 series: the value of gender diversity on corporate boards to the corporation and to the country.
Christine Krause is a marketing team member for the 2020 Women on Boards 8th Annual Conversation on Board Diversity – Chicago. This series, Corporate Boards 101+, will highlight her experience and learnings as a newcomer to the important work of board diversity.
