The Many Roles of Boards of Directors
“You’re fired!” is a commonly used phrase most closely associated with Donald Trump as he dismisses candidates
on his reality show, The Apprentice. But who would have the power to utter these words to today’s CEOs, whose
paychecks are on par with many of the top celebrities and athletes in the world? This honor belongs to the board
of directors—a group of individuals that oversees the activities of an organization or corporation.
Potentially firing or hiring a CEO is one of many roles played by the board of directors in their charge to provide
effective corporate governance for the firm. An effective board plays many roles, ranging from the approval
of financial objectives, advising on strategic issues, making the firm aware of relevant laws, and representing
stakeholders who have an interest in the long-term performance of the firm (Table 10.1 “Board Roles”). Effective
boards may help bring prestige and important resources to the organization. For example, General Electric’s board
often has included the CEOs of other firms as well as former senators and prestigious academics. Blake Mycoskie
of TOMS Shoes was touted as an ideal candidate for an “all-star” board of directors because of his ability to fulfill
his company’s mission “to show how together we can create a better tomorrow by taking compassionate action
today (Bunting, 2011).”
The key stakeholder of most corporations is generally agreed to be the shareholders of the company’s stock.
Most large, publicly traded firms in the United States are made up of thousands of shareholders. While 5
percent ownership in many ventures may seem modest, this amount is considerable in publicly traded companies
where such ownership is generally limited to other companies, and ownership in this amount could result in
representation on the board of directors.
The possibility of conflicts of interest is considerable in public corporations. On the one hand, CEOs favor large
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salaries and job stability, and these desires are often accompanied by a tendency to make decisions that would
benefit the firm (and their salaries) in the short term at the expense of decisions considered over a longer time
horizon. In contrast, shareholders prefer decisions that will grow the value of their stock in the long term. This
separation of interest creates an agency problem wherein the interests of the individuals that manage the company
(agents such as the CEO) may not align with the interest of the owners (such as stockholders).
The composition of the board is critical because the dynamics of the board play an important part in resolving the
agency problem. However, who exactly should be on the board is an issue that has been subject to fierce debate.
CEOs often favor the use of board insiders who often have intimate knowledge of the firm’s business affairs.
In contrast, many institutional investors such as mutual funds and pension funds that hold large blocks of stock
in the firm often prefer significant representation by board outsiders that provide a fresh, nonbiased perspective
concerning a firm’s actions.
One particularly controversial issue in regard to board composition is the potential for CEO duality, a situation in
which the CEO is also the chairman of the board of directors. This has also been known to create a bitter divide
within a corporation.
For example, during the 1990s, TheWalt Disney Company was often listed in BusinessWeek’s rankings for having
one of the worst boards of directors (Lavelle, 2002). In 2005, Disney’s board forced the separation of then CEO
(and chairman of the board) Michael Eisner’s dual roles. Eisner retained the role of CEO but later stepped down
from Disney entirely. Disney’s story reflects a changing reality that boards are acting with considerably more
influence than in previous decades when they were viewed largely as rubber stamps that generally folded to the
whims of the CEO.
Table 10.1 Board Roles
William Shakespeare once wrote, “All the world’s a stage, and the men and women merely players.” This analogy
applies well to boards of directors. When the performance of board members is impressive, the company is able
to put on a dynamic show. But if a board member phones in their role, failure may soon follow. We discuss the
different roles board members may play below.
Accountant Board members may, at times, approve financial objectives.
Lawyer Ensuring the firm complies with applicable laws is a key role.
Advisor Providing advice on strategic issues is a critical role that is overlooked by less effective boards.
Activist Boards must ensure the rights and interests of stakeholders (especially stockholders) are represented.
Human Resource
Manager Boards must monitor the CEO and engage in hiring, firing, and the administration of CEO compensation.
Agent Because board members may serve in powerful positions at other companies, a well-networked board member may
be able to bring new connections to the firm.
Managing
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