A board of directors is the group of individuals elected by a corporation's shareholders to represent their interests, oversee the company's management, and establish the corporation's major policies. The board does not run the company's day-to-day operations itself; that responsibility belongs to the officers the board appoints, most notably the chief executive officer, with the board instead focused on oversight, strategy, and accountability.
What the board is responsible for
Among a board's core responsibilities are hiring, evaluating, and if necessary removing the chief executive officer and other top officers; approving major strategic decisions such as significant acquisitions, large capital expenditures, and changes to corporate structure; declaring dividends on the company's stock; and overseeing the integrity of the company's financial reporting, typically delegated in practice to an audit committee composed of board members. The board also typically approves executive compensation and sets the framework for how management is held accountable for the company's performance.
Board structure and committees
Most boards of any size organize their work through standing committees, with an audit committee overseeing financial reporting and the relationship with the external auditor, a compensation committee setting executive pay, and a governance or nominating committee managing board composition and succession planning. Directors are generally classified as either inside directors, who also hold a management role at the company, or outside (independent) directors, who have no other employment relationship with the company, with governance best practice and stock exchange listing rules increasingly requiring a majority of independent directors on public company boards.
Fiduciary duties
Directors owe the corporation and its shareholders fiduciary duties, principally a duty of care, requiring them to make informed, reasonably diligent decisions, and a duty of loyalty, requiring them to act in the corporation's best interest rather than their own. A director who breaches these duties, for example by approving a transaction that benefits themselves at the company's expense, can face personal legal liability, which is why directors and officers liability insurance is a standard feature of corporate governance.
Why the board matters to financial reporting
The audit committee's oversight of financial reporting is one of the most consequential governance functions from an accounting perspective: it is typically the audit committee, not management, that formally engages and oversees the independent auditor, reviews significant accounting judgments and estimates with management and the auditor, and serves as the first line of defense against financial statement fraud originating from within management itself.
A simple illustrative example
A board reviewing a proposed $50 million acquisition would typically require management to present due diligence findings, financing plans, and expected synergies before voting to approve or reject the deal, with the audit committee separately satisfying itself that the acquired company's financial statements and accounting policies have been properly reviewed as part of that same approval process.
Board structure and independence
Most public-company boards are a mix of executive directors who also work inside the company and independent, or outside, directors who do not, and corporate governance codes in most developed markets now require that independent directors hold a majority of board seats, along with the entire audit committee. The point of this requirement is to reduce the risk that a board simply rubber-stamps whatever management proposes; an audit committee stacked with directors who are financially independent of the company's day-to-day management is considered far more likely to push back on aggressive accounting choices or insist on a more thorough audit than one dominated by executives reporting on their own performance.