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What is the board of directors?

What are the functions of the board of directors ? What is the function of each member of the board ?
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categorysociety
typeunderstand
tynamite
tynamite's avatar A board of directors, in a sentence, are the people who are not a CEO, yet they still manage to own the business because they are major shareholders in it.

Any shareholder owns a % of a business, and as they are major shareholders, they can control the business by influencing managorial decisions.

That is going to need some explaining.

When you want to start a business but do not have any capital of your own to set it up, you'll need some investors. These investors can either be from a Venture Capital firm, or be an Angel Investor, it doesn't matter. What will happen if they invest in your business, is that you'll get £xxxxxxx to fund your business, in return for X% of your profits.

That investor is now a major shareholder of your business, hence they are now on your board of directors.

As you've already secured funding, that would mean that you've already signed your investor's contract, in order for them to give you the money.

Here's the thing.

Although you own your business and have "full control" over it, however you don't have control on whether your investor is going to continue funding your business (if it's not yet profitable) or if they'll sell your shares to devalue your company (if you're already profitable). (Could you imagine Goldman Sachs selling Facebook shares to Google? That would be a shambles!)

Because the board of directors represents a major source of income (or potential revenue lost) for your business, they take it upon themselves to make suggestions for how you should run your business, and what decisions should be made. This is so they can maximise their profits and prevent their money being lost. (A good example of this is when the Yahoo! board decided to fire Carol Bartz and replace her with Marrissa Mayer.)

The way that companies work, whoever has the majority share owns the business. If I run a business that is cashflow positive, I own 60% and you own 40%, if you are investing in my business, you cannot tell me how to run it, because I own it. However if I own 50% and 3 people own 20%, 20% and 10% respectively, if I decide that I want my coffee shop to sell bagels or launch outside of London, the board of directors can have a vote and outnumber me with their decisions, as they own most of the percentage. They would need 3 votes for yes to override my one vote for no. (A good example would be Facebook as nobody from the board can fire Mark Zuckerberg or tell him what decisions to make, unlike many other tech businesses.)

I hold shares in Apple, Nokia, American Airlines and more as part of the investment society I'm in, but I'm not on their board of directors, as I don't own enough shares of those companies. It's typically investors who get on the board of directors, unless someone buys loads of shares from someone else.

The board of directors that a business has, is very important and is as important as the business itself and who is running it.

A business with a different board will have different results. For example, Jimmy Wales is the co-founder of remotely hosted wiki service, Wikia, which doesn't allow users to delete their wikis, and they merge multiple abandoned wikis together at will and steal the author's traffic when they move elsewhere. Imagine what Quora would be like, if the Demand Media (eHow, Cracked) CEO was on its board, the content farm company.

I got offered unlimited funding for all my startups from some dodgy VC company, and I refused, because the contract said that I had to disclose all propetary information, roadmaps, plans, code and intellectual property. Some people like to put the business's profitability ahead of the user and are scared to cannibalise themselves or deviate from the mainstream, like when Apple's board fired Steve Jobs or Kodak. Did you know that Kodak had the first digital camera, but refused to release it until it was too late?

Unless you deal with shares, the board of directors a company has, won't be important to you.
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