How a board of directors works, and who it answers to

Every corporation has a board of directors, and it sits above the CEO at the top of the org chart. Most employees never see it and couldn't name a single member, which is normal, because the board does not run the company so much as decide who does.

What the board does

The board's job is oversight, which in practice comes down to a short list of decisions that only it can make.

It hires the chief executive and can fire them. It sets the CEO's pay, usually through a compensation committee. It approves anything large: an acquisition, a sale of the company, taking on major debt, issuing new stock. It signs off on the annual financial statements. And it decides whether to pay dividends.

Everything else, from product decisions to who gets laid off in a restructuring, is management's call. The board might ask questions, but it rarely overrules.

A big public company board has around ten or eleven members. They meet six to eight times a year, often for a day or two at a time. Directors at S&P 500 companies are paid around $300,000 a year for this, mostly in stock. It is a part-time job, and most directors have another one. A large share of them are current or former CEOs of other companies.

How directors get there

Shareholders elect the board, and on paper this is the democratic part of the structure. In practice, the board nominates its own replacements through a nominating committee, and shareholders vote on that slate. Contested elections, where an outsider runs against the board's picks, are rare and expensive. Most years, at most companies, the slate passes with well over 90 percent of the vote.

Votes are counted by share, not by person. A pension fund holding 4 percent of the company casts 4 percent of the vote. A retail investor with 100 shares casts a rounding error. Most individual shareholders don't vote at all. The large index funds do vote, and they usually vote with management.

Stock exchange rules require that a majority of directors at a listed company be "independent," meaning they don't work for the company and don't have a material business relationship with it. The audit and compensation committees have to be entirely independent. This is meant to keep the board from being the CEO's friends. Whether it works is debated, but the rule exists.

Who the board answers to

Directors owe fiduciary duties to the corporation and its shareholders. There are two: a duty of care, meaning they have to be informed and pay attention, and a duty of loyalty, meaning they can't put their own interests ahead of the company's. Break either and shareholders can sue.

Nothing in that structure gives employees a vote. Workers are not represented on US boards unless they happen to own shares, and a company's entire workforce typically holds well under 1 percent. Germany requires worker representatives on the boards of large companies; the United States does not. A bill to require it, the Accountable Capitalism Act, was introduced in 2018 and never got a vote.

So the board answers upward, to whoever owns the stock. Employees are a cost line in the reports the board reviews. No individual director chose that; the job is defined that way.

The CEO's relationship to the board

The CEO serves at the board's pleasure, and boards do fire CEOs. Turnover at large companies runs around 10 to 15 percent a year, some of it forced. At the same time, the CEO usually sits on the board, sometimes chairs it and has a hand in picking the other members. The board sees the company mostly through the information management gives it.

That tension is the whole design. An outside group with limited time and limited information is supposed to keep a full-time executive honest. It works better at some companies than others.

How this compares

At a worker cooperative, the board is elected by the employees, one vote each, and it answers to them. The mechanics look the same from the outside (a board, a hired manager, committees) and the accountability runs the opposite direction. Our post on what worker-owners actually vote on covers that side.