What are corporate boards of directors supposed to do, exactly?
What are corporate boards of directors supposed to do, exactly?
Tell me if you’ve heard this one before… The former co-CEO of Salesforce, a former U.S. Treasury Secretary and the former chief tech officer at Facebook walk into a conference room together, and voila! You have the new interim board of directors for the best-known AI company in the world.
You might have heard, OpenAI’s old board of directors got into a bit of a spat with CEO Sam Altman. That old board is mostly gone, but Altman is still there. Now, OpenAI is technically a nonprofit and has its own weird corporate governance structure. But boards of directors are by law a staple of every U.S. corporation.
Which got us wondering, what exactly does a board of directors actually do?
The origin story for boards of directors dates back to the guilds of medieval England. Blacksmiths and fishmongers and seafaring merchants would elect a council to set industry rules.
When those councils met they sat on a bench, which they called a board. Lumbar support was a luxury reserved for the council leader.
“Everybody else sat on the bench next to the table. The chair at the head of the table is the chair, that’s how they got the title chair,” said Frank Gevurtz, a professor at the University of the Pacific’s McGeorge School of Law.
With the rise of the first big corporations like the British East India Company, that council evolved into modern boards of directors, elected by shareholders.
“Its purpose in many ways is to be a democratic institution, so that we can say there is somebody that’s elected, whose in charge,” Gevurtz said.
The average Fortune 500 company has a board of about 11 members, give or take. For publicly listed companies, stockholders elect the board annually. Private corporations also have boards, often appointed by private investors.
Boards members typically meet every quarter and get paid hundreds of thousands of dollars. Sweet gig!
“We’re talking about people in the highest, highest echelons of the business world. Very typical to find people who are CEOs of other major corporations, people who have very high level executive experience,” said Yo-Jud Cheng, an assistant professor at the University of Virginia’s Darden School of Business.
Cheng said board members have to be available in times of crisis or scandal and help set strategic goals for the organization. But the number one job is basically to make sure the people running the company are doing their jobs.
“One of the core responsibilities is hiring and firing the CEO and as we’ve seen, that can have huge implications for the direction of an organization,” Cheng said.
And that can be pretty awkward, because CEOs are often on the boards of these corporations.
Law school professor Frank Gevurtz said CEOs also have major sway on who sits on the board in the first place.
“Kicking out the CEO, that, ironically, is something that boards historically are reticent to do and the complaint is they don’t do it enough,” Gevurtz said.
And even if they do … sometimes the CEO doesn’t stay fired.
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