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Role of Directors in a Corporation

16. What is the role of “directors” of the corporation?

Corporate governance procedures under state law and the Revised Model Business Corporation Act regulate the actions of boards of directors. The Organization for Economic Cooperation and Development, Principles of Corporate Governance (2004) describe the responsibilities of the board; some of these are summarized below:

⁃    Informed – Stay informed of corporate affairs;

⁃    Ethics & Good Faith – Act ethically and in good faith;

⁃    Duty of Care – Act as a reasonable person would in the situation;

⁃    Duty of Loyalty – Act in the corporation’s best interest by avoiding self-dealing or usurping a corporate opportunity;

⁃   Planning & Guidance – Control high-level corporation decision making, such as budgeting, strategic considerations, distribution of dividends, proposal for changes in corporation structure, etc.;

⁃    Executives – Hire, determine compensation of, and oversee managers;

⁃    Election Process – Oversee the process for nominating and electing directors;

⁃    Disclosure & Reporting – Review and certify the accuracy of all required corporate reporting.

The amount of board responsibility varies a bit in closely-held firms. State law often allows a heightened role of directors in the daily management of operations.

•    Discussion: Why do you think boards of directors are vested with the above-referenced responsibilities? Should there be more or less overlap in the responsibilities of shareholders and directors? Why or why not?

•    Practice Question: Serena is elected to serve on the board of directors of ABC Corp. What will be her primary duties and responsibilities in this role?

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