A corporation is managed by directors and officers. Directors act as a group known as a board of directors. The board of directors is the corporation’s governing body. It manages the corporation’s business and affairs and has the authority to exercise all of the corporation’s powers. Corporations also have officers who are appointed by and receive their powers from the board. Generally, the board of directors is responsible for making major business and policy decisions and the officers are responsible for carrying out the board’s policies and for making the day-to-day decisions
The statutes generally provide that a board of directors may consist of one or more individuals. The number of directors the corporation will have, or a minimum and maximum number of directors that the corporation may have, are set forth in the articles of incorporation or bylaws.
Generally, any individual may act as a director. However, the corporation can provide in its articles or bylaws that an individual must meet certain reasonable qualifications in order to serve as a director.
A corporation’s first directors are either named in its articles of incorporation or elected at the organizational meeting. They serve until the shareholders hold their first meeting and elect their successors. Thereafter, directors serve until the next annual shareholders’ meeting.
Corporations may also classify or stagger their directors’ terms. Typically, the corporation must have at least nine directors in order to classify the board. In a classified board of directors, the shareholders elect either 1/2 or 1/3 of the directors at each annual shareholders’ meeting. Each director then serves a 2 or 3-year term. If a vacancy occurs on the board, it can usually be filled by either the shareholders or the remaining directors. The bylaws may provide the exact method of filling vacancies.
Directors may resign at any time. They may also be removed by the shareholders for cause or for no cause unless the corporation provides in its articles that shareholders can remove directors for cause only.
A corporation’s business and affairs are managed by or under the direction of its board of directors. Although the board has the power to make all decisions on behalf of its corporation, many business decisions are actually made by the corporation’s officers. The board of directors is, however, responsible for making certain major decisions. For example, the board is responsible for determining corporate policy with respect to products, services, prices, wages and labor relations. The board fixes executive compensation, pension, retirement, and other plans. The board decides if dividends should be declared, if new shares should be issued, or if other financing and capital changes should be made. The board of directors appoints officers. The board also proposes certain extraordinary corporate matters such as amendments to the articles of incorporation, mergers, asset sales, and dissolutions.
Directors are subject to limitations on their powers. They may not act outside the corporation’s articles of incorporation or purposes. They may not take any action that is in violation of the law. There are also actions that directors cannot take — such as amending the articles or merging into another corporation — without first obtaining the shareholders’ approval. In addition, bylaw provisions may further limit the powers of directors.
As persons in control of the property of others, directors are fiduciaries. As such, they must act in the best interests of those they serve.
Directors owe a duty of care to their corporation. This duty requires directors to stay informed about corporate developments and to make informed decisions. In addition, directors owe the corporation a duty of loyalty. This duty mandates that the best interests of the corporation take precedence over any personal interests a director may have. For example, directors cannot compete with the corporation or usurp a corporate opportunity for personal gain.
Most states have adopted a statutory standard of conduct that directors must abide by. These statutes generally provide that a director must discharge his or her duties as a director in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner he or she reasonably believes to be in the best interests of the corporation.
In discharging his or her duties, a director is entitled to rely on information, opinions, reports, or statements prepared or presented by: (1) officers or employees whom the director reasonably believes to be reliable and competent, (2) lawyers, accountants, or other persons as to matters the director reasonably believes are within the person’s professional or expert competence, and (3) a committee of directors if the director reasonably believes that the committee merits confidence.
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