Explained: What a company board does

When a company makes headlines for the wrong reasons, questions soon turn to the board. Here’s what a board of directors actually does, who sits on it, and what directors can be held responsible for.

Shareholders own a company, but they don’t run it day to day. That’s the job of management, led by the chief executive officer.

The board of directors sits between the two. It represents shareholders, oversees management and makes the most important decisions.

What a board does

The board’s main responsibilities typically include setting the company’s strategy and approving major decisions, such as big acquisitions, capital raisings and dividends.

It appoints the CEO, sets their pay, monitors their performance and, if necessary, replaces them.

It oversees risk management, financial reporting and audit, and the company’s culture and compliance with the law.

Boards usually do much of their work through committees, such as audit and risk, remuneration and nominations committees.

Who sits on it

Listed companies usually have between about six and 12 directors.

Executive directors work for the company, usually including the CEO, also known as the managing director.

Non-executive directors don’t work in the business. They’re meant to bring outside experience and independent judgement.

Independent directors are non-executive directors who have no material relationships with the company that could influence their judgement, such as being a major shareholder, a former executive, or a significant supplier.

The chair leads the board. The ASX Corporate Governance Council recommends that a majority of the board, and the chair, be independent, and that the roles of chair and CEO not be held by the same person. Companies that don’t follow its recommendations must explain why.

Directors’ duties

Under the Corporations Act, directors must act with care and diligence, in good faith in the best interests of the company and for a proper purpose, and must not misuse their position or information.

They must also prevent the company from trading while insolvent.

The Australian Securities and Investments Commission can take action against directors who breach their duties, and courts can fine them or ban them from managing companies.

How directors are elected

Shareholders of listed companies elect directors, usually at the annual general meeting. Directors must regularly stand for re-election, generally every three years.

Shareholders can also vote against directors, and large investors sometimes campaign to remove directors they believe have performed poorly.

Why it matters

Investors pay close attention to boards because good governance can protect a company from scandals and poor decisions. Major failures, such as those exposed by the banking royal commission in 2019, have often led to questions about whether boards were properly overseeing management.

Diversity of boards has also become a focus, with investors and governance groups pushing for more women and a wider range of skills and backgrounds.