Control by board: Overview, definition, and example
What is control by board?
Control by the board refers to the authority and responsibility of a company’s board of directors to oversee the management and operations of the organization. The board is typically made up of elected individuals who represent the shareholders and are tasked with making high-level strategic decisions, approving significant business actions, and ensuring that the company operates in a way that benefits its stakeholders. Control by the board involves guiding the overall direction of the company, ensuring compliance with laws and regulations, and making decisions on matters such as mergers, acquisitions, executive appointments, and financial policies.
For example, the board of directors may have the authority to approve major capital investments or decide on the company's dividend policy, while day-to-day management is usually handled by the company's executives.
Why is control by board important?
Control by the board is important because it provides governance and oversight to ensure that the company is managed effectively and in the best interests of its shareholders and other stakeholders. The board’s control ensures that the business stays on track with its strategic goals, maintains compliance with legal and ethical standards, and manages risk effectively.
For businesses, having a clearly defined structure for control by the board helps maintain accountability and provides a system of checks and balances. It ensures that major decisions are not made unilaterally by management but are subject to collective approval and oversight.
Understanding control by the board through an example
Imagine a publicly traded company, Company X, has a board of directors who are responsible for approving key decisions, such as the appointment of the CEO, changes in corporate strategy, or acquisitions. The board meets quarterly to review the company’s performance and discuss long-term objectives. While the CEO and other executives handle the day-to-day operations of the company, the board has control over major decisions, like approving the company’s budget or overseeing changes in executive compensation.
In another example, a non-profit organization might have a board of directors that controls the organization's financial policies, ensures that donations are being used according to the charity's mission, and approves major fundraising initiatives.
Example of a control by board clause
Here’s how a control by board clause might appear in a corporate governance document or shareholder agreement:
“The Board of Directors shall have the exclusive authority to approve all strategic decisions of the Company, including but not limited to mergers, acquisitions, capital expenditures exceeding $500,000, and executive appointments. The Board shall meet at least quarterly to review and approve the Company’s financial performance and long-term business objectives.”
Conclusion
Control by the board ensures that a company is governed properly and operates in a way that benefits its stakeholders. The board of directors is crucial in providing oversight, making strategic decisions, and holding management accountable for the company's performance.
For business owners, understanding the role of the board in governance is essential to ensure that decision-making is structured and transparent. By empowering the board with clear control, businesses can safeguard their long-term success and maintain good governance practices.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.