If you listen only to National Public Radio or other media, you might think that the only purpose of a Board of Directors is to approve astronomically high salaries for the Board’s "cronies" including the CEO and other high level managers.

While one of the functions of corporate Boards is to approve the CEO’s (and other high level managers’) compensation, that is certainly not the only function.

Likewise, although attorneys tend to describe the Board of Directors in terms of legal duties, during most Board meetings legal issues are only incidental to the matters discussed by the Board. The primary function of the Board of Directors is to ensure the corporation operates its business in a way that is most beneficial to its shareholders. That means the business of the Board is taking care of business.

Strategic Direction and Supervisory Role

The Board of Directors is charged with determining the strategic direction of the corporation and supervising the business of the corporation. The key word here is "supervising". Although Board members are sometimes drawn into implementation, supervising generally involves choosing others to implement, giving them directions and ascertaining whether the implementation is effective in achieving the goals.

The monitoring and supervising part of the Directors’ job is perhaps the most difficult and time consuming. The Directors must track the performance of the CEO, COO, CFO and other high level managers to ensure that the Board’s strategic decisions are carried out. As outside directors spend only a short time meeting with management, they must assimilate large amounts of information and make decisions quickly. This requires the Board to review information before each Board meeting so that they are prepared to act at the meeting.

Outside Directors vS. Inside Directors

The Board also must supervise the management of actual and potential conflicts of interest and monitor the integrity of the company’s accounting systems and oversee financial disclosure and corporate communications.

In order to perform these business functions, it is useful that the majority of Directors be "outside" Directors who are not from inside the company and have no business ties to the company or its management team. Outside Directors who are not involved in the day to day operations of the corporation often provide valuable perspective from a distance and challenge assumptions that management makes. Having outside Directors is also useful because inside Directors may on occasion advocate their own interests to the detriment of shareholders. Also, the Board of Directors looks at the corporation as a whole, whereas many officers concentrate on their own particular area, such as marketing, manufacturing, R&D or human resources. The Board's responsibility goes beyond whether each individual area is being handled effectively to whether all areas combined are causing the corporation to achieve the overall goal.

Setting Major Policies

The Board of Directors is charged with setting major policies for the corporation. Major policies include a wide range of areas. The Board spends most of its limited time addressing the following essential business.

Strategic Direction. The Board should decide what markets the Company should pursue and what products or services to sell to those markets. Although management makes recommendations to the Board, the Board determines the areas to which the marketing and advertising as well as research and development should be allocated. Once these decisions are made, the Board continually monitors the Company’s progress and determines what changes need to be made.

Growth. The Board should make strategic decisions regarding the rate of growth, timing for growth and the manner of growth of the Company. Directors also decide whether to grow by acquisition or by internal development.

Resource Allocation. The Board should decide which part of the business should receive funds and for which purposes. The strategic decisions regarding whether to re-invest profits or to pay dividends and in what amount and when is made by the Board.

Budgets/Business Plans. The Board should ensure that the corporate budget is based on reasonable assumptions, is adequate to achieve the strategic goals of the corporation and is reasonable in light of financial resources.

Personnel Decisions. The Board also makes decisions like hiring and firing the CEO (and other officers) and compensation. A proactive Board will also seek to motivate management to maximize performance.

Finance. The Board should be proactive in anticipating the future capital needs of the company and determining when capital can be raised at the lowest cost. This function is vital to both enable the company to have the resources it needs to achieve its business plan and to avoid unnecessary dilution to shareholders.

Debt. One way to avoid dilution to existing shareholders is to borrow so that additional shares do not have to be sold to finance growth. Debt, however, has a first priority claim over the shareholders to the assets of the corporation. Therefore, taking on excessive debt can mean that the shareholders risk losing ownership of corporate assets. The Board must decide between the benefits of debt and its risks in determining whether to borrow and how much to borrow.

Financial Reporting/Accounting. The Board has an obligation to ensure the integrity of the corporation's financial information, which is important for both internal decision making and external disclosure. This means ensuring that the corporation has adequate systems in place for generating accurate financial information and that the financial statements of the corporation reflect proper accounting practices. Although the Board can rely on accounting experts, the Board must supervise the process and ensure that any deficiencies are corrected.

Securities Compliance. The Board should ensure that accurate and full disclosure is made to all investors and shareholders in SEC filings, press releases and otherwise. The Board should also ensure the corporation has policies in place to prevent insider trading.

Shareholder Relations. The Board should oversee shareholder relations and communications. Part of this investor relations function is to monitor the stock market's perception of the company and its stock price. The Board should ensure that management gets the company's story to financial markets in a way that causes the markets to fairly value the company. Directors should supervise and monitor the manner and substance of communications with the company’s shareholders and investors, whether the communications are in the form of SEC documents, press releases or articles on a web-site.

Liquidity and Exit Strategies. The Board should focus on the shareholders' natural desire for liquidity. This means developing a strategy for sale or IPO of the company or for paying dividends and evaluating all corporate action in light of whether it advances or hinders achieving the strategy.

Mistakes and Changes. The Board must decide when it and management have made mistakes and must change direction in light of new facts.

Professional Advisers. The Board must ensure that the professional advisers to the corporation (accountants, attorneys, investment bankers, etc.) have the ability and expertise that is adequate for the corporation's needs and that will enable the Board to reasonably rely on their advice as experts. The Board must ensure that its professional advisers continue to be adequate as the corporation grows and faces new challenges.

Adding Value

Surveys say that investors are more likely to invest in companies with good governance than they are to invest in companies with equivalent financial performance and weak governance. Because of the Board’s ability to attract capital to companies, a good Board, above all, will add value.

Weak Boards. A weak Board can be afflicted with an array of maladies, including poor management of its own operations, inappropriate constituency (personal or professional backgrounds of Directors are less than ideal- the "idiot brother-in-law" problem) and bad blood between the Board and the management of the company. Non-value adding Boards are deferential, reactive and focused on process instead of aggressively taking the initiative. Weak Boards also often have too many members with the same kind of experience and expertise. They do a few things well, but not the broad range of issues that Boards must supervise.

Strong Boards. For a Board to add value, it should be pro-active and anticipate changes in the market instead of merely focusing on historical data. Successful Boards are forward thinking. They motivate management to solve problems before they appear instead of merely analyzing what went wrong after the fact. Strong Boards generally include members who have experience in a wide range of areas so that the collective wisdom of the Board is broad enough to address the wide range of business matters the Board must deal with.

Partners. Management and the Board of Directors should work with one another as partners, not opponents. To add value, Boards must question the proposals of executives, strategize and assess risks instead of merely rubber stamping management proposals. At the same time, questions should be posed in ways that do not unnecessarily alienate management and some deference should be given to the depth of knowledge management has about the company and its industry.