Board of Directors in United States

Practical Information

Note: Some of this information was last updated in 1982

A group of individuals elected by stockholders, who as a body manage a corporation (in U.S. law) .

Who is qualified to act as director

Any person who is legally competent to contract can be a director, unless the statute, certificate (in U.S. law) of Incorporation or bylaws (in U.S. law) provide otherwise. Ownership of stock is generally, but not always, a statutory, charter or bylaw requirement. Some statutes require residence in the state of incorporation (in U.S. law) by one or more directors; a few require United States citizenship.

Number of directors

A minimum, usually three, is generally fixed by statute; a maximum is also sometimes fixed by statute. Actually, a number within statutory limits is fixed by charter or bylaws of the corporation. This number may be increased or decreased by amendment to the charter when the charter fixes the number; or by amendment to the bylaws when bylaws fix the number.

Election

The certificate of incorporation usually names the first board of directors; statutes give stockholders the right to elect directors annually thereafter. Election must take place once a year when the statute or certificate requires an annual election; no corporate bylaw or regulation can modify a statute directing the method of election. In the absence of an election, incumbent directors are retained in office.

Terms of office

The term is usually fixed by the bylaws. Directors continue to hold office and must discharge their duties until their successors are elected.

Resignation

A director may resign at any time unless prevented by the certificate of incorporation or bylaws or by statute of the state of incorporation. A director who has made a contract with a corporation to serve a definite period is liable for damages caused by his or her resignation before the expiration of that period. Written resignation is preferable but an oral one is sufficient. Resignation should state when it is to become effective; otherwise, it is effective immediately.

Powers

The directors have power to conduct the ordinary business activities of the corporation. They are free to exercise their independent judgment upon all matters before them, without interference by the stockholders except in matters requiring stockholders’ consent. In many states the laws provide that matters affecting all the property of the company must be referred to the stockholders; for example, a sale of the assets, lease of all the assets, consolidation or merger, amendment of the charter to increase or decrease capital stock.

Liabilities

Directors must act in good faith and with reasonable care, and must handle the affairs of the corporation with the prudence that an ordinary person would use. The law presumes that they know everything concerning the corporation that they might have learned from the use of reasonable care and diligence. They are not personally liable for losses resulting from accident or mistakes of ‘judgment. Their relation to the corporation is of fiduciary nature and they are accountable to it for any secret profits. They are not to use their positions of trust and confidence to further their private interests. They need not volunteer information affecting the value of stock when trading with the individual stockholders. Directors also incur liabilities under certain federal and state statutes.

Meetings

Generally, directors can bind the corporation by their acts only when they are assembled in a meeting. Bylaws usually provide for the place of the meeting and the method of calling it. A majority of the members of the board is necessary to constitute a quorum (in U.S. law). A director cannot vote by proxy (in U.S. law) and is forbidden to vote on any matter in which the director is personally interested. It is advisable that the director leave the meeting when the board is considering a matter of personal interest, because some courts hold that favorable action will not be binding if the director’s vote is necessary to decide the question. (See director’s meetings (in U.S. law).) Figure 1 shows a convenient form for recording the meeting minutes.

Compensation

Directors are not legally entitled to compensation for performing their duties as directors or for attending meetings in the absence of charter or bylaw provision. State corporation laws rarely regulate compensation of directors. Directors who perform duties beyond the scope of a director’s duties are entitled to compensation for their services.

(Revised by Ann De Vries)

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