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Serving on a Board of Directors: What You Need to Know

A California corporation is governed at the highest level by its board of directors. The day-to-day operations of the company are conducted by the corporate officers, who carry out the policies made by the board. This article discusses some practical and legal aspects of serving on a board of directors.

San Diego Corporate Law: Elections

A corporation’s board of directors is elected by the corporation’s shareholders. Often there is an overlap between the shareholders and the directors, particularly with small and closely-held corporations. Even with giant publicly-held corporations, shareholders with large ownership percentages will often become directors. In effect, the shareholders elect themselves to the board of directors. This is perfectly legal and expected; shareholders are protecting their investment.

Board Meeting and Board Action

Once elected, the board must conduct meetings of the board of directors. As the name suggests, the directors meet to discuss various important decisions for the corporation. Meeting are generally face-to-face, but attendance can be accomplished — sometimes — via teleconference and via other remote methods. With some decisions, board action can also be taken via written board resolutions if the board members are in full agreement.

As noted, the day-to-day activities are conducted by the officers and upper level management. The board, however, must approve “important” decisions and actions. What constitutes “important” depends on the circumstances of the corporation, the size of the company, etc. It is probably safe to say that the board should be involved in any matter that will have a significant impact on the success or failure of the company. As an example, for a small business, the board is likely to be involved in and approve the purchase of a $2 million office facility or production facility or retail outlet. For a small business, a $2 million purchase is significant. On the other hand, for a giant corporation like General Motors, buying and selling properties is so routine that the board may be unlikely to review or be involved. Plus, the success or failure of a $2 million sale/purchase is unlikely to significantly impact the success/failure of GM.

As a practical matter, issues to be decided by the board tend to be “brought to the board” by upper management under the general guidance of the board. To continue our example, the board might direct that upper management must seek approval for real estate purchases exceeding $500,000. At the same time, the board can raise issues without the involvement of upper management; indeed, sometimes the board is legally obligated to discuss and vote on various matters irrespective of whether the officers bring the issues to the board.

Among the most important decisions made by the board is the hiring of upper management including the Chief Executive Officer and the Chief Financial Officer.

Legal Obligations

In voting and making decisions, each member of the board has certain duties and obligations. In general, the law requires a director to use his or her best judgment. That means a director must fully inform him or herself on the issues to be voted and consider what is in the best interest of the corporation. The director is legally allowed to rely on information provided by other members of the board, experts like attorneys and accountants, and information provided by the officers. Board members also have various other duties to the corporation such as a duty of loyalty.

Legal Liability

In general, as long as a director uses his or her best judgment and does not violate various legal duties, a director cannot be held personally liable for decisions made. So, in the above-discussed example, if the purchase of the $2 million office space turns out to be a bad business decision, in general, the director cannot be held personally liable for that decision as long as no legal duties were violated in the decision process. That being said, insurance products are available and should be purchased by the corporation to protect directors from liability.

Length of Service

Terms of office vary from corporation to corporation, but a three-year term is most common. If the board has six members, then the start-dates are staggered so that the terms of two board members end/begin each year.

Contact San Diego Corporate Law Today

For more information on this topic and other aspects of running a corporation, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard provides a full panoply of legal services for businesses including formation of corporate entities of all types. Mr. Leonard can be reached at (858) 483-9200 or via email. Mr. Leonard proudly serves business owners and residents in San Diego and in the surrounding communities.