Who Is Responsible for Electing the Directors of a Company?

For small businesses, it’s often important to consider incorporating and establishing a board of directors. In this article, we'll discuss the details of a Board of Directors, including what it is, how it's formed, and who is responsible for electing its members. 

First, let's discuss what it means to incorporate a business and how it may be beneficial.

What Does Incorporating a Business Mean?

Incorporating a business means that the business will become its own legal entity, separate from its owners. This has several advantages, including personal liability protection and the ability to raise money via sales of shares. 

For those incorporating a new business, it’s important to file the appropriate paperwork with the secretary of state. Once a business is incorporated, an owner can then establish a board of directors.

What Is a Board of Directors?

A board of directors is a group of people elected by the company's shareholders to oversee the management of the business and make major decisions on its behalf. This includes hiring and terminating C-level company executives, making major financial decisions, and acting in the best interest of the company.

The size of a company's board varies, but it typically consists of between three and seven members. However, small companies can also have a single member on the board. So, how is a board of directors formed? 

The first time a business forms a Board of Directors, it will have to appoint–not elect–the board, meaning that the shareholders will vote to approve a slate of directors proposed by the company's management. Once the board is appointed, it will then elect its own officers, such as a president, secretary, and treasurer, and set its own meeting dates. 

Thereafter, shareholders will elect the board via annual board of directors elections. If a member wants to change the composition of the board, they’ll need to hold a shareholders' meeting and propose a new slate of directors for approval. 

Keep in mind that although company directors are often elected annually, this may not always be the case, depending on a company's bylaws. In addition, most companies have staggered board terms, which means that only some members are up for election at any given time. This can be helpful in ensuring continuity on the board and avoiding situations where the entire board is replaced at once. 

Who Is Responsible for Electing the Directors of a Company?

The shareholders are responsible for electing the directors of a company–this is typically done at the annual shareholders' meeting, where shareholders vote to approve a slate of directors proposed by the company's management. 

Some may be confused by the term "shareholder"--a shareholder is simply an individual or entity that owns shares in a company. This can be anyone from the company's founders, to its employees, to outside investors. 

Shareholders have the right to vote for the directors of the board, and majority shareholders, who own more than 50% of the company's shares, may have the power to appoint or remove directors at any time. 

It's also important to note that shareholders don't have to be U.S. citizens or resident aliens–in fact, they can be foreign entities. However, if a company has more than 20% of its shares owned by foreign shareholders, it may be subject to certain reporting requirements. 

What Is the Best Way to Elect Board of Director Members?

Today, the best option for conducting Board of Directors elections is online voting, which is the process of casting votes using the internet or another electronic device. Not only is online voting more secure and transparent than paper balloting, but it can also help improve voter turnout and keep voters engaged. 

Of course, it’s important to choose an online voting system that is cost-effective and easy to use in order to ensure voters are as clear as possible throughout the voting process.

Additionally, it’s vital to make sure that an online voting system supports both preferential and cumulative voting, which are the two most common voting methods used for Board of Director elections.

In Summary

A board of directors is a group of people elected by the company's shareholders to oversee the management of the business and make major decisions on its behalf. The size of a company's board varies, but it typically consists of between three and seven members. 

Moreover, the shareholders are responsible for electing the directors of a company. This is typically done at the annual shareholders' meeting, where shareholders vote to approve a slate of directors proposed by the company's management.