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Boardroom basics: Why this e.l.f.ing matters!

Who sits on a company’s board of directors is a BIG deal.

What is a board of directors?

A board of directors is a group of individuals that are elected by the company’s shareholders to generally oversee the company’s business. Their primary role is to represent the company’s shareholders.

A board provides strategic planning and oversight, selects C-suite executives, and protects the interests of the company’s shareholders.

They make important decisions in a company, and that’s why it’s important for boards have a wide variety of personal and professional experiences to pull from. Unfortunately, they often don’t. The average U.S. corporate board room is 88% white, and only 27% women, which is wild, because research has shown companies with ethnically and gender-diverse boards are more likely to financially outperform those that don’t.*

Why is a board important and what does a board do?

In simple terms, the board makes important decisions for the company. The board assesses the overall direction and strategy of the company, approves material transactions (like acquisitions and major investments), approves capital allocations and dividends, establishes a governance program, and oversees the company’s risk management.

The CEO and other C-suite executives (think: CFO, CMO) are responsible for the day-to-day operations of a company. They make thousands of decisions every day about how the company operates, what products it sells, how it treats employees, and many other things..

The board gets to decide who wields that power—this is an important choice in determining a company’s future outcome, and outcomes it creates for its employees, customers, shareholders, the climate and society at large.

Because the board sets the tone for a company’s mission and vision, and figures out what the company’s goals should be, who sits on the board and what experiences they represent is crucial.

Do directors have special responsibilities or duties?

Yes! Directors have fiduciary duties of loyalty and care to the company and its shareholders.

The duty of loyalty means that a director must put the interests of the company and its shareholders over the director’s own personal interests in making decisions for the company and evaluating opportunities.

The duty of care means that a director must exercise care in making decisions as a director, based on adequate information and a good faith belief that the director’s decisions are in the best interest of the company and its shareholders.

Directors can be held legally liable by the company’s shareholders if they breach their fiduciary duties.

Who can serve on a board?

Anyone with the right experience can serve on a board!

Generally a board will include a few company executives, such as the Chief Executive Officer or the Chief Financial Officer. Other board members may include representatives of large shareholders of the company or other individuals with experience in a relevant industry or that have certain desired skills. Think C-Suite executives from other companies, seasoned professionals, founders, subject matter experts, etc.

Public companies that trade on the NYSE (like e.l.f. Beauty) or Nasdaq are required to a majority of the directors on the board be “independent”. That means those directors cannot have a material relationship with the company (such as being a large shareholder or an executive for a major supplier/customer), cannot be members of the company’s executive team, and cannot be involved in the day-to-day operations of the company. Independent directors help provide an unbiased view for the board and company management.

How do boards get selected?

Directors are elected by the shareholders of a company, generally at the company’s annual shareholder meeting—in the case of vacancy, however, the board can appoint someone to fill that vacancy until the next shareholder vote. Term lengths for directors vary based on the company’s governing documents.

Suggestions for candidates for a board come from many different sources—current directors, executives, director search firms, and shareholders.

All suggested candidates for a board are vetted by a committee of the board (often called the nominating committee or a similar name), which will then recommend candidates to the full board for approval. The full board will then vote to approve whether the candidate is appointed to the board (if there is a vacancy) or put to the company’s shareholders for a vote.

In addition to suggesting candidates to the board, all shareholders have the right, assuming they comply with required procedures, to put their own candidates to the company’s shareholders for a vote. Shareholders that directly nominate candidates are sometimes called “activist investors”. If a shareholder put its own candidate(s) to the company’s shareholders for a vote, there will be a brief period of time where all candidates can campaign for a seat on the board (similar to elections for office in the U.S.). Eventually an election is held, the votes are counted, winners are declared, and the board is seated.

Why do people serve on corporate boards?

To help shape the direction of a company, give insights and advice from their experience and get a chance to lead a company’s future. Plus, it’s a pretty sweet job to get to call the shots.

Do board members get paid?

Yep! Independent board members at public companies are often paid for their services, and at least partially in stock. This helps align the incentives of the board with the company’s shareholders. Doing better business for the company means more money for the directors!

* Source: Mckinsey & Company, December 2023
** Source Mckinsey & Company, January 2018

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