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This post was originally an answer we posted to a question on Quora.

Boards of Directors are an integral part of a corporation. The word corporation stems from the latin corporare meaning “to combine in one body”. When you create a corporation you are, in a legal sense, creating an artificial person. (Bet you didn’t think of company founders as being in the same line of work as Dr. Frankenstein.) That artificial person can then own things and be sued, among other rights.

A problem arises in that the corporation needs to act through real people and there needs to be some basis for determining whether a CEO of a company (or anyone else) is acting for the corporation or on her own behalf.

The traditional way to solve this problem (the origins of which extend at least back into the middle ages) is to create a board of directors to oversee and be responsible for the actions of the corporation. None of the individual board members, in their capacity as board members, can act individually on behalf of the corporation. But, acting as a group they can make collective decisions for the corporation and, legally, those decisions are the decisions of the corporation, not any of the directors individually.

One decision that a board can make is to appoint a chief executive officer (who might also be a board member) with specified authority to act for the corporation. But the CEO’s ability to act for the corporation extends only as far as the board authorizes. If the board authorizes the CEO to sign contracts in value up to $100K, then the CEO can do that. After that, the CEO needs to get board approval in order for the corporation to enter the contract.

So, you might be saying to yourself, that this seems like a lot of complication and overhead. And perhaps in some ways it is. But the benefits are large. Corporations can sell shares to combine capital from many shareholders, they can enter into contracts that bind the corporation and not any of its individual directors or officers, they can shield their shareholders, directors and officers from liability by assuming that liability to themselves.

Now, in addition to all of this, there are large benefits from having a board of directors in that typically the major investors or donors to the organization sit on the board, those directors are typically great sources of advice for the organization’s management, etc.

But fundamentally, the board exists in order to provide a collective will for the artificial person that a corporation is. By the way, this post isn’t legal advice, I’m not a lawyer and you should get your own independent advice and form your own independent judgment on all these matters.

May 18, 2016 11:52 am EDT
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