In our previous blogs, we have been studying, interpreting, and discussing the various principles of corporate governance.
Board committees constitute a vital and important element of the governance process. Countless demands are placed on boards by the public, regulatory bodies, shareholders, and stakeholders, resulting in boards needing to make the most efficient use of their time to make calculated and effective decisions. Boards, therefore, appoint board committees to deal with specific issues that require specialised areas of expertise.
The board’s responsibility is to determine if and when particular roles and responsibilities need to be delegated to an individual member, board members, or a specific committee. In this regard, the exercise of judgement by the governing body is subject to legal requirements to ensure that decisions are guided by what is appropriate for the organisation to achieve its objectives. If the board decides to withhold responsibilities that are usually assigned to and dealt with by a specific committee, it must fulfil those obligations.
The King IV Report on Corporate Governance™ (King IV™) recommends that the delegation of power, duties, and responsibilities to an individual board member(s) be official, recorded in writing, and approved by the board, and reviewed annually. The formalisation of this process allows members to have formal terms of reference to determine the scope of their authority, provide guidance, and determine decision-making powers, the committee’s tenure, reporting responsibilities, and performance evaluations.
The terms of reference guide the committee and should include the following:
- Composition of the committee
- Objectives, purpose, and responsibilities
- Delegated authority
- Mandate to make recommendations to the board
- Process for accessing resources and information
- Meeting procedures
- Lifespan or tenure of the committee
- Committee’s reporting requirements to the board
Each appointed committee must possess the necessary skills, knowledge, and experience to perform and fulfil its duties effectively. There are crucial factors to consider when the board determines membership composition and the allocation of roles and responsibilities across committees.
The board is responsible for an even and balanced distribution of power within committees – making comprehensive and knowledgeable decisions to ensure the effective collaboration between committees and the avoidance of the duplication of tasks and responsibilities. The definitions of specific roles and positioning of committees are vital for cross-jurisdiction to guarantee a balanced approach between different committees.
The board can classify committees as standing or ad hoc. A standing committee is smaller than the full board and needs to have at least three members, subject to legal provisions. The committee has defined goals and responsibilities delegated by the board. Members of the executive and senior management should be invited to attend meetings to provide them with valuable information and reports regarding their specific areas of expertise.
The standard statutory* and board committees are:
- Audit committee*
- Social and ethics committee*
- Risk committee
- Nomination committee
- Remuneration committee
In addition to statutory and board committees, some boards form ad hoc committees or task forces when a specific need is identified. Each ad hoc is unique, so the answers to questions concerning meeting frequency, membership, and size will vary. Ad hoc committees allow the board to concentrate on pressing issues and avoid occupying the board members’ time with activities that are not of strategic or long-term importance. Typical ad-hoc board committees include campaign committees, event committees, and research committees.
It is important to remember that the delegation of responsibilities to a committee or board member will not absolve the board of its responsibilities. The board should work together in unity, applying its collective mind to opinions, information, recommendations, statements, and reports.
Committees are crucial to ensure harmonious and strategic functioning in a company. They allow for the utmost efficiency, time management, and balance of responsibilities and duties, providing strong accountability and effectiveness.
As experts in corporate governance, we can assist you with establishing statutory and board committees at Okina Company Secretarial Services. We can also help if you have created a committee but are unsure of how to make it work effectively and efficiently. Contact us at email@example.com.