Committees provide a formal way for boards to delegate tasks that are their responsibility, but that they wouldn’t be able to follow through on responsibly because of time constraints. In fact, boards need to rely on committees much more than they have in the past. Regulators, shareholders and others expect board directors to be more diligent than they have been in the past. Board directors are more commonly held accountable for failings than they’ve been in the past. Committees have adequate time to research and discuss issues before providing a summary or recommendations to the full board. Committees help the board work more efficiently.
Board portals are an efficient tool for board committees to complete their work. A board portal provides a secure online space for committee members to communicate and collaborate.
Board Director Committee Basics
Depending on the size of the corporation, boards may have many committees, a few committees or no committees at all. The important thing is that boards can form committees at any time to delegate the work that the full board isn’t able to do.
The committee charter spells out the duties, authority and limitations of the committee. Committees usually have a chair and sometimes a co-chair as well. The charter spells out whether the committee is a standing committee or an ad hoc committee that just meets for a specified period of time.
The audit committee is usually a standing committee, but the committee members may not meet on a regular basis. It’s more likely that they only meet at a specified time of year, such as the active period in the audit cycle.
Boards form ad hoc committees when they need a group of people to work on a certain project or issue. Ad hoc committees dissolve when their work is complete.
In most cases, only board directors serve on committees. Certain committees may require the assistance of executive directors or other experts to provide additional knowledge and expertise. For example, it’s common for boards to invite at least one executive director on the nominating committee because senior executives often transfer to the board of directors upon retirement.
Executive directors who serve on the board must be mindful to act independently and avoid conflicts of interest. Boards must choose committee members wisely. Committee members should possess the skills and expertise that the committee needs. In particular, the audit committee must have at least one individual on it who has strong financial experience. Committee members must also realize that committee work is in addition to board work and they must manage their time wisely, so they have sufficient time to fulfill their board work and their committee responsibilities.
Regulations require some corporations to form audit committees. Most corporations follow best practices for good corporate governance and set up audit, remuneration and nomination committees. Boards may also form ethics and risk committees.
The Role of the Audit Committee
Audit committees are an integral part of risk management and internal control systems. Members of the audit committee recommend sources for identifying external auditors and oversee the relationship with the external auditors during audit season. Audit committees are responsible for setting the terms of engagement for auditors, as well as their remuneration.
Because major corporations have been caught in falsifying information, the audit process is usually scrutinized carefully. It’s important for board directors to have relevant professional and regulatory requirements, financial expertise and financial experience. Audit committee members provide the link between internal and external auditors to ensure the quality of financial statements, prevent fraud and advise the board on the next steps to take after an audit.
The Role of the Remuneration Committee
Shareholder activism has been increasing, which is placing remuneration committees in the spotlight. Shareholders are greatly interested in the annual general meeting and they have a vested interest in the amounts of executive pay. The media and the legislators also keep tabs on executive pay rates.
Remuneration committee members must be aware of issues such as independence, transparency and conflicts of interest when making decisions about director and executive pay. There are no simple answers on how remuneration committees decide on pay rates; however, best practices suggest that board director and executive pay should be aligned with the long-term success of the company.
Regulations may require disclosures on remuneration for key executives. Board directors should not be involved in making decisions on their own remuneration, so executives don’t serve on remuneration committees. In fact, most remuneration committees are comprised of all, or mostly, independent board directors.
Disclosures give investors the opportunity to assess whether remuneration plans are appropriate and aligned with the corporation’s objectives for the short and long term.
The Role of the Nomination Committee
Nomination committees are important to the work of corporate boards. Nomination committees often work in tandem with senior executives on succession planning to develop talent and keep it in the pipeline so that the board always has the highest caliber of talent. Nomination committees take a broad view of recruiting board directors. As nomination committee members review the corporation’s long-term strategy, it helps them staff the board with the right level of experience, diversity and skills. Gender is a big topic when discussing board diversity; however, diversity is about more than gender. Boards need a variety of perspectives to do their best work. A well-composed board accounts for race, ethnicity, religion, age, gender and other demographics. Nomination committees pursue board independent and executive board directors.
The Role of Board Management Software
Board management software has made it possible for committees to work remotely as needed. Board portals have created a new sense of efficiency for board committees by providing an online space in which committee members can work. Governance Cloud by Diligent allows board directors to log in from any setting using any device to communicate and collaborate with committee members. Members can share documents, reports and other information online and in real time without risk of hacks and data breaches.
Governance Cloud by Diligent is a highly secure suite of governance tools for boards that are fully integrated with each other for the most effective governance possible. The online platform helps committees to do their work faster and more efficiently, so they can get the results back to the full board quicker.
The Wrap-Up on Corporate Board Committees
While committees bring boards a fair amount of information, boards should consider other ways to gather valuable stakeholder input. Boards that create diversity at the board level will naturally have diversity throughout the organization. Whether a committee is temporary or continuous, board management software solutions help committees work efficiently. More efficiency sets the stage for better board performance.