Do board committee structures need a rethink?

As industry disruption quickens, information sharing across committees is vital.

Deborah Page AM FAICD has had a front-row seat in the evolution of board committees. The former accounting partner has chaired audit and risk committees for two decades.

The big change, says Page, has been an increase in board members who do no serve on a committee but attend its meetings. On some of her boards, most or all of the non-executive directors will attend all committee meetings to stay informed on issues.

“In years past, only directors who served on the committee attended its meeting,” says Page. “Today, you see a lot more directors attending committee meetings when they can. There’s a tendency to attend most meetings rather than leave an issue solely up to a committee.”

Page says this approach has pros and cons. “I like that the chair of a remuneration committee on a board I serve attends the audit and risk committee, which I chair. He has a different approach to me and adds real value. But you do worry sometimes that committees can get too large.”

Page chairs the audit and risk committee at Pendal Group, Brickworks, GBST Holdings and Service Stream, each an ASX-listed company. She is a former chair of Investa Office Fund and has served on numerous government and not-for-profit boards and committees.

Some of her audit and risk committee meetings can have 20 attendees. “You’ve got most of the board there, internal auditors, external auditors, key people in Australia and London, and a few other observers. On a board I serve, we run a parallel audit committee meeting for our UK subsidiary. The meeting can be quite a production and requires careful planning.”

Page’s audit and risk committees meet three to six times a year (at the higher end for financial services businesses) and meetings run for at least half a day. She meets the company’s internal and external auditors, Chief Financial Officer and Chief Risk Officer before the meeting, structures an agenda, and ensures the main board has full minutes of the meeting.

“The mechanism of a committee meeting has not changed much in two decades,” says Page. “But a lot more issues are considered at committees these days, the volume of papers has grown and the committee has far greater responsibility. There is also extra work for the chair of audit and risk, and particularly remuneration committees, in meeting external stakeholders.”

More questions with committee structures

Growth in the role and responsibilities of board committees raises several questions. First, is there a risk of too much governance work being outsourced to specialised committees, or the main board losing sight of issues that should be considered by all directors?

Second, could committee meetings become less effective if too many directors, executives and external advisers attend? And if the full board attends most committee meetings, is the committee structure morphing into something different with potentially unintended consequences?

Third, is there sufficient reporting and market scrutiny on committee composition, given they are central to an organisation’s governance strategy and performance? There has been less debate on gender and skill diversity in committees, for example.

Fourth, how does growth in committee work tie in with the debate on director busyness and “overboarding” (directors holding too many roles)? Overseas research has shown that busy directors tend to serve on fewer committees, particularly more involved committees such as audit and risk.

Proxy advisors and institutional investors consider committee work when assessing director workloads, but it’s likely that committee work will have a higher weighting in that view in coming years, as meeting work expands.

Fifth, are committee chairs adequately compensated for their work as meetings become larger and more involved? And as institutional investors single out committee chairs when there is a problem, such as excessive CEO pay, and vote against their re-election.

There are no easy answers to these questions and limited academic studies in Australia and overseas on committee structure and effectiveness. Most research focuses on an organisation’s main board rather than the composition and performance of its committees.

Also unclear is the most effective committee structure and whether other committees are needed. The ASX Corporate Governance Principles and Recommendations suggest there should be nomination, audit and remuneration committees, each with at least three members who are non-executive directors.

The Australian Prudential Regulation Authority (APRA) requires APRA-regulated entities to have a separate risk committee. Many ASX 200 companies combine their audit and risk committees. Some companies, particularly in heavy industries, have safety and sustainability committees, but nomination, audit and risk, and remuneration remain the big three.

A June 2018 study by the EY Centre for Board Matters found committee structures in S&P 500 companies in the US have largely remained unchanged for six years, despite unprecedented industry change. Boards typically had the recommended nomination, audit and risk committees and three-quarters of the S&P 500 had one additional standing committee.

Less than 10 per cent of S&P 500 boards had separate technology, public policy and regulatory affairs, or corporate responsibility and sustainability committees. Few of these boards, outside financial services, had a separate risk committee.

Australian boards appear to mirror the international experience with committees. ASX 200 boards have mostly resisted the temptation to form extra permanent committees, instead preferring working committees or other group formats that can be disbanded when a “deep dive” on an issue, or a key transaction or investment, is complete.

That approach makes sense. Issues such as cybersecurity and climate change, for example, cut across organisations, meaning there is less value in examining them in a small, standalone committee with a few directors. Having more of the board attend committees and understand these interrelated issues, which could affect another committee – and the main board – is logical, although adds to director workloads.

Having more board members attended committee meetings as observers also frees up main board meetings to focus on strategic issues because less time is spent on committee matters. More directors have attended the committee meeting, received its minutes and only need to discuss high-priority committee issues in the main board meeting.

Challenging committee structures

EY says boards should continue to challenge their committee structure to ensure it meets the organisation’s needs and current and emerging governance challenges. “Today’s boards are navigating a sustained, highly disruptive and competitive environment,” it says.

“Board agendas have become increasingly packed with complex and evolving oversight topics, and key committee responsibilities have stretched beyond their core purview. Challenging the committee structure as part of the board assessment process may help the board determine the most effective oversight approach based on the company’s unique circumstances.”

EY adds: “The ideal board committee structure is appropriate for the company’s specific needs and the board’s unique culture, is forward-looking, and supports the board’s ability to think strategically and comprehensively about key elements of the company’s business.”

EY proposes the following questions for boards to consider with committees:

• Is the board’s committee structure appropriate to forward-looking board priorities and company specific needs?
• Is the board size and composition adaptable to changing committee responsibilities as needed, based on the company’s evolving oversight needs?
• Is the board familiar with how peer companies are addressing board oversight responsibilities?
• Do assessments of board effectiveness reveal possible pressure points that might be resolved with changes in committee structure?
• As committees assess their own effectiveness and performance, is their capacity, workload and areas of expertise part of that assessment?
• As new directors join the board and bring new areas of expertise, does the board consider whether the current committee structure fully leverages those new director skills?