Board committees can assist in using directors’ time more efficiently.
The boards of larger organisations often delegate work to committees that members of the board serve on, to enable a more effective consideration of complex or specialised issues. Committees make recommendations for action to the board, thereby ensuring that the board retains collective responsibility for corporate decision-making. Involvement in committees allows directors to deepen their knowledge of the organisation, become more actively engaged and fully utilise their experience. Additionally, the existence of committees allows for more managerial talent within the company to learn about strategic initiatives and the decision-making process.
Smaller companies might not benefit from a formal committee structure because their boards are often quite small and operations less complex. Nonetheless, these companies will have board processes in place to cover all the issues that might otherwise be considered by relevant committees.
Committees signal the importance of key issues. Examples include audit, risk, remuneration and investment committees. The nature and type of committees will vary from industry to industry, and according to the size of the organisation.
Each board will have deliberations as to the number and kind of committees that will serve the board function most efficiently. This process ought to be subject to feedback and review to ensure that the board’s governance function is optimised, which in turn ensures that the relevant committees add value to the company.
Committees can be of an ongoing nature, like the audit committee, and these are usually referred to as standing committees. Or a committee might be formed for a specific short-term project. Audit, remuneration and nomination committees are the most common. Others might be necessary for organisations in specific industries. For example, a resources company could have an environmental committee, an airline may have a safety committee, a charity might have a fundraising committee.
Committee members
It is widely accepted in Australia, and also a requirement of some committees (for example, audit committees for S&P/ASX 300 companies) that the majority of committee members will be independent non-executive directors. It is recommended that committee members also be suitably qualified in terms of abilities, knowledge and experience.
Committees must be large enough to allow for proper consideration and debate of issues, but not so large that decisions cannot be reached. In practice, most committees will have three or four members, usually on rotation every few years.
Non-executive directors who are not committee members are often allowed to attend committee meetings as observers, in which case, a statement to this effect should appear in the committee’s charter.
Public companies must disclose the number of meetings of each board committee held during the year, and each director’s attendance at those meetings, in its annual report.
Reporting to the board
Responsibility for taking the minutes of each committee meeting is usually assigned to the company secretary. The minutes capture the key deliberations, show options for action and make recommendations for the board to endorse or decide upon. Either the minutes, or a written report of the meeting, should be included in the board papers for the next board meeting. The information contained will reflect the needs of the board and include, for example, highlighted key issues, options and recommendations for required decision-making.
If a committee meeting occurs just before a board meeting, the committee chair should present a verbal summary of key points raised at the meeting, with the minutes to follow.
Developing a charter
To facilitate effective operations, a committee will have a clear purpose outlined in a written charter. These will vary according to the type of committee, although they will usually state elements including the role, purpose and responsibilities and scope of authority, extent of power and decision-making abilities of the group.
Other considerations include membership requirements and procedure for meeting attendance by non-committee members, structure and composition, frequency of meetings, terms of access to internal or external resources and information, requirements for reporting to the board, committee chair powers, and tenure.
Evaluating the committee
The committee’s role is to meet, discuss and advise the board, not to make a decision. The board must continually monitor each committee’s activities as part of its duties of care, diligence and good faith.
The chair of the main board, along with the committee chair, should make sure the committee is functioning well, delivering, and still has a purpose to exist. Develop working groups if formal committees are not necessary. Streamline processes to ensure they are simple and efficient.
Often, board self-assessment questionnaires are general in the evaluation of committees. They may not probe specific purposes or drill down into the workings of the regular or ad hoc needs of the board. When analysing the effectiveness and future requirement for a particular committee, consider creating specific evaluation questions, to make each committee a tool of good governance.
This article first appeared under the headline 'Delegating director duties’ in the October 2024 issue of Company Director magazine.
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