BOARD COMMITTEES

The nature of a board committee

a committee set up by the board,
consisting of selected directors,
is given responsibility for monitoring a particular aspect of
the company's affairs
A committee is not given decision-making powers.
Its role is to monitor an aspect of the company's affairs,
and:
report back to the board, and
make recommendations to the board.
a board committee is not a substitute for executive
management and a board committee does not have
executive powers.

The main board committees

Within a system of corporate governance, a
company might have at least three or possibly
four major committees.
All companies should have, at a minimum, an
audit committee and a corporate governance
committee. The Corporate Governance
Committee should include in its terms of
reference the key areas normally covered by a
Nomination Committee and a Remuneration
Committee (unless these have been separately
constituted).

The reasons for having board

committees
There are two main reasons for having board committees.
The board can use a committee to delegate timeconsuming and detailed work to some of the board
members. Committees can help the board to use its
resources and the time of its members more efficiently.
The board can delegate to a committee aspects of its work
where there is an actual or a possible conflict of interests
between executive directors (management) and the
interests of the company and its shareholders.
However, to avoid a conflict of interests, board committees
should consist wholly or largely of independent directors.
This means independent non-executive directors.

The need of audit committee

The history of corporate governance has shown that when a corporate
scandal
occurs:
misleading financial statements have been used to disguise the
wrongdoing and
misdemeanours
senior executives (the CEO and/or finance director) are to blame for the
misleading accounts, and
the company's auditors failed to spot the problem:

possibly because they were misled by the company's executives, or

possibly because the quality of the audit was not as good as it should
have
been, or
possibly because the auditors were willing to accept assurances from
executive management when they should perhaps have asked more
questions.

The need of audit committee

An audit committee can provide a check on the risks of
misleading reporting,
by providing an additional line of communication to
the auditors and;
by ensuring that the auditors remain independent
from executive managers and perform the audit
effectively.
One of the requirements for the auditors is that they
should perform their audit work with independence. In
this sense, independence means freedom from the
influence of the company's executive management

Risk to auditors independence

Familiarity threat.
Self-interest threat.
Intimidation threat.
Self-review threat
Advocacy threat

Assessing auditor independence

When auditors are appointed for the first time,
the audit committee should ask for a statement
from the audit firm that the auditors and their
staff have no family, financial, employment,
investment or business relationship with the
company, other than in the normal course of
business.
Each year the audit committee should obtain
information from the audit firm about the
policies and processes that it uses for ensuring
the continued independence of the auditors.

Assessing auditor independence

The audit committee should check periodically that the
policy on the recruitment of former auditors is
complied with by the company.
The audit committee should check that the audit firm
complies with ethical guidelines issued by the
accountancy bodies and regulatory issues, such as:
- the rotation of audit partners
- the amount of fee income that the audit firm
receives from the company, in relation to the
overall fee income of (1) the audit firm or (2) a
regional office of the audit firm, or (3) an individual
audit partner.

Role and functions of the audit

committee
the functioning of the internal control system;
the functioning of the internal audit department;
the risk areas of the company's operations to be
covered in the scope of the internal and external
audits;
the reliability and accuracy of the financial information
provided to management and other users of financial
information, and whether the company should
continue to use the services of the current external and
internal auditors;
any accounting for auditing concerns identified as a
result of the internal or external audits;

Role and functions of the audit

committee
the company's compliance with legal and
regulatory provisions, its articles of association,
code of conduct, by-laws and the rules
established by the board;
the scope and results of the external audit and its
cost effectiveness, as well as the independence
and objectivity of the external auditors; and
the nature and extent of non-audit services
provided by the external auditors , where
applicable;

Composition of the audit committee

The chairperson of the board should not be a member of the Audit
Committee.
The chairman of the Audit Committee should be an independent
non-executive director. The chief executive officer should not be a
member of the Audit Committee.
The Audit Committee should be composed entirely of nonexecutive directors.
It is not a requirement that the majority of the Audit Committee be
independent non- executive directors although this would be
strongly recommended (Aspiration: majority independent).
All members of the Audit Committee should have financial
awareness. The chairman should be skilled and experienced in
financial matters.

The corporate governance committee

The Corporate Governance Committee should
include in its terms of reference the key areas
normally covered by a nomination committee
and a remuneration committee (unless these
have been separately constituted).
Its role is also to ensure that the reporting
requirements on corporate governance, whether
in the annual report or on an ongoing basis are in
accordance with the principles of the Code.

Composition of the corporate

governance committee

A non-independent chairperson of the board can only be the chairperson of the

Corporate Governance Committee on condition that the majority of the
committee are independent non-executive directors.
If this is not the case then the non-independent chairman of the board can be a
member of the Corporate Governance committee, but not its chairperson.
The chairperson of the Committee would then have to be an independent nonexecutive director (Aspiration: the chairman of the Corporate Governance
Committee should be an independent non-executive director).
The chief executive officer may be a member of the Corporate Governance
Committee.
The Corporate Governance Committee should be composed of a majority of nonexecutive directors.
Other than in the case where the non-independent chairperson of the board is
also chairperson of the Corporate Governance Committee, it is not a requirement
that the majority of the Corporate Governance Committee be independent nonexecutive directors, although this would be strongly recommended (Aspiration:
always majority independent).

Remuneration as a corporate
governance issue
The remuneration of executive directors and senior
managers is an important issue in corporate governance.
are primarily concerned about their personal
remuneration.
However, the conflict of interest between management and
shareholders might be resolved if the remuneration of
directors could include incentives.
If directors are rewarded for achieving performance targets
that are consistent with the best interests of the company's
shareholders, the conflict of interests could be reduced.
Directors and shareholders would both benefit.

The need for a remuneration

committee
The need for a remuneration committee was first recommended in
the UK by the Greenbury Committee in 1995: Putting together a remuneration package for senior executives is a
key issue in corporate governance.
The system for negotiating and agreeing a remuneration package is
open to abuse if executive directors can decide or influence their
own remuneration arrangements.
It is not practicable for shareholders to be involved in the
negotiation of remuneration packages, and shareholders should not
be able to make decisions about the remuneration of individual
directors. However, they are entitled to extensive information
about directors' remuneration.
Remuneration for executive directors and other senior executives
should therefore be decided by a remuneration committee of the
board.

The UK Combined Code on directors

remuneration
Levels of remuneration should be sufficient to
attract, retain and motivate directors of the
quality required to run the company successfully,
but a company should not pay more than is
necessary for this purpose.
There should be a formal and transparent
procedure for developing policy on executive
remuneration and for fixing the remuneration
packages of individual directors.
No director should be involved in deciding his or
her own remuneration.

Duties of remuneration committee

determining, agreeing and developing the company's
general policy on executive and senior management
remuneration;
determining specific remuneration packages for executive
directors of the company, including but not limited to basic
salary, benefits in kind, any annual bonuses, performancebased incentives, share incentives, pensions and other
benefits;
determining any criteria necessary to measure the
performance of executive directors in discharging their
functions and responsibilities;
determining the level of non-executive and independent
non-executive fees to be recommended to the
shareholders at the Meeting of Shareholders.

Composition
A non-independent chairperson of the board can be the
chairperson of the Remuneration Committee
The chief executive officer may be a member of the
Remuneration Committee. The Remuneration Committee
should be composed of a majority of non- executive
directors.
Other than in the case where the non-independent
chairperson of the board is also chairperson of the
Remuneration Committee, it is not a requirement that the
majority of the Corporate Governance Committee be
independent non- executive directors, although this would
be strongly recommended
No member of the Remuneration Committee can be
involved or vote on committee decisions in regard to
his/her own remuneration.

Appointments to the board as a

corporate governance issue
To ensure that there is a suitable balance of power on the board,
the system for nominating and selecting new directors should not
put the choice into the hands of one individual or a small group of
individuals.
executive directors should have a voice in new appointments to the
board.
When the appointment of a new executive director is considered,
the executive directors are probably in a better position than NEDs
to assess the qualities of internal and external candidates for the
position.
The executive directors should be aware of the skills and experience
that they lack, and so can offer suggestions about the type of nonexecutive that they would like to add to the board.

Succession planning
In addition to selecting new directors for the
board, the process of nomination also involves
succession planning.
Succession planning means planning in advance
for the eventual replacement of key members of
the board when they eventually retire
Succession planning applies in particular to:
the board chairman
the CEO, and
possibly, the finance director.

The need for a nominations committee

When a vacancy on the board has to be filled, or
when succession planning is considered, the
process of identifying and evaluating suitable
candidates takes time.
The board should delegate the task to a
committee to save time and resources
The appointment of directors to the board, and
the succession for top positions on the board,
should be a carefully organised process.

Main duties of a nominations

committee
ascertain whether potential new directors are fit and
proper and are not disqualified from being directors
ensure that the right balance of skills, expertise and
independence is maintained;
ensure that there is a clearly defined and transparent
procedure for shareholders to recommend potential
candidates;
ensure that potential candidates are free from material
conflicts of interest and are not likely to simply act in
the interests of a major shareholder, substantial
creditor or significant supplier of the company

Composition
A non-independent chairperson of the board can be the
chairperson of the Nomination Committee (Aspiration:
Committee chaired by an independent non- executive
director)
The chief executive officer may be a member of the
Nomination Committee.
The Nomination Committee should be composed of a
majority of non-executive directors.
Other than in the case where the non-independent
chairperson of the board is also chairperson of the
Nomination Committee, it is not a requirement that the
majority of the Nomination Committee be independent
non-executive directors, although this would be strongly
recommended

Responsibility of the board for risk

management and risk control
The board of directors is responsible for safeguarding
the assets of the company and protecting the value of
the shareholders' investment.
The board has a duty to make sure that systems,
procedures and checks are in place to prevent losses
through errors, omissions, fraud and dishonesty
The board has the ultimate responsibility for the
effectiveness of the internal control system.
The board is also responsible for developing the
strategy for the company

Risk management as a task for

management
Although the board has responsibility for risk
management and internal control, management
has the operational responsibility for planning
and implementing risk management and control
systems.
Risk management and internal control should
therefore be:
planned and implemented by management, and
monitored by the board, to ensure that effective
systems of risk management and control are in place.

Responsibilities of the audit

committee for financial controls
The UK Combined Code also states that a responsibility of
the audit committee should include the review of the
company's internal financial controls.
The audit committee is in a good position to carry out a
review of these controls, because of the discussions it has
with the company's external auditors and internal auditors.
For example, the external auditors produce a 'management
letter' at the end of the audit, making recommendations for
improvements in financial controls. The audit committee
should discuss these recommendations with the auditors
and management, to establish whether the
recommendations have been implemented (and if not, why
not).

Terms of Reference
The necessity for and composition of a Risk
Committee will depend on the nature and
complexity of the business.
Responsibility for setting risk strategy will
remain with the board but the responsibility
for assessing and assuring the quality of the
risk management process may be delegated to
the Audit Committee if a Risk Committee has
not been constituted.

Composition
the chairman of the Committee should be a nonexecutive director;
the chief executive officer should be a member of the
Committee;
the Committee should be composed of suitably
qualified members which should include at least one
independent director;
the company may also set up committees composed of
management or appoint a chief risk officer, as
appropriate, who would then report to the Board Risk
Committee. The Audit Committee would retain an
assessment and assurance role in this case.