Each committee should have clear terms of reference, reviewed annually by the board to ensure their relevance.
Here we explain the roles of the board in relation to its committees: the audit committee, the nomination committee and the remuneration committee.
The role of the Audit Committee
The audit committee’s primary task is to monitor the integrity of the company’s financial reporting. It also has a role in checking the company’s internal financial controls, reviewing them and their operation and ensuring that necessary risk management systems are in place.
It is responsible for overseeing the company’s external audit process and relations with the external auditor. This includes making recommendations on the appointment, reappointment and removal of the external auditors. It must also keep a close check on the external auditors’ independence and objectivity.
The audit committee has a role in fraud prevention. It needs to be confident that there are opportunities throughout the company for employees to act as “whistleblowers” and report improprieties and abuses. The committee should ensure that arrangements are in place for the proportionate and independent investigation of such matters and for appropriate follow-up action.
The UK Corporate Governance Code recommends that the audit committee should be comprised of at least three, or in the case of smaller companies two, independent non-executive directors, one of whom should have recent and relevant financial experience.
The role of the Nomination Committee
One of the board's most crucial functions is to decide on new appointments to the board and to other senior positions in the company. Again, in some cases, this is done within a committee, composed of executive and non-executive directors, whose task it is to ensure that appointments are made according to agreed specifications. Where implemented, the appraisal of directors is often tied directly into the selection and nomination process.
As a matter of good practice, the selection process of directors should be carried out by the nomination committee, which then makes recommendations to the full board. Non-executive directors should form a majority of this committee.
The nomination committee will typically also ensure that succession plans are in place for the board and the executive level immediately below it.
The role of the Remuneration Committee
Devising the appropriate remuneration packages for the executive directors can be one of the most contentious issues a board faces - not least because of the publicity executive pay has attracted in recent years. Levels of remuneration should be sufficient to attract and retain the executive directors needed to run the company, but companies should avoid paying more than necessary. It is vital that decisions on executive remuneration, benefits and bonuses are seen to be taken by those who do not stand to benefit directly from them. In listed companies and some larger private companies therefore, policy on executive remuneration is usually decided by a committee of non-executive directors.
As a matter of good practice, executive directors should not be responsible for determining their own remuneration. The UK Corporate Governance Code recommends that this should be the remit of a remuneration committee made up of at least three or in the case of smaller companies two, independent non-executive directors.
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