Delegate authority to committees

Boards have a limited amount of time for meetings, and so the Articles of Association normally permit the board to delegate its functions to committees of the board.

There is normally no limitation on what the board can choose to delegate to committees.

Committees are often a means of utilising the expertise of non-executive directors and of involving them more in the organisation's affairs.

If you are invited to join a board you should enquire as to these extra responsibilities and potential calls on our time.

In the UK, the Cadbury and Hampel Committees recommended that boards should set up a number of key sub-committees with specific responsibilities, in particular, audit, remuneration and nomination committees. These committees are committees of the board; the board agrees their terms of reference and their membership; the board retains the responsibility for committee decisions.

These committees are also required under London Stock Exchange listing rules.

The main board is responsible for the success of the company within a framework of controls, which enables risk to be assessed and managed. It is responsible for setting strategy, maintaining the policy and decision making framework in which this strategy is implemented, ensuring that the necessary financial and human resources are in place to meet strategic aims, monitoring performance against key financial and non-financial indicators, overseeing the system of risk management and for setting values and standards in governance matters.

Audit Committee

The UK Corporate Governance Code (previously The Combined Code) recommends that for listed companies this committee should include at least three non-executive directors, or in the case of smaller companies two.

In smaller companies the company chairman may be a member of, but not chair, the committee in addition to the independent non-executive directors, provided he or she was considered independent on appointment as chairman. The board should satisfy itself that at least one member of the audit committee has recent and relevant financial experience.

This committee provides independent oversight in relation to financial reporting; internal control and risk management; regulatory compliance; external audit and internal audit.

The main role and responsibilities of the audit committee, as required by the UK Corporate Governance Code are listed on page 20 of the Code, which may be downloaded at www.frc.org.uk/corporate/ukcgcode.cfm.

The terms of reference of the audit committee, including its role and the authority delegated to it by the board, should be made available. A separate section of the annual report should describe the work of the committee in discharging those responsibilities.

In practice, the audit committee is usually required to:

  • review the company's financial statements, accounting principles and the practices underlying the;
  • review the scope and results and cost effectiveness of the audit;
  • liaise with the company's internal and external auditors;
  • monitor and review the effectiveness of i nternal financial controls.

The audit committee should review arrangements by which staff of the company may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters. The audit committee's objective should be to ensure that arrangements are in place for the proportionate and independent investigation of such matters and for appropriate follow-up action.

The audit committee should monitor and review the effectiveness of the internal audit activities. Where there is no internal audit function, the audit committee should consider annually whether there is a need for an internal audit function and make a recommendation to the board, and the reasons for the absence of such a function should be explained in the relevant section of the annual report.

Remuneration Committee

In order to avoid conflict of interest, executive directors should not be responsible for determining their own remuneration.

The UK Corporate Governance Code recommends that boards should establish a remuneration committee of at least three, or in the case of smaller companies two, independent non-executive directors. In addition the company chairman may also be a member of, but not chair, the committee if he or she was considered independent on appointment as chairman.

The remuneration committee should make available its terms of reference, explaining its role and the authority delegated to it by the board. Where remuneration consultants are appointed, a statement should be made available of whether they have any other connection with the company.

The remuneration committee should have delegated responsibility for setting remuneration for all executive directors and the chairman, including pension rights and any compensation payments. The committee should also recommend and monitor the level and structure of remuneration for senior management. The definition of 'senior management' for this purpose should be determined by the board but should normally include the first layer of management below board level.

The board itself or, where required by the Articles of Association, the shareholders should determine the remuneration of the non-executive directors within the limits set in the Articles of Association. Where permitted by the Articles, the board may however delegate this responsibility to a committee, which might include the chief executive.

In the case of LSE listed companies, shareholders should be invited specifically to approve all new long-term incentive schemes and significant changes to existing schemes, save in the circumstances permitted by the Listing Rules.

The remuneration committee should carefully consider what compensation commitments (including pension contributions and all other elements) their directors' terms of appointment would entail in the event of early termination. The aim should be to avoid rewarding poor performance. They should take a robust line on reducing compensation to reflect departing directors' obligations to mitigate loss.

The annual report and accounts of a listed company should include a report to shareholders by the remuneration committee, containing various disclosures about directors' remunerations, a statement that full consideration has been given to best practice relating to remunerations policy and a statement of compliance with the best practice provisions of the Greenbury Report (www.ecgi.org/codes/documents/greenbury.pdf).

Nomination Committee

The Cadbury Report recommended the setting up of a nomination committee, with the responsibility of proposing to the board, in the first instance, any new appointments, whether of executive or of non-executive directors. A nomination committee should have a majority of non-executive directors on it and be chaired either by the chairman or a non-executive director. (www.ecgi.org/codes/documents/cadbury.pdf)

Other committees

Boards may establish an executive committee to manage its business between board meetings. If so, its powers and responsibilities should be clearly specified.

They also may establish other committees, but the values and benefits of establishing an elaborate committee structure need to be carefully considered.

Other committees might include, a finance committee, a planning committee, as well as human resources, donations, environmental compliance, health a safety, intellectual property. These will depend on such considerations as the character of the organisation, market conditions, regulations and litigation environment.

Corporate governance

Has the board reviewed its committee structure? In particular: -

  • Do the board's committees meet best practice, and fulfil the requirements and recommendations of the Corporate Governance Code?
  • Do the committees have clear and effective terms of reference?
  • Do the committees make good use of the expertise of non-executive directors?
  • Do the committees have a proper balance of executive and non-executive membership?
  • Are all the committees effective – indeed, are they all necessary?

* Inspired by the Institute of Directors Standards for the Board

What to do next

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