How to Enhance Corporate Governance

The Role of Board Committees in Corporate Governance

Committees play an important role in a board of directors fulfilling its fiduciary corporate governance obligations, including its duty of care. Committees enable board members with particular expertise to oversee specialized areas of the business, and improve the productivity of the board of directors by meeting offline and reporting back their findings. The most common standing committees include audit, which is the oversight of the accounting and financial reporting of the company, and compliance with legal and regulatory requirements and adherence to ethical standards; compensation, which is the oversight of executive compensation and other human resource matters of the company, and; nominating/governance, which is the oversight of corporate governance and board member effectiveness, and board of director succession planning matters. Depending on the business structure and industry-served other standing committees can be formed to further leverage board member expertise and time. Situations may arise where circumstances dictate an “ad hoc” board committee to address a particular matter of sufficient complexity. Examples include an M&A transaction, bank (re)financing, legal matter, large capital investment, etc. In these episodic situations the board committee exists for the duration of the matter, and is staffed with board members with experience in the matter at hand.

Audit and compensation committee activities tend to be more intuitively understood by those forming a board of directors. Alternatively, the scope of the nominating/governance committee is typically less well understood. Most readers associate the “nom/gov” committee with finding new board members or board of director succession planning, which is correct. However, a well-developed nom/gov committee spends more of its time assessing the effectiveness of the board itself. For example, the nom/gov committee prepares and implements the annual board evaluation. The evaluation measures board effectiveness and seeks ways to improve board performance. A well-designed evaluation identifies possible concerns or issues that may undermine board performance and holds board members accountable. Generally, the evaluation is done as a group review but individual board member reviews are growing more prevalent. Companies are equally successful using an inside versus outside facilitator when administering an annual board of director evaluation, and trade-offs exist whichever you choose.

The nom/gov committee scope may also evaluate keeping a retiring CEO on the board of directors. Hopefully, this situation isn’t occurring often, but thoughtful reflection is needed when it does occur. Any successful CEO possesses deep, rich knowledge of the company, and its customers, products and processes. They bring institutional memory, which in most cases is highly valued. Areas of concern have more to do with the retiring CEO’s capacity to “shift gears” into a board member role, and avoid the urge to take charge. Consequently, in some cases a retiring CEO may not be a good board member because of their tendency to inhibit or criticize the new CEO or may be unwilling or incapable of accepting large scale change. The answer is “it depends” when asked if a retiring CEO should be kept on the board of directors.

Part four defines the more common standing board of director committees, and summarizes their functions in fulfilling corporate governance. It is intended to provide the chairman of the board perspective, so they may make an informed decision on which committees to form and how to staff them. Part five will discuss some common guidelines for making the board of directors more productive and effective.

Mark Richards is the retired Chairman and CEO of Appvion, Inc. headquartered in Appleton, WI.

Mark is now President of Meade Street Advisors, LLC a board governance, executive coaching, and strategic planning consulting business headquartered in Fort Lauderdale, FL.