Achieving Board Effectiveness Using Board Committees

The composition, mix and structure of the Board of Directors of a Company and the effectiveness of the decision making process are key elements of sound corporate governance. A Board Committee consists of Directors mandated to carry out specified functions assigned by the Board. The establishment of Board Committees is one way of achieving greater efficiency in the performance of the Board’s oversight functions, thereby strengthening the Governance structure.

The Companies and Allied Matters Act (CAMA) allows the Board to exercise its powers through Committees consisting of such members of the Board as it deems fit. Section 9.1 of the SEC Code of Corporate Governance for Public Companies provides that the Board “should determine the extent to which its duties and responsibilities should be undertaken through Committees”. It goes on to recommend the establishment of a Governance and Remuneration Committee, a Risk Management Committee and any other Committee that the Board may deem appropriate, depending on the size, needs or industry requirements of the company.

The various industry Codes have similar provisions. The exposure draft of the Nigerian Code of Corporate Governance recommends the establishment of the Nomination and Governance, Remuneration, Audit and Risk Management Committees. It further recommends that each Committee should be composed of at least three members with a majority of Independ Non-Executive Directors. The Board may combine any of the responsibilities of Board committees, taking into consideration the size, needs and other requirements of the Company. All members of the Audit committee should be financially literate and should be able to read and interpret financial statements. At least one member of the committee should be an expert and have current knowledge in accounting and financial management

Beyond regulatory compliance however, Board Committees if properly structured are indeed quite useful to the overall efficiency and effectiveness of a Board.  Generally, Board Committees focus on specific areas, thereby allowing the Board concentrate on more strategic issues. An effective Committee structure allows the Board to focus expertise where it can best be utilized, and also manage the flow of information so Directors are not unduly burdened with too many details that may hinder rather than facilitate effective decision making.

Committees are usually charged with drilling down on specific issues; generally assume responsibility for forming an opinion on such issues and making recommendations to the Board. They are at liberty to seek independent professional advice at the expense of the company and seek clarification from senior management as required.

An effective Board is composed of Directors with diverse experience, skills and expertise. To maximize the benefits of this diversity, Committees should comprise of Directors with relevant skills and competences in specific areas. Membership of Committees also affords Directors the opportunity of gaining better insight into the business of the company in respect of which they have oversight responsibilities.

When used effectively, Committees can increase the Board’s ability to carry out its mandate. It is however key to note that while the Board may delegate some responsibilities to Committees, the Board as a whole retains ultimate oversight responsibility over the affairs of the Company Whilst Committees would make recommendations to the Board based on extensive consultations and deliberations, the Board has to approve such recommendations before they become effective.

To ensure the effectiveness of the Committee structure, the Board should ensure that Committees are composed of Directors with the relevant skills and who are able to devote sufficient time to Committee work. The Board should also ensure that the requisite information is made available to its committees timeously. Below are some of the elements that would ensure Board Committee effectiveness:

Committee Charters

It is recommended that Board Committees have specific Charters or terms of reference setting out their roles and responsibilities in the area of membership, quorum, scope of work, as well as authority and reporting obligations.

Effective Committee Chairs

As with the Chairman of the Board, the role of the Committee Chairman is an important one and the effectiveness of the incumbent ultimately determines the effectiveness of the Committee. Thus the Board should carefully select Committee Chairs, taking cognizance of availability, strength of character, relevant skills set (knowledge, experience, proven leadership and people’ management) respect from peers, etc.

Accountability to the Board

The Board must clearly communicate to Committees its expected reporting format, substance and frequency of receiving such reports. Usually, the expectations of the Board are encapsulated in the Committee Charters. The Board should ensure that the performance of its Committees is evaluated annually to ensure that they continue to be effective.

An emerging trend that makes for even greater effectiveness is the attendance of non-Committee members of the Board at Committee meetings. This practice ensures that deliberations at the Board meeting are more inclusive as the non-Committee members would have had the benefit of the reasoning that went into recommendations by the Committee to the Board. To retain the utility of the Committee system, it is important that the composition be refreshed periodically whilst ensuring that Directors with relevant expertise and experience sere on Committees to which there experience and qualifications are best suited.

---

Contributing Advisors