The composition, mix and structure of the board of directors of a company and 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.
Regulatory basis for board committees
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. The SEC Code of Corporate Governance provides that the board of directors of a public company shall establish a governance and remuneration committee, a risk management committee and any other committee that the board may deem appropriate. The CBN Code of Corporate Governance for Banks also provides for the establishment of Risk Management, Audit and Credit Committees as a minimum.
The need for board committees
Beyond regulatory compliance, board committees are a useful tool in decision making. Generally, board committees focus on specific areas, thereby allowing the board concentrates on more strategic issues. An effective committee structure allows a board to focus expertise where it can best be utilised, 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.
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Committees are usually charged with drilling down on specific issues and making recommendations to the board. They are at liberty to engage the services of consultants if required and seek clarification from senior management as required. Board committees may be ad-hoc. It is, however, good corporate governance practice to have standing rather ad-hoc board committees.
It is, however, key to note that while the board may delegate responsibilities to committees, it 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.
It is recommended that board committees have specific charters setting out their roles and responsibilities, membership, terms of reference, authority and reporting obligations. It is the responsibility of the board to ensure that committees are composed of directors with the requisite competencies and that an effective reporting structure is in place.
It must be noted that as useful as board committees may be, they may not always be necessary, particularly in the context of the peculiarities of some organisations. Furthermore, committees may not be able to deal with certain matters efficiently and it may be more effective to seek advice from a consultant than refer such matters to a committee.
Finally, although various codes of corporate governance provide for the establishment of board committees, to be effective the board has to recognise the true worth of setting up committees and not just in compliance with regulatory requirements or a box ticking exercise.
