Chapter 6 pt.2 - Board Committees & NEDs

Question 1

What 3 board committees does the Code recommend listed companies establish?

Answer 1

Audit Committee (now mandatory under EU Statutory Audit Directive 2008)

Remuneration Committee

Nominations Committee

Question 2

What additional committee should financial service boards also establish?

Answer 2

Risk committee

Question 3

Summarise functions of the 3 main board committees.

Answer 3

Nomination Committee – leading process for Board appointments, ensuring plans are in place for orderly succession to both Board and senior management positions (majority independent NEDs);

Audit Committee – Monitoring the integrity of financial statements, reviewing internal controls and risk management, ensuring effectiveness and independence of internal and external audit functions (all independent NEDs); and

Remuneration Committee – Determining policy for ED remuneration and setting remuneration for Chair, EDs and senior management (all independent NEDs).

Question 4

What one committee has final say on some matters (rather than the others which make recommendations)?

Answer 4

Remuneration Committee re executive / chair / senior management remuneration.

In practice, some Articles may require this be ‘rubber stamped’ by the board.

Question 5

What are three general recommendations FRC G.B.E gives regarding board committees?

Answer 5

• Chair ensure sufficient time at board meetings for committees to report on nature/content of discussion, on recommendations, and on actions to be taken
• Where disagreement between committees and the board- allow adequate time with view to resolve
• Where disagreements cannot be resolved = committee should have RIGHT TO REPORT issue to shareholders as part of report on its activities in AR.

Question 6

Expand on the responsibilities of the nominations committee

Answer 6

Regularly review the structure, size and composition of the board and make recommendations to changes;

Succession planning for directors and other senior executives;

Review the leadership needs of the organisation (exec + non-exec), ensuring continued ability for it to remain competitive;

Up to date/fully informed re strategic issues and commercial changes affecting the company and its market;

Identifying/nominating candidates to fill board vacancies. Evaluate balance of skills, knowledge, experience and diversity of the board. Prepare description of the role and capabilities required;

Appointment of chairman - committee should prepare JD inc. time commitment expected;

Prior to appointment, appointee should be required to disclose any other business interests that may result in a conflict of interest + report on any future business interests that could result in a conflict;

NEDs - ensure they receive formal appointment letter setting out clearly what is expected of them in terms of time commitment, committee service and involvement outside board meetings;

Review results of board evaluation process that relate to its composition;

Annually review time required from NEDs. Performance evaluation should be used to assess whether the NEDs are spending enough time to fulfill their duties; and

Work/liaise with all other board committees.