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Usefulness and nonsense of board committees

Usefulness and nonsense of board committees
The origin of board committees

Within the boundaries of the ‘corporate governance tripod’, corporate governance codes typically allocate three roles to the board of directors. Deciding upon the strategic direction of the company, monitoring the company and its management and  ensuring that the company has the right daily leadership. In order to execute these roles, the board can install specialised advisory committees.

In the early days, it was a sign of good governance to set up a number of committees in areas with the highest risk of conflicts of interests, in particular finance, nominations and remuneration. Later on, committees became more and more used to deal with specific tasks which fall under the responsibility of the board, but for which it does not necessarily have the time and resources. By giving tasks to committees, boards can spend their time more efficiently. 

Setting up board committees

For listed companies, the establishment of an audit and remuneration committee is a legal obligation since several years. Additionally, the 2020 Belgian Code on Corporate Governance (‘2020 Code’) recommends listed companies to also set up a nomination committee (which can be combined with the remuneration committee). However, non-listed companies may also benefit from installing these committees. In the financial services sector, additional requirements exist such as the obligation to have a separate risk and nomination committee.

Our research within listed companies shows that in addition to the three 'traditional' committees, some companies have set up additional committees, such as a strategic committee, a financial committee, a scientific committee and/or an investment committee. The strategic committee is present in 10 companies. Much has already been written about the existence of a strategic committee and the opinions on its usefulness are divided. Supporters believe that a strategic committee allows for more detailed discussion on certain strategic issues amongst a small group of directors. Critics draw attention to the fact that a strategic committee is equivalent to a division of the board of directors, with on the one hand those who are aware of everything and are closely involved in the company's strategy and on the other hand those who, on the basis of a more limited vision, can only agree with the others on the strategy. One of the essential roles of the board of directors would then be rendered meaningless. The Corporate Governance Committee has, in its 2020 Code, formulated a new provision which states that “Strategy formulation should not be referred to any permanent committee” whereby the Committee aligns itself with the opponents of a strategic committee.

Populating Board Committees

The codes and the legislation contain a number of rules relating to the composition of the board committees. A board committee should consist of at least three board members. However, there are countries where committees are not composed of board members but of external people, such as Italy (audit committee) or Sweden (nomination committee). Also in some Belgian non-listed companies, for example in the public sector, it is common practice to add external people with a specific expertise to the audit committee. There are also the requirements regarding the presence of non-executive/independent directors and the necessary competencies. Finally, the chairmanship cannot simply be filled in arbitrarily. It is important to remember that these requirements are cumulative but also vary according to the type of committee. This is why listed companies sometimes have a hard time to attract the (right) people with the right profile and competences to sit on their board of directors and its committees. It is clear that the role of management is crucial for the functioning of the board committees. Like the entire board, the members of the board committees highly depend on management for providing information. It therefore makes sense to invite the (relevant) members of the management team to the committee meetings. Finally, like the board of directors, the board committees can seek external professional advice at the company's expense, after informing the chairman of the board of directors.

Trends and challenges for board committees

Over recent times, GUBERNA has identified some trends and challenges with regard to board committees. Some critical thoughts result from the board evaluation exercises that GUBERNA regularly conducts for companies. It is indeed common practice not only to evaluate the functioning of the board of directors but also of its committees.

Board committees are increasingly tasked with (additional) missions. This is not only due to new legislation (for example, the audit reform) but also due to new emerging topics like AI, cybersecurity, digitalisation etc. Therefore boards need to be careful no to overcharge its board members but more importantly, the board must remain vigilant that board committees have a purely advisory role. After all, the final decision is taken by the board of directors, which remains collegially responsible. Still, in some court cases, members of board committees have been held accountable instead of the full board (cfr. Lernaut&Hauspie).

We sometimes notice a tendency for boards of directors to shift their responsibility: "the audit committee looked at it”; “the remuneration committee has decided this and we support it”. It is indeed the question to what extent the opinions of the board committees have an impact on the decisions of the board of directors. Do they remain opinions, or is there a tendency towards decision-making via the committee procedure? It is important that the board finds a balance between trusting the advice of the board committees and having extensive discussions in the full board of directors on the dossiers that have been discussed in the board committees.

A clear and transparent reporting process from the board committees towards the full board can help in finding this balance and avoid a substantial information asymmetry between members and non-members. The 2020 Code acknowledges this and recommends that, in addition to providing oral feedback from each committee at the next board meeting, the board should receive a written report on the findings and recommendations (“minutes”) of each committee. Companies could even consider going one step further in enhancing the transparency of its committee working by allowing access to the information that is, normally, only provided to the committee members.

All in all, board committees support the board of directors to provide the necessary added value to the company. Clear agreements are therefore key which could be captured in a corporate governance charter. A crucial task of the chair of the board of directors is to ensure that these are respected.

Article written by Annelies De Wilde, Senior Research Associate for CxO Magazine - edition June 2019

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Usefulness and nonsense of board committees