Committees
The establishment of committees is a matter for the board to determine. It is the board’s responsibility to set the terms of reference for all committees, setting out the scope and level of delegated powers given as part of the governance framework.
The board should maintain sound risk management and internal control systems and this should be appropriately reflected in the terms of reference for any committee.
The chair should ensure that sufficient time is allowed at the board for discussion of these issues. All board directors should familiarise themselves with the associated provisions of the relevant governance code and its related guidance, and any relevant regulatory requirements.
Sufficient time should be allowed after committee meetings for them to report to the board on the nature and content of discussion, on recommendations, and on actions to be taken. The minutes of committee meetings should be circulated to all board members and the company secretary. The remit of each committee, and the processes of interaction between committees and between each committee and the board, should be reviewed regularly.
The audit committee
It is for the board to decide the overall role and scope of the audit committee. The audit committee should identify any matters where it considers that action or improvement is needed, and make recommendations to the board as to the steps to be taken.
It should review annually its terms of reference and its own effectiveness and recommend any necessary changes to the board. The board should also review the audit committee’s effectiveness annually. The main role and responsibilities of the audit committee should be set out in written terms of reference and should include:
- to monitor the integrity of the financial statements of the company and any formal announcements relating to the company’s financial performance
- to review the company’s internal financial controls
- to review the company’s internal control and risk management systems
- to monitor and review the effectiveness of the internal audit function
- to make recommendations to the board in relation to the appointment, re-appointment, removal, remuneration or terms of engagement of the external auditor
- to review and monitor the external auditor’s independence and objectivity and the effectiveness of the audit process
- to report to the board on how it has discharged its responsibilities.
The audit committee should review the arrangements by which employees may raise concerns about possible improprieties. The committee’s objective should be to ensure that arrangements are in place for the proportionate and independent investigation of such matters and for appropriate follow up action.
Where there is disagreement between the audit committee and the board, time should be made available for discussion with a view to a resolution. Where any such disagreements cannot be resolved, the committee should have the right to report the issue to the shareholders in the annual report.
Risk management
Unless there is a separate risk committee it is likely the audit committee should have an oversight of this business-critical issue.
A sound system of internal control depends on the evaluation of the nature and extent of the risks to which the organisation is exposed. Since risk is an inherent and normal part of any business operation the purpose of internal control is to help manage and control risk rather than to eliminate it.
The audit and risk committee or separate risk committee must ensure the business and operational risks are fully understood and effectively managed. The ongoing regulatory framework will continue to emphasise the need for robust business planning, risk management frameworks, stress-testing and control mechanisms.
Reporting of risk is also a key factor for the sector to consider. With a continuing desire for greater transparency in the corporate world, the governance equation will demand open and honest reporting of risks for shareholders and investors. The audit committees, working with the boards, should be ensuring full disclosure in the annual report or corporate website.
The remuneration committee
The remuneration committee’s role is to ensure that remuneration arrangements:
- support the strategic aims of the business
- enable the recruitment, motivation and retention of senior executives while complying with the requirements of regulatory and governance bodies
- satisfy the expectations of shareholders and remain consistent with the expectations of the wider employee population.
The UK Corporate code states that remuneration should be sufficient to attract, retain, and motivate directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose. Remuneration committees should ensure that the compensation paid to executives is fair and reasonable and linked to the long-term strategy and success of the business. The remuneration committee should not consider non-executive levels of pay.
The nominations committee is responsible for making recommendations to the board concerning its composition including proposed appointees. The board chair is often the most appropriate individual to lead this committee. However, when recruiting for a new chair it is most likely that the senior independent board member (SID) should chair the nominations committee, unless he or she has an interest in applying for the role.