BOARD COMMITTEES

The nature of a board committee

a committee set up by the board, consisting of selected directors, is given responsibility for monitoring a particular aspect of

the company's affairs A committee is not given decision-making powers. Its role is to monitor an aspect of the company's affairs,

and: report back to the board, and make recommendations to the board. a board committee is not a substitute for executive

management and a board committee does not have executive powers.

The main board committees

Within a system of corporate governance, a

company might have at least three or possibly four major committees.

All companies should have, at a minimum, an audit committee and a corporate governance committee. The Corporate Governance Committee should include in its terms of reference the key areas normally covered by a Nomination Committee and a Remuneration Committee (unless these have been separately constituted).

The reasons for having board

committees There are two main reasons for having board committees.

The board can use a committee to delegate time-consuming and detailed work to some of the board members. Committees can help the board to use its resources and the time of its members more efficiently.

The board can delegate to a committee aspects of its work where there is an actual or a possible conflict of interests between executive directors (management) and the interests of the company and its shareholders.

However, to avoid a conflict of interests, board committees should consist wholly or largely of independent directors. This means independent non-executive directors.

The need of audit committee

The history of corporate governance has shown that when a corporate scandal occurs: misleading financial statements have been used to disguise the

wrongdoing and misdemeanours senior executives (the CEO and/or finance director) are to blame for the misleading accounts, and the company's auditors failed to spot the problem:

- possibly because they were misled by the company's executives, or - possibly because the quality of the audit was not as good as it should

have been, or - possibly because the auditors were willing to accept assurances from executive management when they should perhaps have asked more

questions.

The need of audit committee

An audit committee can provide a check on the risks of misleading reporting,

by providing an additional line of communication to the auditors and;

by ensuring that the auditors remain independent from executive managers and perform the audit effectively.

One of the requirements for the auditors is that they should perform their audit work with independence. In this sense, independence means freedom from the influence of the company's executive management

Risk to auditors independence

Familiarity threat. Self-interest threat. Intimidation threat. Self-review threat Advocacy threat

Assessing auditor independence When auditors are appointed for the first time,

the audit committee should ask for a statement from the audit firm that the auditors and their staff have no family, financial, employment, investment or business relationship with the company, other than in the normal course of business.

Each year the audit committee should obtain information from the audit firm about the policies and processes that it uses for ensuring the continued independence of the auditors.

Assessing auditor independence

The audit committee should check periodically that the policy on the recruitment of former auditors is complied with by the company.

The audit committee should check that the audit firm complies with ethical guidelines issued by the accountancy bodies and regulatory issues, such as:

- the rotation of audit partners - the amount of fee income that the audit firm

receives from the company, in relation to the overall fee income of (1) the audit firm or (2) a regional office of the audit firm, or (3) an individual audit partner.

Role and functions of the audit

committee the functioning of the internal control system;

the functioning of the internal audit department; the risk areas of the company's operations to be

covered in the scope of the internal and external audits;

the reliability and accuracy of the financial information provided to management and other users of financial information, and whether the company should continue to use the services of the current external and internal auditors;

any accounting for auditing concerns identified as a result of the internal or external audits;

Role and functions of the audit committee

the company's compliance with legal and regulatory provisions, its articles of association,

code of conduct, by-laws and the rules established by the board;

the scope and results of the external audit and its cost effectiveness, as well as the independence and objectivity of the external auditors; and

the nature and extent of non-audit services provided by the external auditors , where applicable;

Composition of the audit committee

The chairperson of the board should not be a member of the Audit Committee.

The chairman of the Audit Committee should be an independent non-executive director. The chief executive officer should not be a member of the Audit Committee.

The Audit Committee should be composed entirely of non-executive directors.

It is not a requirement that the majority of the Audit Committee be independent non- executive directors although this would be strongly recommended (Aspiration: majority independent).

All members of the Audit Committee should have financial awareness. The chairman should be skilled and experienced in financial matters.

The corporate governance committee

The Corporate Governance Committee should include in its terms of reference the key areas normally covered by a nomination committee and a remuneration committee (unless these have been separately constituted).

Its role is also to ensure that the reporting requirements on corporate governance, whether in the annual report or on an ongoing basis are in accordance with the principles of the Code.

Composition of the corporate governance committee

A non-independent chairperson of the board can only be the chairperson of the Corporate Governance Committee on condition that the majority of the committee are independent non-executive directors.

If this is not the case then the non-independent chairman of the board can be a member of the Corporate Governance committee, but not its chairperson.

The chairperson of the Committee would then have to be an independent non-executive director (Aspiration: the chairman of the Corporate Governance Committee should be an independent non-executive director).

The chief executive officer may be a member of the Corporate Governance Committee.

The Corporate Governance Committee should be composed of a majority of non-executive directors.

Other than in the case where the non-independent chairperson of the board is also chairperson of the Corporate Governance Committee, it is not a requirement that the majority of the Corporate Governance Committee be independent non-executive directors, although this would be strongly recommended (Aspiration: always majority independent).

Remuneration as a corporate

governance issue The remuneration of executive directors and senior

managers is an important issue in corporate governance. are primarily concerned about their personal

remuneration. However, the conflict of interest between management and

shareholders might be resolved if the remuneration of directors could include incentives.

If directors are rewarded for achieving performance targets that are consistent with the best interests of the company's shareholders, the conflict of interests could be reduced.

Directors and shareholders would both benefit.

The need for a remuneration

committee The need for a remuneration committee was first recommended in

the UK by the Greenbury Committee in 1995:- Putting together a remuneration package for senior executives is a

key issue in corporate governance. The system for negotiating and agreeing a remuneration package is

open to abuse if executive directors can decide or influence their own remuneration arrangements.

It is not practicable for shareholders to be involved in the negotiation of remuneration packages, and shareholders should not be able to make decisions about the remuneration of individual directors. However, they are entitled to extensive information about directors' remuneration.

Remuneration for executive directors and other senior executives should therefore be decided by a remuneration committee of the board.

The UK Combined Code on directors remuneration

Levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully, but a company should not pay more than is necessary for this purpose.

There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors.

No director should be involved in deciding his or her own remuneration.

Duties of remuneration committee determining, agreeing and developing the company's

general policy on executive and senior management remuneration;

determining specific remuneration packages for executive directors of the company, including but not limited to basic salary, benefits in kind, any annual bonuses, performance-based incentives, share incentives, pensions and other benefits;

determining any criteria necessary to measure the performance of executive directors in discharging their functions and responsibilities;

determining the level of non-executive and independent non-executive fees to be recommended to the shareholders at the Meeting of Shareholders.

Composition A non-independent chairperson of the board can be the

chairperson of the Remuneration Committee The chief executive officer may be a member of the

Remuneration Committee. The Remuneration Committee should be composed of a majority of non- executive directors.

Other than in the case where the non-independent chairperson of the board is also chairperson of the Remuneration Committee, it is not a requirement that the majority of the Corporate Governance Committee be independent non- executive directors, although this would be strongly recommended

No member of the Remuneration Committee can be involved or vote on committee decisions in regard to his/her own remuneration.

Appointments to the board as a

corporate governance issue To ensure that there is a suitable balance of power on the board,

the system for nominating and selecting new directors should not put the choice into the hands of one individual or a small group of individuals.

executive directors should have a voice in new appointments to the board.

When the appointment of a new executive director is considered, the executive directors are probably in a better position than NEDs to assess the qualities of internal and external candidates for the position.

The executive directors should be aware of the skills and experience that they lack, and so can offer suggestions about the type of non-executive that they would like to add to the board.

Succession planning

In addition to selecting new directors for the board, the process of nomination also involves succession planning.

Succession planning means planning in advance for the eventual replacement of key members of the board when they eventually retire

Succession planning applies in particular to: the board chairman the CEO, and possibly, the finance director.

The need for a nominations committee

When a vacancy on the board has to be filled, or when succession planning is considered, the process of identifying and evaluating suitable candidates takes time.

The board should delegate the task to a committee to save time and resources

The appointment of directors to the board, and the succession for top positions on the board, should be a carefully organised process.

Main duties of a nominations

committee ascertain whether potential new directors are fit and

proper and are not disqualified from being directors ensure that the right balance of skills, expertise and

independence is maintained; ensure that there is a clearly defined and transparent

procedure for shareholders to recommend potential candidates;

ensure that potential candidates are free from material conflicts of interest and are not likely to simply act in the interests of a major shareholder, substantial creditor or significant supplier of the company

Composition A non-independent chairperson of the board can be the

chairperson of the Nomination Committee (Aspiration: Committee chaired by an independent non- executive director)

The chief executive officer may be a member of the Nomination Committee.

The Nomination Committee should be composed of a majority of non-executive directors.

Other than in the case where the non-independent chairperson of the board is also chairperson of the Nomination Committee, it is not a requirement that the majority of the Nomination Committee be independent non-executive directors, although this would be strongly recommended

Responsibility of the board for risk

management and risk control The board of directors is responsible for safeguarding

the assets of the company and protecting the value of the shareholders' investment.

The board has a duty to make sure that systems, procedures and checks are in place to prevent losses through errors, omissions, fraud and dishonesty

The board has the ultimate responsibility for the effectiveness of the internal control system.

The board is also responsible for developing the strategy for the company

Risk management as a task for

management Although the board has responsibility for risk

management and internal control, management has the operational responsibility for planning and implementing risk management and control systems.

Risk management and internal control should therefore be: planned and implemented by management, and monitored by the board, to ensure that effective

systems of risk management and control are in place.

Responsibilities of the audit

committee for financial controls The UK Combined Code also states that a responsibility of

the audit committee should include the review of the company's internal financial controls.

The audit committee is in a good position to carry out a review of these controls, because of the discussions it has with the company's external auditors and internal auditors.

For example, the external auditors produce a 'management letter' at the end of the audit, making recommendations for improvements in financial controls. The audit committee should discuss these recommendations with the auditors and management, to establish whether the recommendations have been implemented (and if not, why not).

Terms of Reference

The necessity for and composition of a Risk Committee will depend on the nature and complexity of the business.

Responsibility for setting risk strategy will remain with the board but the responsibility for assessing and assuring the quality of the risk management process may be delegated to the Audit Committee if a Risk Committee has not been constituted.

Composition the chairman of the Committee should be a non-

executive director; the chief executive officer should be a member of the

Committee; the Committee should be composed of suitably

qualified members which should include at least one independent director;

the company may also set up committees composed of management or appoint a chief risk officer, as appropriate, who would then report to the Board Risk Committee. The Audit Committee would retain an assessment and assurance role in this case.