Boards in the UK are beginning to restructure their committees, to better integrate them into the company’s operations and strategy. Currently, 60 per cent of UK boards have more than the traditional three committees: for audit, nomination and remuneration. Creating effective committees means providing a clear objective and filling them with board members who are skilled in attaining that purpose. Standing committees should be set up for long-term goals, while ad hoc committees can be formed for specific near-term objectives.
Board committees in the UK
The UK Corporate Governance Code requires a board to have three committees, remuneration, audit and nomination, but boards in the UK are beginning to restructure their committees, although not as rapidly as that is happening in the United States.
According to the latest statistics from London-based researcher Spencer Stuart, the number of boards with more than the three obligatory committees has increased during the past decade. This year, 60 per cent of boards have more than three committees, compared with 57.3 per cent last year and 40 per cent in 2006. HSBC Holdings, BT Group and BP each have seven committees, the highest number for boards in the top 150 FTSE companies. Twenty per cent of the top 150 companies in the FTSE have a separate risk committee, while 10.7 per cent of companies have a combined audit and risk committee. In the remaining companies, the audit committee normally deals with risk.
Financial services companies continue to be the most likely to have a separate risk committee, although we have started to see these in the energy, mining and engineering sectors. A further 17 companies from a variety of sectors specify a combined risk and audit committee, although in practice, most audit committees include risk as part of their remit.
Companies with five or more board committees are mostly in the financial services, energy, mining and diversified industrials sectors. As noted above, HSBC, not included in the numbers below, has a total of seven board committees.
Boards are obliged to form audit, nomination and remuneration committees, but they can choose to form others if there are extensive areas of work to be undertaken. Risk is one area where boards often feel that more extensive work is necessary. There can be a quality committee or a reputation committee if the board sees the need — there is no legal restriction on forming board committees.
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Making committees work
Forming committees does not obviate the board’s responsibility for all activity.
“However, through committees, work can be divided so that far more can be accomplished than if the entire board acted on all matters. Committees provide organisational structure, and at the same time allow enough flexibility so the board can adapt quickly to the changing demands of the environment,” according to the Centre for Non-Profit Management.
There are four functions that board committees serve, including:
- Dividing up the work of the organisation
- Expediting work by removing routine tasks from monthly board consideration
- Utilising the specific talents and knowledge of board members
- Permitting broader participation by all board members
Building effective committees
But just dividing up responsibility doesn’t necessarily make effective committees.
“Just as every board is unique, every board’s committee structure is unique too. Most organisations have the same committee structure from year to year with little thought given as to what the committees do or whether they are still relevant to the organisation. As a result, the committees have vague objectives, committee meetings are often endless discussions with no work achieved, and the members of the committees become bored or frustrated,” commented Eileen Morgan Johnson, a partner with the law firm Whiteford, Taylor & Preston.
For a committee to operate effectively, it needs clearly specified objectives. This should include a specific commission so that it is aware of its responsibility, the timeline and the limits of its authority.
An effective committee chair, who understands the decision-making process and who knows how to lead a group through that process, is another requirement for an effective committee.
Then, the committee members must be carefully selected. First, they must have the time to attend both committee and board meetings. Then, they must be able to understand the issues to which the committee is dedicated. They should know how to work in a group, and be skilled at considering various solutions to problems set for attaining the board’s goals.
A further requirement is a capable group of support advisors and staff, explained corporate governance expert Zabihollah Rezaee.
Standing and ad hoc committees
There are generally two types of board committees:
Standing committees (also called operating committees) are those committees that an organisation uses on a continual basis. They may be required by the organisation’s bylaws, or they may have been established by the board.
Ad hoc committees are formed for a limited period of time to address a specific need. When the work of the ad hoc committee is completed, the committee is dissolved. There are no limits to how long the ad hoc committee should take to accomplish its work; anything from a single day to several years may be determined.
How should work be divided among standing and ad hoc committees?
“The bulk of the board’s work should be done through its standing committees. Some boards have board development plans where members rotate through the different committees to gain a broad understanding of the organisation. Others allow members to stay with the same committee each year to develop a deeper knowledge of the subject area to provide greater service to the organisation. A balance of the two strategies allows board members to gain experience with different committees and to develop some expertise with the work of one or two committees,” explained Johnson.
Ad hoc committees are formed for very specific purposes, such as recruiting a new CEO, relocating the organisation or launching a new division.
Enabling communication among the board and its committees
Coordinating communication among the board and its committees can become complex, but not with a board portal like Diligent Boards. Diligent Boards moves all of the agendas, documents, annotations and discussions of board meetings online into one intuitive, secure board portal. And it goes beyond digital board books to manage the full scope of a board’s moving parts — committees, contacts, voting, reporting and more.
With Diligent Boards, you can keep up with committee meetings and materials easily in real time. You can annotate documents in tandem with other users and get notifications for updates. And you can search archives and board resources easily.
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