What is the Role of a Corporate Governance Committee?
The role of the Corporate Governance Committee has risen in profile as the regulatory and compliance landscape has intensified, and the effective functioning of Boards themselves has come under greater scrutiny.
The Corporate Governance Committee (sometimes called the Nomination and Corporate Governance Committee) is tasked with ensuring that the board of directors structures, procedures and operations align with the company’s governance ambitions, corporate values and external compliance demands. Effectively, this committee governs the governors, providing rigorous oversight to make sure that the Board is fit for purpose now and in the future; is suitably resourced to carry out its duties and performs those duties effectively.
Additionally, this committee is the custodian of the organisation’s overall approach to corporate governance and is responsible for monitoring the wider governance and compliance landscape and making recommendations to the Board regarding actions and strategies to ensure governance best practices. Global consumer credit reporting company Experian (LSE: EXPR) has a committee charter which says the Corporate Governance Committee must “keep under review all legislative, regulatory and corporate governance developments that might affect Experian’s operations, striving to ensure that the Company is at the forefront of best practice.”
Governance Committees Role, Authority and Scope
The power invested in the Governance Committee is determined by the Board, and its importance means that it is typically given full access to directors and all the resources it needs to carry out its duties with full authority. Those duties and scope are documented in the committee’s charter, alongside specific authorisations such as permission to contract third parties required to assist in the specific elements of the committee’s role.
Board Size, Board Composition and Structure
To ensure that a Board is fit for purpose, the committee must regularly review its size, board composition and the committees it has in place and recommend any changes that should be made. Size is an important consideration. Boards need to be large enough so that individual directors are not overburdened with responsibilities and to ensure that sufficiently diverse perspectives and talents are available to the organisation. However, if they are too large, they can become unwieldy and costly as a decision-making organ. The average Board size in FTSE 150 companies in the UK was 10.1 directors in 2018, according to Spencer Stuart, and this figure has remained broadly stable over the past 10 years.
What is the size and scale of the challenge that companies face in building a balanced board?
The composition of UK Boards was a key aspect of the recently revised UK Corporate Governance Code. To ensure successful functioning of the Board, the Corporate Governance Committee must ensure that there is the right mix of personalities, skills, perspectives and relevant experience of topics affecting the organisation’s activities.
Additionally, subsequent to the Hampton-Alexander and Parker reviews, on gender and ethnic diversity, respectively, the code requires that, alongside skills and qualifications, Boards consider improving diversity in the makeup of their director cohorts.
This means that the Corporate Governance Committee must create a robust Board succession plan, identifying a pipeline of suitable directors and prequalifying their attributes, ready to make a recommendation when a directorship becomes available.
The committee must give sufficient consideration to recruiting directors on an unbiased basis. In its Six-Step Guide to Best Practice in Improving Board Diversity, the Equality and Human Rights Commission counsels against selecting candidates on the basis of intangible criteria such as “chemistry” and “fit,” recognising that such subjective factors tend towards groups appointing candidates in their own image and, therefore, albeit subconsciously, stifling diversity. The use of external selection consultants is also recommended in preference to reliance on word of mouth or the personal networks of existing directors. This is why governance committees may be authorised to employ external support to identify a wider pool of candidates.
Diligent’s Nomination and Governance application helps Boards to identify strengths and weaknesses in Board composition
The Corporate Governance Committee must also review the structures of the board and determine whether the right committees are in place and working effectively to serve the organisation. The fast-evolving corporate landscape means that it may be prudent to put new committees in place to deal with emerging risks and topics of importance. Examples include committees focusing on cyber-risk, digital transformation, and environmental and social factors.
Reviewing Board Effectiveness and Resources
The primary way that the Corporate Governance Committee assesses whether change is needed in the size, board composition and structure of the Board is through regular evaluation of Board effectiveness. For FTSE 350 boards and those committed to adopting best practice principles, external evaluation is mandated every three years and governance committees are authorised to engage external consultancies to facilitate this independent review.
Interim evaluations may take place through internal channels, such as director surveys and informal feedback, but the committee must always be aware of the governance successes and potential weaknesses of its board and be prepared to act to address them if necessary.
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The Corporate Governance Committee should also consider whether the Board has sufficient resources in place to perform its duties. They may assess operational issues, such as the security of board communications both within and outside the formal board meeting process, as insecure communications that represent a significant governance risk. They should keep watch on whether Board books are delivered suitably in advance of meetings and via an appropriate channel. They will also evaluate whether the Board has the right level of access to the Company Secretary and key members of the senior management team in order to improve their working knowledge of the business.
Board Reporting and Monitoring Corporate Governance Best Practice
The Corporate Governance Committee is responsible for ensuring that the organisation reports on its governance performance transparently via the right channels. Board reports must address the relevant compliance and regulatory topics, highlighting successes and managing any issues that have emerged.
Given the increasingly complicated corporate governance environment, it is not only important that the committee manages the Board’s own governance procedures, but also establishes governance principles for the business in the light of best practice and emerging compliance risks. This requires directors to engage with relevant regulatory organisations and networks that scrutinise and promote best practice so that they can assess the relevance of new directives and regulations and advise the Board on the right response.
The increasing scrutiny of companies’ corporate governance performance by shareholders, stakeholders and activist investors, along with the growing complexity and volume of regulatory requirements that the business must meet, means that the Governance Committee plays a role of mounting importance within today’s businesses. Whereas, in the past, this committee may have garnered less attention than others in the board structure, today it is foundational to a well-governed, well-resourced and effective Board of Directors.
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