Boards of Directors typically constitute Board Committees to support the Board in the performance of specific aspects of Board oversight. Typically, the Company’s Article of Association and respective industry Codes and regulations allow the Board to perform its oversight role through Committees. Committees are often given the mandate to deal more effectively with complex issues or matters that require some more drilling down. This allows the Board enough time to provide general oversight over the affairs of the Company. Board Committees typically function independently from each other and are provided with sufficient authority and resources to assist the Board in the discharge of its oversight function. Board Committees make recommendations to the Board for approval on assigned tasks and the Board retains collective responsibility for decision making.
Board Committees meet according to their terms of reference or as otherwise exigent. It is therefore important that prospective Directors consider time availability not only as it pertains to the work of the Board, but also for committee work.
Committees when effectively engaged can be a great asset to the Board. Committee membership encourages involvement of Board members in the different aspects of the Company’s business. Also, organizations benefit from the diversity of expertise and experience of the committee members. The type and number of Committees established by respective Boards would depend on factors such as industry/sector, size of the Board, complexity of the business, etc. The Committees may be extant and are often referred to as standing committees or ad-hoc committees set up to deal with specific time-bound issues.
Whilst it is not mandatory for all companies to have board committees, the various sectoral corporate governance codes recommend the constitution of some Board committees. The Companies and Allied Matters Act (CAMA) and the Nigerian Code of Corporate Governance 2018 allows the Board to exercise its powers through Committees consisting of such members as the Board deems fit.
The Nigerian Code of Corporate Governance in respect of which companies would start reporting compliance from January 1, 2020 recommends the establishment of the Nomination and Governance Committee, Remuneration Committee, Audit Committee and Risk Management Committee. These committees may be combined taking into cognizance the size, needs and other requirements of the Company.
It is good practice to charge the Nomination & Governance Committee with the selection of suitable Director candidates for consideration by the Board in line with defined criteria. Other roles of the Nomination Committee include monitoring the succession plan, ensuring the Board is properly constituted in terms of structure, size and diversity as well as ensuring the annual performance evaluation of the Board, its committees and individual Directors. The Committee should also be responsible for reviewing of Board and Committee Charters.
The Audit Committee is responsible for monitoring the financial reporting process, effectiveness of the internal control, risk and audit systems, statutory audit and review of the independence of the company’s external auditors. The Committee also assists the Board in discharging its oversight responsibility with respect to the review of financial statements. The Nigerian Code of Corporate Governance recommends that members of the Audit committee should be non-executive directors with a majority of independent non-executive directors if possible. In addition to the statutory Audit Committee created by Section 359(3) CAMA, some sectoral Codes require the establishment of a Board Audit Committee.
The Remuneration Committee develops and recommends to the Board the renumeration structure and policy. The committee can operate as a standalone Committee or merged with either the Nominations and Governance Committee or any other Board Committee as shall be expedient. Typically, the Remuneration Committee is required to meet at least once a year and chaired by an Independent Non-Executive Director.
The Risk Management Committee oversees the enterprise risk management framework and assists the Board in fulfilling its oversight function of ascertaining the risk appetite, capacity and tolerance of the organization, risk related policies and processes, controls, compliance and the governance structure. This Committee can be combined with the Board Audit Committee.
The Board has the power to determine the membership and composition of Board committees. Committee members must be suitably skilled in terms of knowledge and experience. The Nigerian Code of Corporate Governance 2018 recommends that only Directors shall be Committee members while members of the senior management team may be required to attend committee meetings as appropriate.
Committees should have at least three members, majority of who shall be independent Non-Executive Directors, and membership reviewed periodically. The Chairman of the Committee is often appointed by the Board while ensuring that there is a balance in the distribution of power to ensure no individual dominates decision making. Committee Terms of Reference varies according to the nature and type of committee. Howbeit, the following are standard terms:
- the composition and structure of the committee
- the objectives, purpose and responsibilities
- the scope of authority, extent of power and decision-making abilities
- Reporting procedure
- Frequency of meetings
- Attendance at a meeting
- Quorum
- Tenure
It is important to note that the establishment of committees and the delegation of some of the Board’s authority to Committees does not exonerate the Board of its responsibilities as the powers of Board Committees are derived from the Board and must therefore always remain under the Board’s control.
In practice, the minutes of committee meetings are usually taken by the Company secretary who prepares a report of key deliberations and recommendations for presentation to the Board for approval. Therefore, whilst the Committee has the power to take decisions on certain issues, those decisions must be approved by the Board before same can be considered as binding.
Board Committees plays a key role in achieving Board effectiveness, therefore the Committee structure most be monitored on an ongoing basis. The performance of Committees and of individual directors therefore ought to be evaluated periodically- typically by external consultants to guarantee objectivity.
Corporate governance is an essential tool in achieving business success and sustainability and Board Committees should be deployed as tool to fulfilling the Board’s mandate rather than from set them up only in compliance with regulatory requirements.