By Sanjana Sahu and Sahil Sharma, School of Law-KIIT University
Editor’s Note: Corporate Governance is the system by which companies are directed and controlled. The Board of Directors are responsible for the governance of their companies and are appointed by shareholders. There are also various Board Committees, which play a major role in the working of the Company. This paper discusses the roles of all these committees.
Governance is a word that barely existed 30 years ago. Now it is in common use not just in companies but also in charities, universities, local authorities and National Health Trusts. It has become shorthand for the way an organization is run, with particular emphasis on its accountability, integrity and risk management.[i]
Corporate Governance is the system by which companies are directed and controlled. Board of directors is responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in its place. The responsibilities of the board include setting up of the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The board’s actions are subject to laws, regulations and the shareholders in a general meeting.[ii]
OECD Principles on Corporate Governance state that together with guiding corporate strategy, the board is chiefly responsible for monitoring managerial performance and achieving an adequate return for shareholders, while preventing conflicts of interest and balancing competing demands on the corporation.[iii]
Responsibilities cast upon directors are quite onerous and multifarious. The duties of directors are partly statutory, partly regulatory and partly fiduciary. Board is responsible for direction, control, conduct management and supervision of the company’s affairs. They have to establish effective corporate governance procedures and best practices and whistle blower mechanism. Ultimate control and management vests with the Board.[iv]
BOARD OF DIRECTORS AND BOARD COMMITTEES
Board of Directors:
Before proceeding to the topic, we need to have a basic idea about the Board of Directors.
At the core of corporate governance practices is the Board of Directors which oversees how the management serves and protects the long term interests of all the stakeholders of the company. The institution of Board of Directors is based on the premise that a group of trustworthy and respectable people should look after the interests of the large number of shareholders who are not directly involved in the management of the company. The position of board of directors is that of trust as the board is entrusted with the responsibility to act in the best interests of the company.
Committees appointed by the Board focus on specific areas and take informed decisions within the framework of delegated authority, and make specific recommendations to the Board on matters in their areas or purview. All decisions and recommendations of the committees are placed before the Board for information or for approval.[v]
To enable better and more focused attention on the affairs of the Corporation, the board delegates particular matters to the committees of the board set up for the purpose. Committees review items in great detail before it is placed before the Board for its consideration. These committees prepare the groundwork for decision making and report at the subsequent board meeting.[vi]
VARIOUS COMMITTEES OF THE BOARD
The following are some of the important committees of the Board-
- Audit Committee
- Shareholders Grievance Committee
- Remuneration Committee
- Risk Committee
- Nomination Committee
- Corporate Governance Committee
- Corporate Compliance Committee
- Ethics Committee
We shall deliberate on the functions of all the committees in detail.
The Audit Committee shall assist the Board of Directors in the oversight of
(1) The integrity of the financial statements of the Company,
(2) The effectiveness of the internal control over financial reporting,
(3) The independent registered public accounting firm’s qualifications and independence,
(4) The performance of the Company’s internal audit function and independent registered public accounting firms,
(5) The Company’s compliance with legal and regulatory requirements,
(6) The performance of the Company’s compliance function.[vii]
Organization and Membership:
The Committee shall be appointed by the Board and consist of at least three Directors, each of whom are independent of management and the Company as defined by the Bylaws of the Company, the SEC and the New York Stock Exchange as well as Clause 49 of the Listing Agreement. Two thirds of the members shall be independent directors.
All Committee members shall be financially literate, or shall become financially literate within a reasonable period of time after appointment to the Committee. The Committee shall aspire to have at least one member who is an “audit committee financial expert” as such term is defined by the SEC.
The Chairman of the Committee shall be an independent director. No Director may serve as a member of the Committee if such Director serves on the audit committees of more than two other public companies unless the Board determines that such simultaneous service would not impair such Director’s ability to serve effectively on the Committee. The Board shall designate one member of the Committee as its Chairman. Directors will serve the Committee at the pleasure of the Board and for such terms as the Board may determine. The Committee shall meet at least quarterly and otherwise as the members of the Committee deem appropriate. Minutes shall be kept of each meeting of the Committee.
Meeting of Audit Committee:
The audit committee shall meet at least thrice a year. One meeting shall be held before finalization of annual accounts and one every six months. The quorum shall be either two members or one third of the members of the audit committee, whichever is higher and minimum of two independent directors
Powers of Audit Committee:
The audit committee shall have powers which should include the following:
- To investigate any activity within its terms of reference.
- To seek information from any employee.
- To obtain outside legal or other professional advice.
- To secure attendance of outsiders with relevant expertise, if it considers necessary.
Role of Audit Committee:
The role of the audit committee shall include the following:
- Oversight of the company’s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible.
- Recommending the appointment and removal of external auditor, fixation of audit fee and also approval for payment for any other services.
- Reviewing with management the annual financial statements before submission to the board, focusing primarily on;
- Any changes in accounting policies and practices.
- Major accounting entries based on exercise of judgment by management.
- Qualifications in draft audit report.
- Significant adjustments arising out of audit.
- The going concern assumption.
- Compliance with accounting standards.
- Compliance with stock exchange and legal requirements concerning financial statements
- Any related party transactions
- Reviewing with the management, external and internal auditors, the adequacy of internal control systems.
- Reviewing the adequacy of internal audit function, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit.
- Discussion with internal auditors any significant findings and follow up there on.
- Reviewing the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board.
- Discussion with external auditors before the audit commences about nature and scope of audit as well as post-audit discussion to ascertain any area of concern.
- Reviewing the company’s financial and risk management policies.
- To look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of nonpayment of declared dividends) and creditors.
Review of information by Audit Committee:
The Audit Committee shall mandatorily review the following information:
- Financial statements and draft audit report, including quarterly / half-yearly financial information;
- Management discussion and analysis of financial condition and results of operations;
- Reports relating to compliance with laws and to risk management;
- Management letters / letters of internal control weaknesses issued by statutory / internal auditors; and
- Records of related party transactions
- The appointment, removal and terms of remuneration of the Chief internal auditor shall be subject to review by the Audit Committee[viii]
SHAREHOLDERS GRIEVANCE COMMITTEE
In terms of Clause 49-IV(G)(iii) of the Listing Agreement, a board committee under the chairmanship of a non-executive director shall be formed to specifically look into the redressal of shareholder and investors complaints like transfer of shares, non receipt of balance sheet, non receipt of declared dividends etc. This committee shall be designated as “Shareholders/ Investors Grievance Committee”.[ix]
The terms of reference of our Shareholders’/ Investors Grievance Committee are given below:
“To allot the Equity Shares of the Company, and to supervise and ensure:
- Efficient transfer of shares; including review of cases for refusal of transfer transmission of shares and debentures;
- Redressal of shareholder and investor complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends etc;
- Issue of duplicate / split / consolidated share certificates;
- Allotment and listing of shares;
- Review of cases for refusal of transfer / transmission of shares and debentures;
- Reference to statutory and regulatory authorities regarding investor grievances; and to otherwise ensure proper and timely attendance and redressal of investor queries and grievances.”[x]
The Shareholders/ Investor Grievances Committee looks into redressal of shareholder and investor complaints, issue of Duplicate/ Consolidated Share Certificates, Allotment and Listing of shares and review of cases for refusal of Transfer/ Transmission of shares and debentures and reference to Statutory and Regulatory Authorities. The scope and functions of the Shareholders/Investor Grievances Committee are as per Clause 49 of the Listing Agreement.[xi]
The role of a Remuneration Committee is:
- To decide and approve the terms and conditions for appointment of executive directors and/ or whole time Directors and Remuneration payable to other Directors and matters related thereto.
- To recommend to the Board, the remuneration packages of the Company’s Managing/Joint Managing/ Deputy Managing/Whole time / Executive Directors, including all elements of remuneration package (i.e. salary, benefits, bonuses, perquisites, commission, incentives, stock options, pension, retirement benefits, details of fixed component and performance linked incentives along with the performance criteria, service contracts, notice period, severance fees etc.);
- To be authorized at its duly constituted meeting to determine on behalf of the Board of Directors and on behalf of the shareholders with agreed terms of reference, the Company’s policy on specific remuneration packages for Company’s Managing/Joint Managing/ Deputy Managing/ Whole-time/ Executive Directors, including pension rights and any compensation payment;
- To implement, supervise and administer any share or stock option scheme of the Company.[xii]
- to review the overall compensation policy, service agreements and other employment conditions to Executive Directors and senior executives just below the Board of Directors and make appropriate recommendations to the Board of Directors;
- to review the overall compensation policy for Non-Executive Directors and Independent Directors and make appropriate recommendations to the Board of Directors;
- to make recommendations to the Board of Directors on the increments in the remuneration of the Directors;
- to assist the Board in developing and evaluating potential candidates for senior executive positions and to oversee the development of executive succession plans;
- to review and approve on annual basis the corporate goals and objectives with respect to compensation for the senior executives and make appropriate recommendations to the Board of Directors;
- to review and make appropriate recommendations to the Board of Directors on an annual basis the evaluation process and compensation structure for our Company’s officers just below the level of the Board of Directors;
- to provide oversight of the management’s decisions concerning the performance and compensation of other officers of our Company; [xiii]
The committee comprises a minimum of three independent non-executive directors, as well as the chief executive and financial director. The chair of the board may not serve as chair of this committee. Members of the committee are individuals with risk management skills and experience. The committee’s responsibilities include:
- Review and approve for recommendation to the board a risk management policy and plan developed by management. The risk policy and plan are reviewed annually.
- Monitor implementation of the risk policy and plan, ensuring an appropriate enterprise- wide risk management system is in place with adequate and effective processes that include strategy, ethics, operations, reporting, compliance, IT and sustainability.
- Make recommendations to the board on risk indicators, levels of risk tolerance and appetite.
- Monitor that risks are reviewed by management, and that management’s responses to identified risks are within board-approved levels of risk tolerance.
- Ensure risk management assessments are performed regularly by management.
- Issue a formal opinion to the board on the effectiveness of the system and process of risk management.
- Review reporting on risk management that is to be included in the integrated annual report.
- Review annually the charters of the group’s significant subsidiary companies’ risk committees, and their annual assessment of compliance with these charters to establish if the Naspers committee can rely on the work of these risk committees.
- Perform an annual self-assessment of the effectiveness of the committee, reporting these indings to the board.[xiv]
The primary role of the Nomination Committee of the board is to assist the board by identifying prospective directors and make recommendations on appointments to the board and the senior most level of executive management below the board. The committee also clears succession plans for these levels.[xv] The Nomination Committee is responsible for making recommendations on board appointments and on maintaining a balance of skills and experience on the board and its committees.
Succession planning for the board is a matter which is devolved primarily to the Nomination Committee, although the committee’s deliberations are reported to and debated by the full board. The board itself also regularly reviews more general succession planning for the senior management of the group.[xvi]
CORPORATE GOVERNANCE COMMITTEE
Together with the audit and compensation committees, the nominating/corporate governance committee rounds out the three standing committees of a public company’s board of directors. It plays a critical role in overseeing matters of corporate governance for the board, including formulating and recommending governance principles and policies. As its name implies, this committee is charged with enhancing the quality of nominees to the board and ensuring the integrity of the nominating process. Given the recent focus on board composition and diversity, director elections, and proxy access, the role of nominating/corporate governance committee is in the spotlight.[xvii]
CORPORATE COMPLIANCE COMMITTEE
The primary Objective of the Compliance Committee is to review, oversee and monitor:
- The company’s compliance with applicable legal and regulatory requirements.
- The company’s policies, programs, and procedures to ensure compliance with relevant laws, the company’s code of conduct, and other relevant standards
- The company’s efforts to implement legal obligations arising from settlement agreements and other similar documents
- Perform any other duties as are directed by the board of directors of the company.
The committee’s specific responsibilities in this area include:
- Overseeing the corporate compliance program, including policies and practices designed to ensure the organization’s compliance with all applicable legal, regulatory, and ethical requirements.
- Recommending approval of the annual corporate compliance plan and reviewing processes and procedures for reporting concerns by employees, physicians, vendors, and others.
- Recommending organizational integrity guidelines and a Code of Conduct.
- Reviewing and reassessing the guidelines and Code of Conduct at least annually[xviii]
The possible roles for an Ethics Committee are:
- Contribute to the continuing definition of the organization’s ethics and compliance standards and procedures.
- Assume responsibility for overall compliance with those standards and procedures.
- Oversee the use of due care in delegating discretionary responsibility.
- Communicate the organization’s ethics and compliance standards and procedures, ensuring the effectiveness of that communication.
- Monitor and audit compliance.
- Oversee enforcement, including the assurance that discipline is uniformly applied.
- Take the steps necessary to ensure that the organization learns from its experiences.
But an ethics committee can do much more. The committee can be charged to meet all seven requirements for an effective ethics management process. For each of the above arenas of responsibility there may be several specific roles.[xix]
SIGNIFICANCE OF BOARD COMMITTEES
After a detailed discussion regarding the various functions carried out by each committee and their lending of crucial assistance to the harmonious functioning of the company is summed up here.
Committees allow the board to –
- handle a greater number of issues with greater efficiency by having experts focus on specific areas
- develop subject specific expertise on areas such as compliance management, risk management, financial reporting
- enhance the objectivity and independence of the board’s judgment
Greater specialization and intricacies of modern board work is one of the reasons for increased use of board committees. The reasons include:
- responsibilities are shared
- more members become involved
- specialized skills of members can be used to best advantage
- inexperienced members gain confidence while serving on matters may be examined in more detail by a committee
The committees focus accountability to known groups. While the board as a legal unit always retains responsibility for the work of its committees, the committees because of its focus on the mandate, the size of the committee being relatively smaller than the board tend to be more effective. However, committees may dilute governance integrity to the extent that they may obscure the direct board to CEO accountability and fragment the board’s wholeness. Therefore, it is important that there is clarity of delegation and it should be ensured that committees are not put between the board and the CEO, either by giving committees official instructional authority or by allowing them to evaluate performance using their own criteria.
Edited by Hariharan Kumar
[ii]Corporate Governance: Beyond Letters, (The Institute of Company Secretaries of India, Taxmann Publications, 1st Edition,2011) 1.101
[iii] Available at http://www.oecd.org/daf/ca/corporategovernanceprinciples/31557724.pdf / accessed 5th March,2014
[iv] Supra N.2;2.15
[v] Available at http://www.drreddys.com/investors/committees-of-board.html / accessed 5th March,2014
[vi] Corporate Governance: Beyond Letters, (The Institute of Company Secretaries of India, Taxmann Publications, 1st Edition,2011) 2.51
[vii] Balasubramanian, N., Ed. Corporate Board and Governance(Sterling Publishing,1998)79
[viii] Available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1293168356651.pdf/ accessed on 5th March,2014
[ix]Available at http://www.oecd.org/daf/ca/corporategovernanceprinciples/31557724.pdf/ accessed on 5th March,2013
[x]Available at http://www.timborhome.com/report_on_corporate_governance.asp/ accessed on 5th March,2013
[xi]Available at http://www.taksheel.com/corporategovernance.html/ accessed on 5th March,2013
[xii] Available at http://www.timborhome.com/report_on_corporate_governance.asp/ accessed on 5th March,2013
[xiv] Available ahttp://www.naspers.com/corp-gov-committees.php/ accessed on 5th March,2013
[xv] Supra N.6;2.60
[xvi]Available at http://www.g4s.com/en/Who%20we%20are/Corporate%20governance/Nomination%20Committee/ accessed on 5th March,2013
[xvii]Available at http://www.corpgov.deloitte.com/site/us/nominating-corporate-governance-committee/ accessed on 5th March,2013
[xviii]Available at www.greatboards.org/…/Charter-Audit-and-Corporate-Compliance-Committee/ accessed on 5th March,2013