Functions and Responsibilities of a Company’s Board of Directors and its Committees

Functions and Responsibilities of a Company’s Board of Directors and its Committees

The board of directors oversights company operations and serves as the link between its shareholders and managers. It has the ultimate responsibility of ensuring that the company adopts proper corporate governance principles and complies with all applicable laws and regulations.

Board Composition

Boards with one-tier structures comprise a mix of executive and non-executive directors. The executive directors are employed by the company and are usually members of senior management, while the non-executive directors are external to the company and bring objectivity to the decision-making process. Independent directors are non-executive directors who do not have a material relationship with the company concerning employment, ownership, or remuneration.

In boards with two-tier structures, the supervisory and management boards are independent of each other. The chairperson of the supervisory board is typically external to the company while the Chief Executive Officer (CEO) usually chairs the management board.

In some countries such as the United States, many companies have “CEO duality” in which the CEO also serves as the chairperson of the board. The CEO and chairperson roles are however becoming increasingly separated.

Functions and Responsibilities of the Board

Duty of care and duty of loyalty are two well-established elements of directors’ responsibilities. The Organization for Economic Co-operation and Development (OECD) Principles of Corporate Governance indicate that duty of care “requires board members to act on a fully informed basis, in good faith, with due diligence and care”. In the same breath, the duty of loyalty “is the duty of the board member to act in the interest of the company and shareholders.”

The board:

  • guides and approves the company’s strategic direction;
  • delegates strategy implementation to senior management;
  • reviews corporate performance and determines the relevant courses of action;
  • hires and fires senior managers;
  • ensure leadership continuity through succession planning for the CEO and other key executives;
  • sets the overall structure of the company’s audit and control systems; and
  • oversees reports by internal audit, the audit committee, and external auditors.

Board of Directors Committees

The board of directors typically establishes committees and delegates some of its responsibilities to these committees. Some of the most common committees include:

  • Audit Committee: the audit committee is responsible for recommending the appointment of an independent external auditor and proposing the auditor’s remuneration. The audit committee also monitors the company’s financial reporting process, including the application of accounting policies. It also presents an annual audit plan to the board and monitors its implementation by the internal audit function which it supervises;
  • Governance Committee: the governance committee ensures that the company adopts good corporate governance practices;
  • Remuneration Committee: the remuneration or compensation committee develops remuneration policies for the directors and key executives of the company and presents them for approval by the board or shareholders;
  • Nomination Committee: this committee establishes the nomination procedures and policies, including eligibility criteria for board directorship;
  • Risk Committee: this committee supervises the risk management function of the company;
  • Investment Committee: the investment committee reviews material investment opportunities such as expansion plans or acquisitions proposed by management and considers their viability.

Question

Which of the following board committees helps to ensure that the board composition is balanced and aligned to the company’s governance principles?

A. Governance Committee

B. Nomination Committee

C. Audit Committee

Solution

The correct answer is A.

The Governance Committee helps to ensure that the board composition is balanced and aligned to the company’s governance principles.

Reading 31 LOS 31f:

Describe functions and responsibilities of a company’s board of directors and its committees

Shop CFA® Exam Prep

Offered by AnalystPrep

Featured Shop FRM® Exam Prep Learn with Us

    Subscribe to our newsletter and keep up with the latest and greatest tips for success
    Shop Actuarial Exams Prep Shop Graduate Admission Exam Prep


    Sergio Torrico
    Sergio Torrico
    2021-07-23
    Excelente para el FRM 2 Escribo esta revisión en español para los hispanohablantes, soy de Bolivia, y utilicé AnalystPrep para dudas y consultas sobre mi preparación para el FRM nivel 2 (lo tomé una sola vez y aprobé muy bien), siempre tuve un soporte claro, directo y rápido, el material sale rápido cuando hay cambios en el temario de GARP, y los ejercicios y exámenes son muy útiles para practicar.
    diana
    diana
    2021-07-17
    So helpful. I have been using the videos to prepare for the CFA Level II exam. The videos signpost the reading contents, explain the concepts and provide additional context for specific concepts. The fun light-hearted analogies are also a welcome break to some very dry content. I usually watch the videos before going into more in-depth reading and they are a good way to avoid being overwhelmed by the sheer volume of content when you look at the readings.
    Kriti Dhawan
    Kriti Dhawan
    2021-07-16
    A great curriculum provider. James sir explains the concept so well that rather than memorising it, you tend to intuitively understand and absorb them. Thank you ! Grateful I saw this at the right time for my CFA prep.
    nikhil kumar
    nikhil kumar
    2021-06-28
    Very well explained and gives a great insight about topics in a very short time. Glad to have found Professor Forjan's lectures.
    Marwan
    Marwan
    2021-06-22
    Great support throughout the course by the team, did not feel neglected
    Benjamin anonymous
    Benjamin anonymous
    2021-05-10
    I loved using AnalystPrep for FRM. QBank is huge, videos are great. Would recommend to a friend
    Daniel Glyn
    Daniel Glyn
    2021-03-24
    I have finished my FRM1 thanks to AnalystPrep. And now using AnalystPrep for my FRM2 preparation. Professor Forjan is brilliant. He gives such good explanations and analogies. And more than anything makes learning fun. A big thank you to Analystprep and Professor Forjan. 5 stars all the way!
    michael walshe
    michael walshe
    2021-03-18
    Professor James' videos are excellent for understanding the underlying theories behind financial engineering / financial analysis. The AnalystPrep videos were better than any of the others that I searched through on YouTube for providing a clear explanation of some concepts, such as Portfolio theory, CAPM, and Arbitrage Pricing theory. Watching these cleared up many of the unclarities I had in my head. Highly recommended.