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