The effectiveness of committees
01 November 2017
By Parmi Natesan and Dr Prieur du Plessis
Committees can and should play a vital role in assisting the governing body to fulfil its responsibilities ̶ but they do not replace the governing body or absolve it of ultimate accountability.
Governing body committees are a familiar feature of the corporate scene, but there is often a lack of clarity about their role and how best to deploy them. The King IV Report on Corporate Governance provides some useful guidance and, above all, points us towards what we want to achieve rather than simply seeking to apply the recommendations.
In terms of the Companies Act, in certain instances companies must appoint an Audit Committee, and a Social and Ethics Committee. Other committees may be appointed according to law to assist the governing body to discharge its duties.
Over and above these two committees, King III recommended that governing bodies form Risk, Remuneration, and Nomination Committees as standing committees, and Governance, IT Steering and Sustainability Committees if considered necessary.
However ̶ and this has been an ongoing challenge for governance implementation ̶ it became clear that many companies were falling into the trap of simply ticking the boxes. Form over substance, in other words.
King IV specifically set out to address this issue by moving away from prescribing what specific committees should be appointed, to enjoining governing bodies to consider what was needed, and appropriate, for the organisation. The wording it uses is apt: “The governing body should ensure that its arrangements for delegation within its own structures promote independent judgement, and assist with balance of power and the effective discharge of its duties.”
The governing body is thus being nudged to focus on what it wants to achieve, and to exercise its judgement on how to achieve it. In terms of this principle, then, it would be perfectly in order for an organisation to entrust risk governance and some other functions to a composite committee or even to the governing body itself. The point is to ensure the structure has the right people with the right skills to do the job.
King IV also encourages governing bodies to adopt a holistic approach to committees. Outcomes would include using cross-membership to promote collaboration between committees, ensuring committees produce complementary work where their jurisdictions overlap, and structuring them so that none are overly reliant on, or dominated by, one member of the governing body.
Best practices for governing body committees
Perhaps the most important factor when it comes to a committee is to ensure its members have the right skills, and have sufficient time to devote to the work. Of course, any statutory requirements as to composition have to be followed. King IV also provides recommendations relating to committee composition, particularly as regards the executive / non-executive balance and the role of the chair of the governing body on committees.
Another important success factor is for the governing body to articulate the committee’s terms of reference. These should cover the committee’s roles and responsibilities, what authority is delegated to it, how it should make its recommendations to the governing body, how often it should meet and what its composition should be. These terms should be as detailed as possible to avoid confusion, especially as regards the role and responsibilities of the committee vis-à-vis the governing body, and the overlapping roles of other committees.
Committees, like all other components of the governance structure, should be regularly evaluated to ensure they are functioning well and delivering on the governing body’s expectations and needs.
Finally, it is essential that governing bodies consciously use the inputs from their committees properly. Specifically, they should avoid reopening discussions already held by the committee; having delegated the work to the committee, the governing body has to confine itself to addressing the key matters raised and recommendations made by the committee.
Committees do not replace the governing body, nor do they abdicate the governing body of ultimate accountability. They can play a vital role in helping the governing body to discharge its duties effectively and make better decisions. It is worth taking care to set them up properly and use them effectively.
Parmi Natesan and Dr Prieur du Plessis are Executive Director: Centre for Corporate Governance and Chairman of the Institute of Directors (IoDSA) respectively.
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