Role of Board Committees in Corporate Governance

Introduction

Recent accounting scandals at UK well-known corporations such as BT group and Tesco plc have greatly shaken the investors’ confidence. Such accounting scandals have seen stock prices plummet drastically coupled with brand image erosion and deterioration of credit ratings (Lee and Fan, 2015).   Williams (2017) holds that the scandals in prominent UK corporations heralds ineffectiveness in corporate governance.  Albeit the auditors have been largely blamed by unearthing, the board is also to blame for failing to bring in checks, balances and controls. Research has indicated that firms with independent boards and audit committees with skills and experience in finance and accounting deliver reliable financial reports free from misstatements (Giannetti and Wang, 2016).  Berthelot et al., (2010) elucidates corporate governance as the scheme of rules, processes and practices by which a firm is directed and controlled. According to Tricker (2015) the key pillars of corporate governance include accountability, transparency and security.  Lee and Fan (2013) elucidates that the role of board of directors is enormous in promoting accountability and transparency as they direct corporate affairs, making overall policy decisions while monitoring the actions and performance of senior management to protect the interests of shareholders. This is through its various committees notably audit committee, risk, remuneration and nomination committees.  

Based on the above background information, this essay critically discusses the role of board committees in corporate governance and how the committees influence accountability by the board with a focus on UK.  

Role of board committees in corporate governance

To enhance objectivity, various committees and how they influence corporate governance is as discussed below：

The role of audit committee in corporate governance

This committee is a central pillar enhancing firm’s corporate governance as it monitors corporate financial reporting, disclosures, external and internal audit and other internal control systems. The audit committee is tasked with overseeing the relationship with external auditors to foster quality financial reporting (Felo, 2011). This entails giving counsel and suggestion on the auditor’s appointment and reappointment, their compensation as well as terms of engagement.  They also offer a link amid internal and external auditors. Ali et al., (2017) holds that the audit committee also ensures implementation of audit recommendations especially on strengthening of internal control systems. Wagner (2011) holds its effectiveness depends on a number of factors such as committee independence and skills and experience of committee members. Felo (2011) explicates that independent audit committee with a high proportion of skilled non-executive director foster accountability and transparency in corporate operations. The accounting scandal at BP group has been partly blamed on a non independence of the audit committee as the group managing director; Iain Conn was part of the committee (Goodley, 2017). However the accounting scandal in Tesco plc occurred despite that the audit committee solely comprises of independent directors and one of them must have financial expertise. Actually two of the members of audit committee in Tesco plc are ex PWC employees (Chakrabortty, 2014).  

Timea (2014) holds that the key role of corporate governance is to steer investors’ confidence and the audit committee plays a pivotal role in this. This is because through control procedures, the committee ensures that the financial reports infer the true picture of firm’s operations. Diageo group which was ranked as the best governed corporation in UK in 2017 is characterized of strong board diversity and audit committee and comprise of purely independent non executive directors (Gordon, 2017).

The role of Remuneration committee in corporate governance

 As aforementioned this committee sets remuneration for the board members and executives. Agyemang-Mintah (2016) puts forth that remuneration packages for corporate executives has been in the limelight for decades. It is one of spot on which stockholders regularly major at AGMs across the globe. The members of this committee must be independent, transparent and have no conflicts of interest when making decisions on executive and board members’ remunerations.  According to Câmara (2012) in order to effectively steer transparency, honesty and accountability, key aspects of effective corporate governance, the remuneration committee independence must never be comprised and shouldn’t comprise of executive directors. However, Appiah and Chizema (2015) established a significant positive influence of remuneration committee independence on corporate failure. However others like Abdullah (2006) established otherwise; remuneration committee independence had such a positive influence on corporate governance.

Gregory-Smith (2011) explicates that remuneration committee prevents instances of CEOs capturing the pay-setting process and inflating their own compensation. However Catuogno et al., (2016) held that levels of remuneration set by the remuneration committee should be adequate to motivate, attract and retain competent top executive to drive the firm’s value. Diageo group is one of the UK firm committed to an independent remuneration committee that is all comprised of non executive directors (Diageo, 2018).  

The role of Nominations committee in corporate governance

This committee is charged with the mandate of assessing the board and evaluating the competence, skills and other features needed for candidates to the board positions. Aras and Crowther (2016) explicates that if this is done by the CEO and top management, it will compromise the independence of the board as they may bring in people that they can easily collude with to swindle corporate resources. As such the nomination committee helps to ensure that requisite candidates with no conflict of interest are considered for board positions.  Baker (2010) puts forth that nomination committee has the role of identifying, assessing, and nominating new board directors; re-nomination of existing directors; and assisting shareholders to elect new directors.

Sison (2010) and Steinberg (2017) indicate that the board should be composed of competent personnel who can effectively oversight corporate operations. The nomination committee must then comprise of skilled and competent individual that espouse integrity. To promote good corporate governance, the focus should be to oversee nomination of competent board members that will formulate corporate policies that will drive corporate performance and who can effectively promote long term growth and survival of the organization. On this note, the nomination committee is charged with the mandate of ensuring that the nomination procedures and policies factor in the requirements of the firm, such as required corporate competencies and skills that should be the focus when nominating the board of directors.