Board of directors acts as shareholders’ monitoring tool. Many corporate governance frameworks require board of directors to represent a diverse mix of expertise, backgrounds, and competencies.
The one-tier boards have executive and non-executive directors. Non-executive directors may be independent if they do not have any material relationship with the company. In the two-tier structure, supervisory and management boards are independent of each other, i.e. there are no overlapping members or there is a limit to the number of people who can serve on both boards.
While in many countries, particularly the US, CEOs typically were also chairpersons of the board of directors (called CEO duality), there is a trend away from this practice recently.
Some boards are staggered in that some of the directors retire and are re-elected each year instead of all directors retiring and being re-elected at the same time.
Function and responsibilities of the board
A board is elected by shareholders to act on their behalf, but they have a responsibility to consider the interests of all stakeholders. They owe a duty of care and duty of loyalty to the company and its shareholders.
The board’s main role is to provide strategic direction, oversee implementation of strategy, evaluation performance and compensation of senior management, review the company’s performance, ensure succession planning of management. They delegate the day to day operations to the management. They also play a central role in ensuring effectiveness of a company’s audit and control systems, reviewing reports by external and internal auditors, financial statements, etc. and checking compliance with corporate and other laws and regulations. They are also responsible for establishing an enterprise risk management system, review proposals for corporate transactions such as mergers and acquisitions, restructuring, etc.
Board of directors committees
A company’s board of directors typically delegates some functions to committees constituted for the purpose, who report their recommendations to the board. But this does not absolve the board of its responsibilities.
Popular committees include audit committee, remuneration committee, nomination committee, risk committee, etc.
Audit committee is responsible for overseeing the audit and control system of a company, i.e. monitoring of financial reporting process; supervision of internal audit, presentation of annual audit plan to board and ensuring its implementation; recommending external auditor for appointment and its remuneration; reviewing reports by internal and external auditors and suggesting remedial action.
Governance committee ensures adoption, constant updating and implementation of a company’s corporate governance framework, code of ethics, board charter, etc.; further, it ensures compliance with relevant laws, and may be responsible for undertaking an evaluation of the board, its structure and activities.
Remuneration or compensation committee is mainly responsible for proposing remuneration policies for directors and key executives for approval by board/shareholders. They may also handle relevant employment contracts, define performance evaluation criteria, evaluate managers, establish HR policies, and oversee implementation of employee benefit plans.
Nomination committee nominates/recommends qualified individuals for elections to the board. They also set nomination policies and procedures, define independence criteria, etc.
Risk committee oversees a company’s enterprise risk management, helps the board in formulating risk policy, risk profile, and oversee the risk management function of a company. It is most important in the case of banks and financial institutions.
Investment committee critically reviews investment proposals (both expansion and divestiture) submitted by management. It is also typically responsible for establishing/revising investment strategy of a company.
Different jurisdictions have different requirements/recommendations regarding committees and their composition. However, many frameworks require only independent directors to handle matters of conflict of interest. For example, LSE and NYSE require that audit and compensation committees be composed solely of independent directors.