Considering the Governance Committee of the Board

Norman Marks, CRMA, CPA, is an evangelist for better run business, focusing on corporate governance, risk management, internal audit, enterprise performance, and the value of information. The views expressed in this blog are his personal views and may not represent those of The IIA.

 

The Canadian Institute of Chartered Accountants (CICA) has published a number of guides for Directors. One is 20 Questions Directors Should Ask About Governance Committees (published in 2010).

The publication starts with many of the right questions:

“As a board, do we have the right directors, with the right experience, knowledge and motivation to help us deliver value to the organization? Are we able to effectively set strategic direction with management and oversee and evaluate management’s execution of strategic plans? Are we confident that we have delegated responsibilities effectively across committees? Are we effective in overseeing risk mitigation and staying on top of emerging risks? Do we receive useful feedback through regular evaluations that help us enhance the value we provide? Are we developing candidates to take leadership positions on our board?

“Do we have an effective and productive relationship with management? How well do we understand stakeholder expectations and is our board proactively engaging with stakeholders in a way that is both productive and mutually beneficial?”

As I have written before, boards’ oversight of risk management should include whether the organization has continuing processes to identify, understand, and then take the right risks — acting when risks are outside acceptable ranges to mitigate them, but taking intelligent risks as and when appropriate to deliver value to stakeholders. That goes further than the language used in the CICA piece.

I like how the CICA introduce the 20 questions with this brief comment on the governance committee:

“The governance committee is unique among the board’s committees. While most committees address a single aspect of the board’s mandate, the governance committee focuses holistically on the entire board. On many boards, the governance committee functions as a centre for self-reflection to build and enhance the board’s effectiveness.”

I recommend reading the CICA document. It has some good content I am not going to cover in this post. Rather, I prefer to comment on the 20 questions CICA listed.

Here are the 20 questions and my comments. Please share your own insights in the comment section of this blog post to add value to the discussion.

1. What are the governance committee’s responsibilities and what value does it bring to the board?

This is an important question. Not only should the responsibilities be defined and agreed among the board and with top management, but they should be documented in a committee charter, revisited on a regular basis, and used to assess the performance of the committee.

The CICA guidance suggests that the governance committee take on tasks that I would personally expect to see elsewhere, such as oversight of compliance with the code of conduct. This raises the issue of the governance committee ensuring that every committee has a clear role, minimizing overlap where possible (such as oversight of the code of conduct and other compliance matters between the audit, compliance, and other committees).

A healthy discussion of who is responsible for what, and especially how issues germane to more than one committee might be coordinated (such as issues identified by one committee affect matters under discussion by another).

2. How can the governance committee help the board enhance its relationship with management?

Each board will decide whether the objectives and compensation of the CEO are set by the governance committee, the compensation committee, or the full board (I prefer that the compensation committee recommend and the board approve these).

One matter that I think is important is that there is a clear understanding of what matters will be brought to the board or one of its committees and when.

3. What is the role of our governance committee?

This question talks to whether there are regulatory (including listing exchange) requirements that need to be observed. Each board needs, as said in question 1, to tailor its governance committee role to its specific needs — and review and update on a regular basis.

4. What skill sets does the governance committee require?

This flows naturally from the questions about the role of the committee. I think it is useful to ensure there are people on the committee with legal experience as well as insights on best governance committee and board practices.

5. Who should sit on the governance committee?

CICA assumes that the governance committee also serves as nominating committee. I would personally prefer the committees to be split to ensure each responsibility is given sufficient attention.

The selection of members should be based on the role and skill sets required.

6. Who should chair the governance committee?

I would prefer that the committee be chaired by the lead independent director.

7. What is the governance committee’s role in building an effective board?

As noted by CICA, this committee is responsible for determining which committees are needed, their role, how they will be coordinated, and how their performance will be assessed. This should be reviewed and changes made at least annually.

8. How can the governance committee assess potential directors?

This is a nominating committee responsibility.

9. How long should directors serve on the board or a committee?

There are a couple of interesting issues here:

  • Should long-time directors be assessed as having lost their independence, as required by governance codes in Singapore and Malaysia?
  • Should there be a mandatory retirement age? Many boards force retirement at age 70, but does that still make sense?

10. How can the governance committee assist directors in retiring from the board?

What an excellent way of describing the issue of non-performing directors! My congratulations go to the CICA for raising the issue and making constructive suggestions.

11. How can the governance committee assist in director development?

Another solid and useful discussion. Key to this area is a professional, diligent assessment of board, committee, and individual director performance. This should drive most of the education that should be provided on a continuing basis, including visits to the organization’s locations and meetings with key employees.

12. How can the governance committee help the board chair sharpen the board’s performance focus?

Unfortunately, many boards do not assess board, committee, and director performance with appropriate diligence. The governance committee, with leadership from the lead independent director, must ensure that these are objective, thorough, and (where necessary) supported by independent advisors (either external or with the assistance of the internal audit function).

13. What is the governance committee’s role in board evaluation and feedback?

As noted above, separate but complementary assessments should be made of the full board, each of its committee, and of every member.

14. What should the governance committee do if a director is not performing or not interacting effectively with other directors?

This is an important issue, covered well by CICA.

15. Should the governance committee have a role in chair succession?

The board should determine whether this is the responsibility of the full board, the nominating, or the governance committee. Clearly, management should not determine who chairs the board or any committee.

16. How can the governance committee help the board keep its mandates, policies and practices up-to-date?

Board and committee charters, as well as related policies, should be reviewed annually and updated as necessary.

17. How can the governance committee enhance the board’s relationship with institutional shareholders and other stakeholders?

I believe this is a matter for the full board to discuss, but it could be addressed by the governance committee.

18. What is the governance committee’s role in CEO succession?

The board should determine how the governance committee should be involved, rather than the full board.

19. What role can the governance committee play in preparing for a crisis?

This is an interesting question. Any role should be coordinated with any oversight by another committee on crisis management (e.g., by the audit committee)

20.   How can the governance committee help the board in deciding directors’ pay?

The point that the governance committee may be seen as more objective is an interesting one.

 

Do you have insights to share on best practices for governance committees? Are there better sets of questions? 

Posted on Jun 16, 2014 by Norman Marks

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