Personal Finance

Board committees drive corporate governance

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Corporate leaders in Kenya have decried the 23 percent overall representation of women on boards, saying the level “is too little in the wake of highly disruptive business environment demanding visionary boards.” FILE PHOTO | NMG

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Summary

  • Corporate governance is the main mandate of the board of directors, which is usually appointed by shareholders during the annual general meeting.
  • Their role is set out under the Companies Act or in the appointment letter.
  • The board of directors usually has powers to set up committees comprised of its members to assist in its role.

Corporate governance is the manner in which a business is managed and controlled for better performance. It is important no matter the size of the business. Corporate governance is the main mandate of the board of directors, which is usually appointed by shareholders during the annual general meeting.

Their role is set out under the Companies Act or in the appointment letter.

The board of directors usually has powers to set up committees comprised of its members to assist in its role.

Internal organisation of the board is very crucial to ensuring optimal performance. While the board is collectively appointed by shareholders, it has free rein to set up and nominate the committees. Board committees are formal groupings charged with handling specific delegated board duties. The committees are structured in such a way that there is a head who is assisted by designated board members. The committees ‘role and composition is set by the main board.

The committee will have its own meetings independent of the board of directors meeting and makes recommendations to the board. A committee must seek board of directors’ approval to take action on certain decisions. Usually, the committee head will prepare a detailed report which he will present to the board of directors. The report could be informational or seek board approval.

At times the board of directors may vote on committee proposals with the majority vote winning. Committees must therefore be transparent and accountable to the board of directors.

Some of the benefits of having committees include task allocation. The board allocates detailed tasks to the committees which in turn allocates roles to individual directors. Boards enable work allocation.

Usually committees are formed with individual directors’ competencies taken into account. Committees provide an avenue through which members can apply their core competencies which results in better output. Committees allow better efficiency, rather than the entire board meeting to deliberate on all issues. The relevant committee meets and makes those decisions.

How then does your board appoint the committees? Board committees are best appointed formally in writing. A board resolution, though not compulsory, may be filed to appoint the board committees. In companies which are regulated such as those listed in capital markets, the appointment of board committees must be done through resolutions.

The board of directors must set out the type of committees needed and their mandates. The mandate will help the committee understand its role and scope. Some examples of committees include finance committee which considers the financial needs of the company. The audit committee handles audit matters of the company. Others include strategy, risk, business development, corporate governance, human resources, administration, ethics and compliance.

The second step in setting up a committee, is to consider the board’s skill matrix and each individual’s competency. An example is appointing members with marketing knowledge in the business development committee. It is important to choose the heads of the committee from the membership.

It is important to diversify a committee to include diverse professions. Including different professions allows for diverse perspectives to the committee to get different perspectives, which makes for a richer output.

Once the board committees are set up, then it is prudent to arrange the calendar of each committee. The best governance practice is that each committee should meet at least once every quarter to discuss matters that are within its mandates.