CORPORATE GOVERNANCE

STI400
SESSION 3
Board Committee Roles and Responsibility
OBJECTIVES :

• Provide an overview of the functions of board committees.

• Understand the roles and responsibilities of board

committees.

• Be aware of the objectives of establishing board

committees.

• Become familiar with the duties, responsibilities, and

composition of the audit, compensation, nominating,
governance, and special committees.

• Understand the process and emerging practices for the

election of corporate directors.
 Relevance of Board Committees

The establishment of board committees can bring more

focus to the board’s oversight function by giving proper
authority and responsibilities and by demanding
accountability for these committees. Listing standards of
national stock exchanges require that listed companies
form at least three board committees that must include
audit, compensation, and nominating committees. Public
companies often, in addition to these three mandatory
committees, have governance and other committees such
as finance, IT, and disclosure.
Average number of directors : 9-15
A board with fewer than 9 directors may be viewed as
being dominated and control by small group, and a board
with more than 15 directors is generally considered less
effective and efficient
 Audit Committee
Lawmakers (SOX), regulators (SEC rules), and listing standards of national stock
exchanges (NYSE, Nasdaq, AMEX) generally require public committees to have an
audit committee, which must be composed of independent directors with no personal,
financial, or family ties to management.

Standards Relating to Listed Company Audit Committees outline these requirements,

which relate to:

1) Audit committee members to be independent

2) Audit committee members to select and oversee the issuer’s independent account
3) Procedural process for handling complaints regarding the issuers accounting
practice
4) The authority of the audit committee to engage advisors
5) Funding for the independent auditor and any outside advisors engaged by the audit
committee.
 Definition of the Audit Committee
- A committee (or equivalent body) established by and amongst the
board of directors of an issuer for the purpose of overseeing the
accounting and financial reporting processes of the issuer and
audits of the financial statements of the issuer; and if no such
committee exists with respect to an issuer, the entire board of
directors of the issuer.
(Section 205(a) of SOX)

- A committee composed of independent, nonexecutive directors

charged with oversight functions of ensuring responsible corporate
governance, a reliable financial reporting process,
an effective internal control structure, a credible audit function, an
informed whistleblower complaint process, and an appropriate code
of business ethics with the purpose of creating long-term
shareholder value while protecting the interests of other
stakeholders. (In the context of the agency theory)
 Audit Committee Relationships with Others
Audit Committee Board of Directors
Works with other committees, assists board by bringing specialization and expertise in
the areas of financial reporting, internal controls, risk management, and audit activities.

Audit Committee Management

Asks appropriate questions pertaining to the company’s corporate governance structure,
internal controls, financial reporting, audit activities, risk assessment, codes of ethics,
and whistleblower programs. Management should provide sufficient information.

Audit Committee External Auditors

Directly responsible for hiring, compensating, and firing external auditors, as well as
overseeing their work. External auditors are held ultimately accountable to the audit
committee and should submit their reports of the audit on ICFR and the audit of financial
reporting to management via the audit committee.

Audit Committee Internal Auditor

Should be responsible for hiring, overseeing, compensating, and firing the head of the
internal audit department (CAE), and internal auditors should report their audit findings
directly to the audit committee, being ultimately accountable to that committee.
The audit committee assists the board of directors in fulfilling its responsibilities by
bringing specialization and expertise to the board in the areas of financial reporting,
internal controls, risk management, and audit activities. As an independent
committee of the board of directors, the audit committee must ensure that
organizational oversight is successful. Senior executives should inform the audit
committee of significant events and transactions that substantially affect the
company’s risk appetite, and thus management must be able to communicate
successfully with the audit committee. The audit committee is responsible for hiring,
overseeing, compensating, and firing the head of the internal audit department, and
internal auditors are ultimately accountable to the audit committee. This aids in
creating robust corporate governance. Open and candid communication between
the audit committee and external auditors should preserve the independence of
external auditors and better enable the audit committee to discharge its oversight
responsibilities. Therefore, an effective working relationship with the external
auditors is also necessary to improve organizational oversight.
 Audit Committee Principles

- Audit Committee Formation

- Audit committee independence
- Audit committee members’ qualifications
- Audit committee authority
- Audit committee funding
- Audit committee oversight function
- Audit committee accountability
- Audit committee charter
- Audit committee agenda
- Audit committee orientation, training, and continued
education.
 Audit Committee Composition

• Audit committee composition is discussed in terms of size,

independence, qualifications, attributes, and resources:

• Audit Committee Size - The size of the committee usually ranges

from three to six members, whereas the SEC rule and listing
standards for public companies require at least three independent
members and should be composed for at least three months.

• Audit Committee Independence - The audit committee should be

composed of independent, nonexecutive, outside directors. The
emerging corporate governance guidelines on audit committee
independence should assist public companies in avoiding
potential conflicts of interest due to committee
• members’ excessive contractual or consulting ties to the
company or its management.
• Member Qualifications - At least one member of the audit
committee should be designated as a financial expert. The
company’s board of directors should apply the SEC’s
definition and consider audit committee members’
experience and knowledge in determining which members
qualify as
• financial experts and, if none qualify, recruit at least one
member who meets the required qualifications.

• Audit Committee Authority/Resources - SOX, recognizing the

increased responsibilities assigned to audit committees,
authorizes them to engage independent counsel and other
outside advisors as they determined necessary and requires
the company to provide appropriate funding for such
advisors.
 Audit Committee Responsibilities

• Audit committee oversight responsibilities can be grouped

into the following categories:

- Corporate governance
- Internal controls
- Financial reporting
- Audit activities
- Code of ethics conduct
- Whistleblower program
- Enterprise risk management
- Financial statement fraud
 Audit Committee Meetings

• A combination of formal audit committee meetings with the

presence of senior executives and executive meetings with
just internal and/or external auditors should improve the
• effectiveness of audit committee oversight functions.

• The audit committee should meet at least four times a year

to review the company’s quarterly financial reports and as
needed to address other important issues.

• The quality and quantity of meetings can have a significant

impact on the effectiveness of fulfilling its oversight
responsibilities.
 Audit Committee Agenda

• The audit committee should have a well-defined, written

agenda for all of its meetings.
• The agenda should cover:
(1)the minutes of the previous meeting;
(2)a review of current financial statements,
(3)a review of the current management, independent auditor
reports on ICFR including identified material weaknesses in
internal control, and the management responses to
reported material weaknesses;
(4)a review of the established whistleblower programs and the
appropriate responses to those complaints;
(5)a review of the company’s enterprise risk management to
ensure objectives are defined, risks are assessed, and
procedures are designed to minimize risks;
(6)a review of internal auditors, external auditors, audit plans,
scope, and findings.
 Audit Committee Reporting
• Audit committee reports to shareholders include, among
other things, a description of audit committee
responsibilities, its activities and accomplishments, and its
self-assessment of how well it has discharged its assigned
responsibilities.

Legal Liability of Audit Committees

SEC rules provide the following safe harbors in addressing the concerns
about the increased liability of an audit committee member designated
as a financial expert:
1. An audit committee financial expert is not deemed to be an “expert”
for the purpose of liability under Section 11 of the Securities Act of
1933.
2. The designation of a member as a financial expert does not impose
liability, obligation, or duties above and beyond those of other members
of the audit committee or the board of directors, nor does the
designation affect the liability, obligations, or duties of other members
of the committee or board
 Compensation Committee

• The compensation committee is usually formed to determine the

compensation and benefits of directors and executives.
• Structure: The committee should be composed of all independent directors
who rotate periodically.
• Responsibilities: committees have a set of responsibilities which they need to
follow stricktly.
• Proxy Statement Disclosure: The committee is directly responsible for
ensuring that all aspects of executive compensation are fully and fairly
disclosed in in the annual proxy statement.
• Committee responsibilities:
1. Evaluation of directors.
2. Design and implementation of director compensation plans.
3. Evaluation of senior executives.
4. Design and implementation of executive compensation plans.
• Performance metrics typically used by the compensation committee
include:
a. Earnings per share (EPS)
b. Cash flow
c. Total shareholder return (TSR)
d. Return metrics
e. Economic profit or economic value added (EVA)
f. Revenue
g. Operational metrics
h. Qualitative factors

• SEC rules require proper disclosure of executive compensation

without imposing or even assessing the nature and extent of the
company’s executive compensation thats why all everything the
compensation committee does should be properly disclosed.
 Corporate Governance Committee

• The corporate governance committee should be composed

of both executive and nonexecutive directors and be
responsible for developing and monitoring the company’s
governance principles, including the roles and
responsibilities of directors and officers.
• The corporate governance committee should be in charge of
establishing the agenda for the company’s board of directors
to determine what the board should discuss with
management and to what extent.
• The corporate governance committee should provide
sufficient information to the board to enable it to effectively
review the company’s performance.
• The information should consist of both financial and
nonfinancial measures of its performance, its comparison
with the industry’s best practices, and the company’s
budget.
 Nominating Committee

• The nominating committee is usually responsible for

evaluating and nominating a new director to the board, and
it also facilitates the election of the new director by
shareholders.
• The nominating committee is responsible for
• (1) reviewing the performance of current directors;
• (2) assessing the need for new directors;
• (3) identifying and evaluating the skills, background,
diversity, and knowledge of candidates;
• (4) having an objective nominating process for qualified
candidates;
• (5) assisting in the election of qualified new directors.
 Other Board Standing Committees

The audit committee is responsible for:

• Overseeing the financial reporting process.
• Monitoring the choice of accounting policies and principles.
• Monitoring the internal control process.
• Overseeing the hiring and performance of external auditors.
The corporate governance committee is responsible for:
• Establishing the agenda for the board of directors to determine what the board
should discuss with management and to what extent.
The compensation committee is responsible for:
• Evaluating the performance of directors.
• Evaluating the performance of executives.
• Designing and implementing compensation plans for directors and executives.
• Disclosing the work of the compensation committee.
 Other Board Standing Committees

• Public companies may form other standing

or special committees to deal with issues
requiring particular expertise.

• Examples:
1.Finance committee to oversee financial
activities
2.Outside directors committee to maintain
board independence
3.Executive committee to approve
managements decision, plans , and
actions on a behalf of entire board.
 What are the key functions of the nominating,
audit, governance, and compensation committees?

Explain the reasons that the audit committee needs effective

working relationships with the board of directors, management,
internal auditors, and the external auditors.

Describe the common-sense executive

compensation program.
END OF SLIDE
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