Administration in large organizations is a rather diverse and complex system. While in sole proprietorship and partnership is consist of just the management team, larger organization and companies in particular (both profit making and non profit making organization) usually have boards of director which serves as the organizations top governing body with management being responsible for overseeing the day to day operations of the organizations. In the latter, the top supervisory and decision making organ is therefore the corporate bond. The composition of and conditions of membership to the board varies among organizations. The formation of the governing board is highly regulated by the organizations charter which clearly outlines the rules of its formation, the structure, authority, as well as roles and responsibilities of members to the board. However, corporate boards are top governing and decisions making organs in organizations and thus perform almost similar functions across all organizations whether profit -making or non- profit making.
According to the panel on accountability and governance in the voluntary sector (1999), the organizational board of directors is charged with the responsibility of governing the organization, taking leadership and directing the formation and administration, as well as evaluation of the major organizational policies. In addition, the corporate boards plays a major role in ensuring organizational effectiveness, credibility and viability at all times, with an overall goal of seeing to it that the organization succeeds in meeting its vision and mission. According to the latter, the board is the top decision making organ and form the top most authority in an organization. According to gulf investment banks corporate charter (2007), the board of directors plays four major basic roles. First, it oversees the operations of the organization. In addition, the board assumes the leadership and directing role. Furthermore, they serve as the main policy setting organ for the organization. However, the modes through which boards execute these roles depend on the nature and size of the organization.
In smaller companies, for instance, the board may even be involved in the operations management of the organization. In complex organizations however, the nature of the organizations operations are so wide that the board and management role are clearly demarcated, with the each role being elaborate and diverse. In such a case, the boards use various committees to help them do their work. The board divides its responsibilities amongst the committees, with each committee being charged with specific roles and responsibilities, which clearly outlines in the committees’ founding charter. Through the committees, the board can hence delegate specific responsibilities and have the roles performed at committees’ level, who in return report back to the board with specific results and recommendations. There are several such standing committees of the boards of governance. These includes, the executive committee, committee of outside directors, the human resource and compensation committee, the governance committee, audit committee to name but a few ( Walton, 2005).
Apart from the standing committees, the boards may also appoint adhoc committees which are temporarily appointed to perform a specific task and then disbanded upon its completion (Walton, 2005). The efficiency and effectiveness of the board therefore depends on the organization of the committee’s structure. In this paper therefore, we look at the roles and responsibilities of various boards committees and how each contributes to the efficacy of corporate boards’ governance. For the purpose of this paper, the analysis concentrate on the specific roles and responsibilities of the audit committee, human resource committee as well as the nominating committee and how each committee contributes to the efficiency of the boards’ performance.
Statement of the Problem
As the size of the organization increase, its operations become more diversified and complicated in terms of management and governance. Normally, the size of the management team or the governing board is supposed to increase subsequently, failure to which it will face difficulties in effectively fulfilling their roles. In addition, large sized organizations require more delegation of duties and responsibilities on the part of the governing boards since the wide range of such responsibilities are likely to overwhelm them. For maximum efficiency therefore, it is important that the boards of governance make use of boards committees. According to CPA journal (2004), the board committees come with scores of benefits to the full board members. First, the directors are few in numbers. In addition, they may not have the necessary expertise in all matters affecting the organization. The use of committees therefore allows them to delegate the various responsibilities to the specific committees. Consequently, the specific committees’ directors are able to look deep into specific issues in the organization in a much detailed manner than the board could have managed. Furthermore, it allows the board to make maximum use of valuable skills that lie in directors thus providing maximum and efficient use of organizational skills and time.
The various committees perform the assigned duties and responsibility independently and then report to the full board regularly in line with the requirement of the charter. The work of the full board is therefore to oversee the working of the various committees and respond to the recommendations they make on specific organizational issues. The committees make corporate governance less complex, and more effective-hypothesis (Walton, 2005). More so, the boards may use temporary committees to attend to emerging issues within the organization. The various board committees, whose responsibilities are clearly stipulated of their formation charter, serve as the organs and agencies of the governing board. As a result, it is expected that if they are well organized, they are likely to enhance efficacy in boards’ governance, while allowing for maximum use of organizational skills and expertise. As a hypothesis of this paper, uses of board committees contribute significantly to efficacy of corporate boards’ governance; of which the audit, human resources and the governing committees are no exception.
According to KPMG review (2007) the board committees adds on the organizational administration costs. These costs include the operation costs and the rewards for the committee members. In non profit -making organizations, most of the committees’ positions are filled by volunteers (sherry, 2008). In the business sector however, the directors and external individuals have to be rewarded hence resulting to costs repercussions. Irrespective of the latter, this paper maintains that the committees are worthwhile. This is because irrespective of the cost consequences the committees have a positive impact on the efficiency of boards’ governance. In addition they allow for utilization of external expertise and skills, especially where outside directors and professionals are included in their formation.
The human resource committee
The human resource and compensation committee is a standing committee to the board, established according to the rules and regulation of the human resource and compensation committee charter. Similarly, its duties and responsibilities are clearly stipulated therein. According to Thomson Reuter’s human resources and compensation committee charter (2007) committee should be made of self-governing directors. In addition, the charter directs that it should have at least three and at most six directors to the committee. According to the statute, the committee is supposed to devise and administer the reward and benefits policies for key executives. However, due to the involving nature of retirement benefits structure, the human resource committee can be off-loaded this responsibility and instead given to an ad-hoc committee or rather sub committee is established to handle the retirement benefits duty (Walton, 2005). Moreover, it should put measures in place to examine and appraise employees’ and executives’ performance. At times the human resources manager should chip in to provide personal assistance to the committee members. In addition, the committee frequently hires outside compensation expatriates so as to lease for harmonization of the organizations compensation with other firms in the industry.
According to the Gulf Investment Bank Human Resources Charter (2007), the HR committee is assigned a number of responsibilities. First, it should assist the board in meeting the requirements of the banks human resources and rewards policies. In relation to the above, the committee should review the organization’s human resource compensation policies proposal and make recommendations as it may deem appropriate, for approval by the board. In addition, it ensures that the organization’s reward policies are as competitive as possible, so as to attract and retain highly skilled and competent workforce as well as motivating the staff in order to achieve the organizational objectives. The committee should also closely watch the cost of the organizations’ remuneration systems and recommend for adjustments as it may deem necessary thereto.
Furthermore, it should ensure that appropriate systems are in place to monitor and appraise employee’s performance. Besides, the human resources and compensation committee has the responsibility to review the organizations succession plan to make sure that the latter is consistent with the current law and regulations. It is the responsibility of the committee to ensure that the organizations compensation policy and structure is in line with the best industry practice (GIB HR charter, 2007, Thompson Reuters HR charter, 2008). In addition, the committee should put measures in place to ensure that all the recruitment procedures are followed to the letter during such recruitment and that the most qualified and quality workforce is attracted to the organization. Furthermore, it is the responsibility of human resources committee to ensure that appropriate programs are entrenched in the organization to provide necessary orientation and employees training and development (GIB HR charter, 2007).
According to Thomson’s Reuters human resources committees charter (effective, 17th April, 2008), the HR committee has several responsibilities which are well outlined in the charter. First, the committee is responsible for assisting the organization’s board in accomplishing its duties which includes: supervising the compensation of the chief executive officer and senior management and recruitment as well as retention of senior management workforce. In addition, it should assist the board prepare adequate arrangements for the succession of major senior management positions within the organization. Moreover, it is the responsibility of the HR committee to assist the board in the management of pensions and benefit plans for employees. Also, the committee may attend to any other matter as may be delegated by the board of directors.
The audit committee
An audit committee is also a standing committee to the board of directors. Similar to the human resources and compensation committee, the audit committee is founded in the audit committee charter which stipulates the rules governing the formation the committee’s formation (CPA journal, 2004). The charter outlines the number and qualifications of individuals for them to be illegible for the appointment to the audit committee. It clearly outlines the duties and responsibilities that the committee is charged with. The audit committee charter also varies among organizations and places. The Sarbanes-Oxley act of 2002 changed the requirement of membership to the audit committee by increasing the need for external independent member. In addition, the act required that organization disclose the qualifications of the members serving in the audit committee so that it could be ascertained whether at least one is a financial expert (AICPA, 2004).
In the United States of America, an audit committee of a public company should be composed of autonomous directors, specifically outsiders to the organization, one of which must be a financial expert. According CPA journal (2004) the audit committee is basically responsible of overseeing preparation of organizations’ financial statements and book keeping processes to ensure that it is in line with the best accounting practices. In addition the AC is responsible for ensuring that the organizations book keeping is in line with the generally accepted accounting principles-GAAP (KPMG AC charter, 2007). Moreover, it should ensure fullness, precision and timeliness in disclosing relevant financial information to the public. According to the GIB bank AC charter (2007), the audit committee is charged with establishing a culture of authenticity and candidness in financial reporting and ensuring reliable financial control within the organization. In addition, the audit committee establishes a direct communication link with both the internal and external auditors.
The audit committee is charged with the responsibility to administer issuance of financial reports and disclosures. In addition it is supposed to keep a close eye on the choice of book keeping policies and rules. Furthermore, the committee administers the process of acquiring independent outside auditors and put appropriate measures in place to evaluate their performance. In addition, the committee ensures that the organizations’ accounting principles are consistent with present laws and guidelines as well as to ensure they comply with the ethical requirements. Also, the audit committee is responsible for keeping a close eye to the organizations, internal control processes as well as appraising the internal auditors (Athi river mining ltd AC charter, 2007). Furthermore, with the enactment of Sarbanes-Oxley act of 2002, the responsibilities of the audit committee were expanded. As a result, the committee is responsible for formulating the risk management policies in collaboration with the organizations’ management.
According to institute of internal auditors and price water house-AC effectiveness (2005), the audit committee’s basic responsibility is assisting the organization’s board to fulfill the constitutional and fiduciary duties in relations to the internal controls, book-keeping policies, auditing and financial reporting exercises. Also, it assists the board in ensuring truthfulness in preparation of organization’s reports as well as ensuring that the process is in line with current legal and bylaws requirements and to oversee the autonomy and performance of the organizations internal and external auditors. In addition, it assists the board to ensure that sufficient effectual, all-inclusive and clear corporate governance processes are upheld. Moreover, AC recommends to the board the most effective method of selecting and rewarding organization’s external auditors subject to approval by the shareholders in the AGM (GIB AC charter, 2007). In addition, it should regularly evaluate and appraise internal auditors’ performance.
The Nominating/ Governance Committee
The nominating committee which is also referred to as the governing committee is also a standing committee of the board of directors and it is established under the governance committee charter. According to the charter of management and governance committee (Bennellium foundation management and governance charter, 2007), the committee should be composed of the chairman of the board and at least for members of the board and it is supposed to meet thrice per year. The basic responsibility of the committee is to select and recruit new members to the board when vacancies emerge or when it is necessary to do so (Walton, 2005). According to Walton, the committee is also charged with the responsibility to continuously appraise the performance of the whole board as well as individual members. It has the mandate to decide whether a board member is illegible for reappointment to the board upon the expiry of his or her term, basing on the results of the appraisal. Such findings are also used as a recipe for continuously improving the boards’ interaction and performance.
In some instances, the committee can be in charge of administering the directors’ compensation as well as ensuring that the governance practices are in the best practice and is in line with the set bylaws. According to the committee charter for management and governance committee (Bennellium GC charter, 2007), the main responsibility of the governance committee is to assist the board in meeting its supervisory duties and help the organization achieve its objectives through effective administration and governance. It is charged with the responsibility of reviewing the organizations governance policies and processes in order to maximize the board’s efficacy in meeting its objectives. Specifically, the committees’ roles and responsibility include reviewing and making appropriate recommendations for improvement and correction to the board, regarding its governance policies and procedures. Also the committee takes charge in formulation of basic governance documents typically the statutes and committees’ deeds. Moreover, the governance committee is bound to assess the organizations’ budget and spending policies and report the organizations’ financial position so as to make appropriate recommendations concerning its spending levels and budget. In addition the committee is supposed to make recommendations regarding the sections of the budget that needs to be amended and look for areas that negatively affect the foundations financial position. Furthermore, the governance committee has the responsibility to evaluate the compensation of the board members while paying close interest to how such compensation compares with the industry rates.
The GC should asses the compensation policies regarding members of staff and make necessary recommendations to the board concerning the same issue (Biennium foundations’ management and governance committee charter, 2007). According to the charter, the committee is also charged with responsibility of evaluating the state of general foundations management to ensure that the latter is consistent with the legal requirements. In meeting the above responsibility, the committee should periodically review governmental, regulations and above-board matter facing the organization so as to make appropriate recommendations that ensures board governance is in line with such regulations and legal requirements. Moreover, the board has the responsibility to evaluate the succession arrangements of the chief executive officer as well as frequently assessing the sufficiency of the organizations’ charter.
Taking a close look at the roles and responsibilities of each board committee, it can be agreed in totality that the committees contributes greatly to the efficiency and effectiveness of the boards’ governance. The roles that each committee plays are significant to making the work of the board of director in all organization smooth and easy. However, there are responsibilities that have a rather direct impact to the efficacy of the boards. The roles and responsibilities of the management/governance or nominating committee have in no doubt the most significant influence on the total efficacy of the governing boards. This committee works hand in hand with the boards and offers assistance and advice on how to continuously improve its performance and overall effectiveness, to enable them fulfill their aims with much ease.
According to Bennellium foundation’s management and governance committee charter (2007), the role of the committee in enhancing the board’s efficacy is clearly stipulated right in the committees’ mission statement. The committee’s main objective is to assist the board to fulfill all its supervisory and leadership duties thus helping the foundation meet its ultimate goal through effectual governance and management. The committee basic role therefore is to continuously analyze the organizations governance strategies and practices and make appropriate recommendations regarding areas of improvement with an objective of ensuring maximum efficacy in the boards’ operations. In some organization, the governance committee is responsible for appraising the entire board’s performance as well as individual board members and use the results as a basis for deciding whether to reappoint the individual or not. This will ensure high performance of the board members hence total effectiveness
It may appear as if the audit committee does not contribute to the board’s efficacy. However, a close analysis of the roles of the committee reveals that it contributes significantly to its efficacy, though their contributions are not express. To begin with, the board of director does not necessarily have financial expert or members with accounting knowledge and skills. The audit committee therefore brings on board valuable financial and accounting skills. This aids the board in overseeing the financial and accounting processes of the organization with ultimate effectiveness, which could have been otherwise impossible without the services of the audit committee. The human resource committee also contributes to the effectiveness of the board, although the contribution is quite indirect. For instance, the human resources committee monitors the costs in relations to employees’ compensation and makes relevant improvement to make it more favorable for the organization.
Large organizations have both the corporate boards and management teams. Although the two are at times mistaken as synonymous, they are totally different and roles completely demarcated, especially in large and complex organizations; both business and non-profit making. While the management concerns itself with the operations of the organization, the corporate board’s primary responsibilities are to direct, lead and make key decisions affecting the organization, making it the top decision-making organ in the organization. Its role is typically supervisory. The membership to the corporate governance boards is guided by the rules and regulation outlined in the organizations statutes which may vary from organizations to the next.
In large organizations the boards govern with the help of standing boards committee established using the guidelines of available statutes, which are referred to as the board committees’ charters. The charter outlines the rules and regulation to govern the formation of the committee. In addition, the roles and responsibilities of the committees are specified therein. Examples of standing committees includes HR and compensation committee, risk management committee, audit committee, nomination or governance committee among others. Using a deep analysis of the roles and responsibilities of the various standing committees, (human resource, audit and governance committees for the purpose of this paper), their contribution to the efficacy of board governance was assessed. Although all the committees contribute to board governance effectiveness, management and governance committee’s contributions on boards’ governance efficiency are the most significant according to the findings.
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