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The role of Board committees has significantly evolved during past years as a direct consequence of ever-increasing regulation,lessons learned, and the wide array of complex risks faced by the financial services industry. Independently of committees which may be necessitated by sector-specific regulations, such audit and remuneration committees, Boards may need additional support to deal with their broadening and challenging responsibilities. Without in any manner implying that the Board can shed any of its responsibilities, a committee helps to manage a Board’s workload by freeing up its time allowing it to focus on the more critical and strategic issues.
The use of committees is primarily prevalent in the case of entities of a certain size as well as entities offering an array of products or services, including particularly sophisticated ones. “Traditional committees” such as those dealing with audit, risk, compliance, remuneration and nomination aspects nowadays also exist alongside other committees focusing on technology and cyber security, outsourcing, AML/CFT and sustainability. Increasingly, specific committees are being entrusted with understanding emerging trends, including environmental, social and governance (ESG) risks, ethics, diversity and risks and opportunities related to innovation and digital technologies. Some entities also opt for an overarching governance committee tasked with overseeing and enhancing the quality of governance within the organization. Committees at times are also formed temporarily for an “ad hoc” purpose or on as-needed basis, for instance to oversee the implementation of a particular project or the appointment of a CEO. Generally, it can be argued that committees tend to signal the importance attributed to key issues by the Board.
Board committees have been generally associated with a monitoring role, or in other words, supporting the Board in the exercise of its oversight function. By being smaller, meeting more frequently and drawing on the specialised expertise and abilities of their members, Board committees are seen to execute the monitoring role more diligently and efficiently, allowing them to delve into more technical detail. Their functions are however also increasingly assuming an advisory dimension.
Recognising the need to set up a particular committee may be the first step; however, it is the workings and the effectiveness of a committee which are then fundamental. Committees translate in costs and time and therefore it is critical that the objectives for which it has been set up are in fact reached. The terms of reference coupled with the right composition lay the foundations for a successful committee. The committee’s mandate needs to be well-defined and provides members with a clear direction to help manage expectations and to enable the committee to hold itself accountable for its activities. While the Chair of the committee plays a pivotal role in leadership, setting the agenda, meeting facilitation and coordination with management, committees should not be over-reliant on strong leadership from the Chair. Membership is therefore equally important and committee members need to dedicate sufficient time, in terms of both attendance and preparation coupled with training and personal development in the area the committee has been entrusted with. The choice should be dictated by knowledge and technical competence but also by issues, such as independence. Time commitment is also key, and it is therefore for this reason that at the outset, potential Board candidates are informed of what is expected from them in terms of ancillary duties to Board attendance. Membership should in any case be kept under review. At times, there is a danger that directors with a long tenure on certain committees feel as if they have been endowed with greater powers withing the Board and consciously or unconsciously a divide may start to form.
Fundamental to the proper working of a committee are the information flows to the committee which then enable the committee to filter, discuss, recommend, report and escalate to the Board as necessary. The committee should therefore be able to articulate to management what information it requires and the manner in which it requires that information to be presented or communicated to it. Committees remain accountable to the Board and reporting to the Board regularly is expected. These reports are typically included in the board pack, and it would be a mistake to consider them a formality. They serve to update the Board on the workings of the committee and to assure the board that they are fulfilling their mandates. Some question the need for reports when minutes of the committees are also circulated. While minutes serve as the official record of what took place at the meeting, reports, on the other hand, should highlight the most important issues emerging from the committee’s discussions, focusing on material judgements and recommendations being put forward that will be decided upon by the Board. A well-articulated committee report sets the tone for a good discussion, allows directors to make the most of the limited agenda time available and gives assurance that the committee has delved into the necessary detail prior to coming to Board.
One pitfall of committees is that they may work in silos or lead to information segregation and therefore vigilance in this regard is advisable. The Chair of every committee should identify areas of collaboration with another committee which could benefit the entity, such as for instance between the Audit and the Risk Committee, or between the Remuneration and the Risk Committee. Admittedly, some areas may appear to give rise to overlap but the challenge is to transform such areas into collaboration. Equal consideration should be given to ensuring that despite the existence of more than one committee, no particular area has been left to unassigned. It is also a standard of good governance to include the performance of committees, committee chairs and members in a dedicated section within the evaluation of Board performance, thus ensuring not only that the committee’s workings and composition is being assessed but that the need for its existence continues to be justified.
This article was published in the Times of Malta on 23rd of June 2024 and forms part of a series of publications focusing on cross-sectoral matters relating to governance, risk and compliance.
This series aims to offer legal and practical insights, a valuable resource for understanding and navigating the dynamic landscape of GRC in Malta.
Author: Catherine Formosa