What is a Board Committee?
A board committee is a specialized group of people, usually directors, designed to focus on specific tasks and topics the individuals are experts on. Board committees are often tasked with oversight, strategic planning, and decision-making on certain matters within the organization. This approach of segmenting the board of directors into groups allows for a manageable division of duties — ensuring that the board of directors achieves the organizational goals.
What is the purpose of board committees?
Primarily, the purpose of board committees is to help the board of directors manage responsibilities more efficiently. They allow for more in-depth discussion, oversight, and decision-making in key areas such as finances, risk management, internal and external affairs, and governance.
Committees, in general, are tasked with:
- Focusing on complex matters with their relevant expertise
- Making well-informed and efficient decisions
- Identifying risks and opportunities in certain business aspects
- Maintaining accountability and ensuring compliance with laws and company policies
Who should be on a board committee?
Board committee members are selected based on their expertise, experience, and relevance to the committee’s focus. Some of the key qualities of a committee member are specialized knowledge and skills, objectivity, and independence. Board committee members include:
- Executive Directors: C-level directors and senior management who directly offer insights on different business operations.
- Non-Executive Directors: Independent directors not involved with the day-to-day operations but offer perspectives on governance.
- Subject-matter Experts: External parties or individuals with expertise in areas like finance, law, or risk management.
In a board committee structure, each has a chairperson, usually a senior director, responsible for guiding and overseeing the committee’s tasks.
Types of Board Committees in Corporate Governance
There are two general types of committees: standing and ad hoc. Standing committees are permanent committees that exist year-round with the responsibility of handling recurring and essential governance tasks. Whereas, ad hoc committees are temporary as they are created for a specific purpose and disbanded once the task is completed. They address issues that arise suddenly or projects that need special attention.
Common examples of board committees in an organization include:
- Executive Committee handling urgent matters and decisions between board meetings, usually composed of chairperson and CEO.
- Audit Committee overseeing financial reports, audits, and compliance with regulations.
- Governance Committee or nomination committee focusing on recruitment and evaluation of board members.
- Compensation Committee managing executive compensation, like salaries, bonuses, and stock options.
- Risk Management Committee identifying and mitigating financial, operational, and regulatory risks.
- Ethics and Compliance Committee ensuring the organization follows legal standards and ethical practices.
- Sustainability or ESG Committee focusing on ESG issues, sustainability reporting, and corporate responsibility.
- Merger and Acquisitions Committee evaluating and recommending mergers, acquisitions, investments, or joint ventures.
- Advisory Committee providing insights or perspectives to the board on certain matters.
What is the difference between a board of directors and a board committee?
The board of directors is responsible for the overall governance and strategic direction of the company, overseeing various organizational areas. Board committees handle specific areas of responsibility, such as audit, finance, or risk management, and are delegated specific tasks to make the board’s work more efficient.