The organizational structures, especially companies, are different and more complex from those of smaller ones. While sole proprietorship and partnership 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 is the organization’s top governing body and decision making organ in the organization while management is responsible for overseeing the day to day operations of the organizations (Walton, 2005).
The governing board governs through committees, through which it delegates responsibilities. These include, 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). In addition, the boards may appoint ad hoc committees which are temporarily appointed to perform a specific task and then disbanded upon its completion (Walton, 2005). This paper therefore looks into the responsibility of a few committees and diagnoses how the latter contributes to effective corporate governance.
Statement of the Problem
Large sized organizations require more delegation of duties and responsibilities. For maximum efficiency therefore, it is important that the board of governance make use of boards committees. According to CPA journal, (2004), the board committees come with scores of benefits. First, the directors are few and may not have the necessary expertise in all matters affecting the organization; hence use of committees aids delegate with the various responsibilities to the specific committees with specific expertise. Consequently, the specific committees’ directors are able to look deep into specific issues in the organization in a much detailed way. 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 committees make corporate governance less complex and more effective (Walton, 2005). More so, it allows use of ad hoc in case of emerging issues within the organization. According to a KPMG review (2007) the board committees add on the organizational administration costs. However, this paper maintains that the committees are worthwhile, because they have a positive impact on the effectiveness 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 which outlines its duties and responsibilities. According to Thomson Reuters human resources and compensation committee charter, (2007) committee should be made of self-governing directors. According to the statute, the committee’s basic responsibility is to devise and administer the reward and benefits policies for key executives and employees as well as examining and assessing their performance. In addition, the committee frequently hires outside compensation expatriates in order to harmonize their compensation with other firms in the industry. First, it should assist the board in meeting the requirements of the human resources and rewards policies. The committee should reviews the organization’s human resource compensation policies proposal and make appropriate recommendations 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 (GIB HR charter, 2007, Thomson Reuters HR charter, 2008). In addition, the committee should put measures in place to ensure that all the recruitment procedures are followed to the latter during recruitment and that the most qualified and quality workforce is attracted to the organization. In addition, it should ensure that appropriate programs are entrenched in the organization to provide necessary orientation and employees training and development (GIB HR charter, 2007).
The audit committee
An audit committee is also a standing committee to the board of directors and embedded on the audit committee charter (CPA journal, 2004). An audit commit 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, ensuring that the organizations book keeping is in line with the generally accepted accounting principles-GAAP (KPMG AC charter, 2007) and ensuring fullness, precision and timeliness in disclosing relevant financial information to the public.
According to the GIB bank AC charter, (2007), this committee is responsible for establishing a culture of authenticity and candidness in financial reporting and ensuring reliable financial control. Also, it establishes a link with both the internal and external auditors, ensures that the organizations’ accounting principles are consistent with present laws and guidelines and to ensure they comply with the ethical requirements and keeps a close eye to the organizations, internal control processes as well as appraising the internal auditors (Athi river mining ltd AC charter, 2007). Furthermore, 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 fundamental 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 AC is responsible for continuously appraising the performance of the whole board and individual member and deciding 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.
In some instances, GC administers directors’ compensation and ensures that the governance practices are in the best practice and also that they are inline with the set bylaws. According to 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 responsible for reviewing the organization’s governance policies and processes in order to maximize the board’s efficacy in meeting its objectives.
Also the committee takes charge in formulation of basic governance documents typically the statutes and committees’ deeds. Moreover, it assesses the organizations’ budget and spending policies and reports the organizations’ financial position so as to make appropriate recommendations concerning its spending levels and budget. Also, it makes recommendations concerning the sections of the budget that needs to be amended and look for areas that negatively affect the foundations financial position. Furthermore, it evaluates the compensation of the board members while paying close interest to how such compensation compares to with the industry rates (BMGC charter, 2007). To achieve these goals the GC 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
All the committees contribute greatly to the efficiency and effectiveness of the boards’ governance. However, some committees’ contribution to efficiency and effectiveness are greater than others. In this paper, the roles and responsibilities of the management/governance or nominating committee have in no doubt the most significant influence on the total efficacy. This committee works hand in hand with the boards and offers assistance and advice on how to continuously improve its performance and overall effectiveness.
According to Bennellium foundation’s management and governance committee charter (2007), this significant role is clear right from 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. It therefore continuously analyzes the organization’s governance strategies and practices and makes appropriate recommendations regarding areas of improvement with an objective of ensuring maximum efficacy in the boards’ operations. The audit committee too contributes to this efficiency more than the human resources committee but not as much as the governance committee. The contribution of the governance committee to the efficacy of the board is more direct and close than the audit committee whose contributions are rather indirect.
Large organizations have both the corporate boards and management teams. 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. Due to complexity of management in large organizations corporate boards govern via standing boards committees established using the guidelines of available statutes, which are referred to as the board committees’ charters Examples of standing committees include HR and compensation committee, risk management committee, audit committee, nomination or governance committee among others. 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.
Athi River Mining Limited Audit Committee Charter (2007). Web.
Audit Committee Effectiveness: What Works Best 2nd Edition; Institute of Internal Auditors and Price Water House: Altamonte Springs, (FLA 2000). Web.
Bennellium Foundation’s Management and Governance Committee Charter (2007). Web.
CPA Journal, The Audit Committee Responsibilities (2000). Web.
Thomson Reuters Human Resource Committee Charter (2008). Web.
Walton R, Corporate Governance Inc European Journal of Business Studies Vol 12(2) 13-24 (2005).