Role of Board Committees
As the responsibilities of directors have become more demanding, boards have increasingly formed committees to deal with some of their more detailed work. The Combined Code requires all quoted companies to establish audit and remuneration committees and, unless they have a small board, nomination committees. These committees strengthen the position of the nonexecutive directors, of whom they are made up, and are important for the work they do. The essential point is that they are committees of the board. It is the board which appoints them, sets their terms of reference, and turns their recommendations into decisions.
Role of Executive Directors
The duties of executive directors are the same as those of the nonexecutive directors. They are as responsible for the monitoring task of the board as the nonexecutive directors, who in turn are as responsible for the strategy and leadership of the company as the executives. This means that executive directors have to take their executive hats off on entering the boardroom and put on their directorial ones. They should only be appointed for the contribution they can make to the board, and they are there to further the company’s interests, not those of their function or department. It is not an easy transition to make, and executive directors can be helped to adopt their new governance role through appropriate training or through a nonexecutive directorship elsewhere.
Role of the Company Secretary
Chairmen and board members should be able to look to the company secretary for impartial and professional guidance on their responsibilities, and all directors should have access to the advice and services of a company secretary, who is responsible for ensuring that board procedures are followed.
Conclusion
Although board members have different roles, what counts is the way those roles are combined in the board team. This is why board selection is so fundamental. Directors should only be appointed for the value they can add to their boards. All directors should have terms of office to enable renewal to take place, although I am personally against rigid rules tying retirement to age or length of board service, preferring to rely on the judgement of boards and their shareholders.
The search for nonexecutive directors should be purposeful, with the aim of filling gaps in the experience and backgrounds of the existing directors, and their selection should involve the board as a whole. Chairmen, however, have a particular responsibility for the choice of board members since it is they who have to turn them into an effective team.
Notes
1 The Combined Code on Corporate Governance was published by the London Stock Exchange in July 2003; it includes Guidance on Internal Control and on Audit Committees and Suggestions for Good Practice from the Higgs Report. Companies listed on the London Stock Exchange are required to disclose how far they comply with the Code as a condition of listing. The latest version was published in June 2008 by the Financial Reporting Council, which is now responsible for the Combined Code, but it does not include the Turnbull and Smith guidance.
2 Although the supervisory boards of German companies above a certain size include employee members, Dutch supervisory boards, for example, do not.
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