Committees, the Board and Directors: Audit and Remuneration Committees

A company’s directors cannot do every task themselves. They hand specialised work to smaller groups, called committees, and they divide the leadership of the company among people with different roles: a chairman, a managing director, executive and non-executive directors and a company secretary. Knowing who does what is basic to understanding how a company is run and held to account.

The Institute of Chartered Accountants of Nigeria (ICAN) syllabus asks you to explain the purposes of committees, their advantages and disadvantages, the functions of the audit and remuneration committees and the roles of board members. These are list-and-explain topics, so learn the points and be ready to say what each one means in practice.

Committees

A committee is a group of people within an organisation who are given a particular task or area to look after. It may deal with a continuing concern, a special project or a strategic initiative. By passing work to smaller groups, a board brings specialist knowledge to each issue and makes better use of its time.

Committees also let members take part in shaping services, give a forum where different views are aired, and train future leaders.

Purposes of a committee

Advantages and disadvantages

The audit committee

The audit committee is a group of board members, normally independent and with relevant skills, that oversees financial reporting, risk management and internal controls. It is a key safeguard for transparency, integrity and accountability. Under Companies and Allied Matters Act 2020 (CAMA 2020), a public company must have one.

The remuneration committee

The remuneration committee is a sub-committee of the board whose main task is to decide the pay of executive directors and senior managers. That covers basic salary, bonuses, termination payments, performance incentives and long-term plans. Its aims are to attract and motivate good executives with competitive, performance-linked pay, and to keep pay fair and in line with the company’s results and shareholders’ interests.

• Designing pay packages by comparing with industry norms and setting salary, bonus and long-term incentives such as share options.
• Linking rewards to performance through clear measures that tie executives’ actions to strategy.
• Being transparent by explaining pay policy to shareholders and the public.
• Working with other committees: with the nominating committee on succession, and with the audit committee to prevent incentive schemes from encouraging reckless risk.
• Aligning pay with strategy, so that the chief executive is rewarded for creating value.

Roles of board members

Worked example: which body should deal with it?

Committees and the board in more detail

Kinds of committee

A standing committee is permanent and deals with a continuing area, such as audit or remuneration. An ad hoc committee is set up for a particular task and dissolved when it is done. A sub-committee reports to a main committee, and a joint committee draws members from different bodies. The board of directors usually remains responsible for the decisions even though committees prepare the ground.

Why the audit committee must be independent

The audit committee reviews the accounts and controls on behalf of the shareholders and holds management to account. If it were made up of the managers whose work it reviews, it would be marking its own homework. That is why it is made up of non-executive and independent directors, and why it reports directly to the board and meets the auditors without management present.

A good committee has members with financial expertise, power to obtain information and advice, and a clear terms of reference. Under CAMA 2020 a public company must have one.

Why executive pay needs its own committee

If executives set their own pay, the temptation to reward themselves is plain. The remuneration committee, made up of independent directors, sets pay in a transparent way, benchmarks it against the market, links a significant part to performance measures, and discloses it to shareholders. It must balance attracting and keeping good executives against the cost to the company and the risk that incentives encourage excessive risk-taking.

Why chairman and managing director are separate roles

The chairman leads the board and is responsible for its effectiveness. The managing director leads management and the day-to-day running of the business. Separating them prevents one person from holding too much power and ensures that the person who runs the business is supervised by a board led by someone else. Where one person does both, the board usually needs a strong independent director to balance the combination.

The roles in action: an example

The board of a plc meets to approve a large acquisition. The chairman sets the agenda and ensures all directors speak. The managing director presents the proposal and answers for its operational detail. Executive directors explain the effects on their functions. Non-executive directors question the assumptions and the price.

The audit committee has reviewed the target’s accounts, the risk committee has reported on risks. The company secretary ensures the process is minuted and the law and the company’s rules are followed. The result is a decision that has been examined from several angles.

Exam focus: committee lists and board-member duties from the syllabus

The syllabus gives definite lists for committees and for each board role. Examiners ask for “state and explain” answers, so learn the headings below and attach one explaining sentence to each.

Purposes of a committee

• Informed decisions. Committees research and debate an issue thoroughly before the board decides.
• Streamlined processes. They handle the detail so the board can focus on strategy.
• Expertise. They use members’ specialised knowledge, and members build that knowledge over time.
• Workload distribution. Tasks are shared, which uses resources efficiently and shortens board meetings.

Committees also involve members in service delivery, offer group problem-solving and several points of view, and train future leaders.

Advantages of committees

• Specialisation. Members are qualified and experienced in different fields.
• Better solutions. Collective knowledge improves the quality of decisions.
• Participative management. Every member can state a view.
• Several alternatives. Experts can identify more options, so management picks the most suitable.
• Better communication. Members understand each other and conflict is reduced.
• Team spirit. Cooperation motivates members towards the objective.

Disadvantages of committees

• Delayed decisions. Divided opinions slow the outcome.
• Lack of secrecy. A large group makes confidentiality hard to keep.
• Expensive. They take time and money, and sometimes outside experts must be hired.
• Lack of accountability. No single member can be blamed for a poor decision.
• High chance of conflict. Ego and self-interest among members can cause disputes.

Functions of the audit committee

An audit committee is a group of board members, made up of independent directors with relevant expertise, that oversees financial reporting, risk management and internal controls. Its functions are:

1. Risk oversight. It checks that the risk management plan is clear and effective.
2. Oversight of the independent auditor. It appoints, pays and oversees the auditor, resolves disagreements between auditor and management, and meets the auditor at least quarterly.
3. Oversight of internal audit. It oversees and suggests improvements to internal controls over operations and processes.
4. Facilitating the external audit. It meets the external auditors separately during the annual audit and works to prevent fraud.
5. Managing financial reporting and controls. It judges whether reporting processes are well designed and working.
6. Review of filings and earnings releases. It checks that published financial information is transparent and fair.
7. Recommendations to management. It gives management a report and a management letter on best practice.
8. Internal control and risk management. It reviews controls and works with the risk committee.
9. Compliance and regulatory controls. It checks that the business follows laws and ethical frameworks.
10. Whistle-blower and ethics programmes. It sets up safe channels for reporting fraud or misconduct and decides what action to take.

Functions of the remuneration committee

This is a sub-committee of the board that decides the pay packages of executive directors and senior managers: base salary, bonuses, termination payments, performance incentives and long-term plans. It aims to recruit and motivate directors with fair pay linked to company performance and shareholder interests.

• Designing competitive packages. It compares pay with the industry and sets salary, bonus and long-term incentives such as share options.
• Performance-based rewards. It links bonuses to clear performance measures so executives’ actions fit strategy.
• Transparency and accountability. It publishes clear pay policies to shareholders and the public.
• Collaboration with other committees. It works with the nominating committee on chief executive officer (CEO) succession and with the audit committee to limit risk-taking driven by incentives.
• Alignment with strategy. Pay packages are built to push the CEO to create value for the firm.

Roles of the Chairman

• Prepares board meetings by setting the agenda and the number of meetings.
• Presides over the board: calls the meeting to order, confirms a quorum, announces decisions, keeps discussion to the point and enforces the rules.
• Provides strategic vision on long-term goals, mission and values.
• Engages with the CEO, as the bridge between the board (governance) and management (implementation).
• Facilitates communication so every director is heard.
• Represents the company, as an ambassador to the media, government and the public.
• Guides senior management so actions fit the company’s mission and values.
• Appoints sub-committees such as audit, governance or compensation, following board decisions.

Roles and skills of the Company Secretary

• Record-keeping of board documents, minutes and correspondence.
• Advising the board on governance and keeping it up to date on standards.
• Planning meetings with the Chairman: agendas, papers, attendance records, minutes and resolutions.
• Compliance oversight, including keeping the memorandum and articles up to date.
• Running board evaluations by distributing forms and summarising results.
• Facilitating board communication through notices and papers.
• Corporate adviser on governance and compliance, and trainer of new and existing directors.

Key skills are multi-tasking, strong communication, a deep understanding of company operations, and organisational skills.

Roles of the Managing Director

The MD turns the board’s vision into reality and acts as chief executive.

Duties include:

• exercising stewardship of the company’s resources
• ensuring profitable operations
• preparing annual budgets, objectives, policies and plans for the board
• implementing the board’s decisions
• setting plans and performance indicators for each business unit
• implementing safety, health and environmental programmes
• driving innovation and growth
• recommending senior appointments and succession plans
• leading communication and consultation with employees
• keeping the Chairman and board informed on stakeholder relations and strategic matters

The MD coordinates all departments and may have deputies.

Executive and non-executive directors

• Executive director. A senior executive who runs a business unit and reports to the board through the MD. Expected qualities are consistent leadership, versatile communication skills, previous experience in the field, and the ability to focus on goals, deadlines and strategic plans. Roles are strategic leadership and functional oversight of an area such as finance or marketing.
• Non-executive director. A board member without an executive office, who gives independent advice and is paid but is not an employee. Roles are performance review of the management team, strategic direction through constructive challenge, and a substantial time commitment. Legal duties and liabilities are the same as an executive director’s.

Common mistakes in the exam

• Giving advantages of committees without the disadvantages when the question asks you to discuss.
• Mixing the audit committee with internal audit. The committee oversees internal audit and the external audit. It does not do the audit.
• Saying the remuneration committee sets all staff pay. It decides executive and senior manager pay.
• Confusing executive and non-executive directors. Executives work full-time in the company. Non-executives oversee part-time.
• Forgetting that independent directors must have no ties that compromise judgement.
• Listing roles with no explanation of what the person does.

Quick revision

• Committee purposes: better decisions, freeing the board, expertise and efficiency.
• Advantages: specialisation, better solutions, participation, alternatives, communication, team spirit. Disadvantages: delay, weak secrecy, cost, unclear accountability, conflict.
• Audit committee: risk, external auditor, internal audit, reporting and controls, filings, recommendations, compliance, whistleblowing.
• Remuneration committee: executive pay, performance links, transparency, cooperation with other committees, alignment with strategy.
• Board roles: chairman, managing director, executive director, non-executive director, independent director and company secretary.

Practice questions

These are original questions written in the style of the ICAN exam. Try each one before you open the answer.

Section A style: multiple choice

Section B style: written questions

A further written question

Model answers

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