Research shows that high-functioning boards actively engage in strategy development, risk mitigation, succession planning and monitoring organizational performance. These high-level, strategic responsibilities typically play out in four or five meetings per year. With such short touch time together as a team, how do boards ensure the depth of thinking and attention to detail essential to make wise decisions? Further, how do they invest adequate “time in” to provide strategic insight to management? The answer, simply put, is through the work of committees.
The work of high-performing boards is carried out through clearly defined committees, utilizing a mix of directors with experience and competencies matched to committee assignments. These committees engage management prior to board meetings and delve into the more complex issues confronting the business and its board. The result is often a thoroughly vetted recommendation that is presented to the full board in the form of a motion for action. This blog discusses typical committees and their respective foci. It also provides questions you can ask to assure your committees are operating at peak performance.
Types of Committees
While boards are not required to have the same number and types of committees, there are some that are more common than others. The National Association of Corporate Directors identifies the following as the most common committees: audit, compensation, nominating and governance, executive, finance, risk, strategy and investment. Similarly, FMI’s recent board survey with the Construction Industry Round Table found that engineering and construction industry companies most often utilize audit, compensation, governance, executive, strategy and succession committees. Here are some examples of where these committees typically focus their time:
- Review quarterly and annual financial statements
- Monitor the impact of accounting policies, practices and principles
- Ensure management has established (and follows) an adequate system of internal control
- Meet with management, internal auditors and external auditors to facilitate communication
- Select and oversee external auditors
A construction industry director recently shared her experience on an audit committee. “We talk a lot about everything from systems to any accounting changes or tax changes that are happening, new policies, anything that could affect the company. We talk about the strength of the people that are actually preparing the reports and doing the accounting and systems and risk-type management that might occur with current issues, such as phishing and fraud-type issues.”
- Develop board policies and procedures, including roles of the board and director duties and responsibilities
- Recruit, nominate and select board members
- Develop orientation and training programs for directors
- Evaluate individual director and overall board performance
- Review and approve organizational objectives related to the CEO’s compensation, evaluate the CEO’s performance and approve the CEO’s compensation
- Review recommendations regarding compensation plans from CEO for management (other than CEO)
- Monitor management compensation relative to market
As you can see by these examples, good committees have a clear purpose and role within the board structure. They provide processes for working through the large issues to ensure high-level decisions and conversations can occur at board meetings.
Determining the Right Committees for Your Board
Committees should be created when there’s an ongoing need in a given category of responsibilities. This could be a short-term “task force” over a specific issue or a fully formed committee with ongoing focus. One industry director shared his experience with creating committees this way: “When you say committees, which is if there’s something that we need to accomplish, a couple of people will step forward and take the ball, advance the ball, bring it back to the group, have collaborated, and report back to try and get board consensus.”
- What committees do you need? What activities need consistent oversight? Clearly define the purpose and scope of the committee so the board and management understand their role and areas of focus.
- Who should you assign to a given committee? There is no perfect number of committee members; you just want to ensure all directors are meaningfully engaged throughout the year. Select committee members and chairs with expertise that matches the committee’s charge. For example, when creating a finance committee, some type of financial planning experience is essential. Also consider other competencies like:
- Real estate experience
- Attention to detail
- Willingness to ask questions, raise flags
You may also want to look for opportunities for directors to mentor your management team through these committees.
The checklist below can ensure that any committee the board establishes is supporting – rather than undermining – the board’s role:
- Does the committee have a defined purpose?
- Have clear objectives been set as to its desired deliverables?
- Is the committee composed of people (directors and employees within the organization) who have expertise in the area of committee focus?
- Has the amount of money and staff time needed to support the committee been calculated and agreed to?
- Does the board have measures in place to determine whether the committee has completed its task successfully?
Committees provide an extraordinary amount of value to the board when created with intention. Start by clearly identifying each committee’s purpose and defining its objectives. Then thoughtfully match directors with the committee that will best leverage their individual strengths and expertise. Providing clear guidance and resources will allow committees to tackle the tough issues and bring the level of discussions and productivity of the board to a higher, more strategic level.