Governance for Corporates

What is the structure and responsibilities of the Board?

The role of the Board is typically set out in Corporate Law and Governance regulation.  In the UK, the role of the Board is defined in the Companies Act, and then there is a range of regulations that set out the specific activities and standards that the Board needs to adhere to.  These include for example; FRC Governance Code, the stewardship Code, S172 of the Companies Act to name a few.  Also, there are additional specific requirements covering industries such as financial services or utilities.  These regulations are often issued by the regulators for these industries.

In the UK, the Board in plenary has collective responsibility however, it uses sub-committees to do some of the preparatory work.  The matters reserved for the Board tend to include for example, the approval of annual and interim results, strategic plans, annual budgets, material increases to borrowing and loan facilities, acquisitions and disposals and major capital and operating expenditure proposals, oversight over corporate purpose and culture, credit rating and external communications.

What are the main sub-committees and their responsibilities?

In most corporations the main Board sub-committees are:

The Audit and Risk Committee (ARC) - They are focused primarily on the integrity of financial statements, internal financial controls, risk management systems and interactions with external as well as internal auditors. The mandate extends to most regulatory compliance issues linked to financial disclosures, risks and related control matters. Its role in assessing and working with risk would typically cover the process underpinning all Principal Risks of the organisation from enterprise risk through financial, systemic, operating and reputational risk.

The Remuneration Committee (RemCo) - Typically oversees executive reward, remuneration policy and incentive structures. It evaluates how executive and broader reward is implemented, testing design, benchmarking of levels and links between performance and pay. Increasingly the RemCo also ensures regulatory compliance, engages with investors and works with matters of risk. Such risk work was originally focused on financial and reputational risks linked to the design of incentives, pensions and other benefit plans, but more RemCos are beginning to extend their risk considerations to behavioural, operational and process risks as well.

The Nominations Committee (NomCo) - Typically mandated to develop and maintain a formal, rigorous and transparent procedure for making recommendations on appointments and reappointments to the Board and for Senior Executives. This will include ensuring that members of the Board and its committees have the necessary skills and experience to deliver on the company’s strategic objectives and sustainable value creation.  NomCo is typically responsible for overseeing and leading the succession planning process both at Board and Exco level.

How does the Board discharge its oversight role?

The direction of governance developments is fundamentally trying to encourage good governance and playing down the “box ticking” attitude that has been prevailing in some areas. Hence, the Board and management must foster a broader perspective which involves closer cross-functional and cross-committee collaboration to bring strategy, risk and reward closer together to ensure value-adding decisions, and avoid a pure compliance focused attitude.

The visibility of the Board on key risk management topics is an important component of the tone from the top set by the CEO and the Board.

The Board has a dual role – on the one hand the Board provides its expertise and experience to senior management in an advisory capacity.  On the other hand, the Board in its oversight capacity, is responsible for defining the parameters of what is acceptable and unacceptable – be that in terms of risk appetite, business practices or adherence to the rules and regulations.

The entire Governance agenda involves balancing compliance with rules & regulations, and making the Governance structures value adding both from a shareholder as well as wider stakeholder perspective.  For everyone involved in these activities, be that in listed or PE owned businesses, there is no doubt that the governance agenda is becoming ever more detailed and complex.