Corporate Board Committees
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Corporate Board Committees
Abstract
Committees of boards are vital to the operation of a board of directors for a corporation or a non-profit organization. In order to best understand the importance of committees to a board of directors for a corporation there is a need to define a few terms. Then look at the structures of boards and the committees they hold and recommendations for additional committees to be considered for increased board efficiency. A conclusion will be offered as to the direction a corporation should go in order to best utilize the board.
Committees of boards are vital to the operation of a board of directors for a corporation or a non-profit organization. In order to best understand the importance of committees to a board of directors for a corporation there is a need to define a few terms. Then look at the structures of boards and the committees they hold and recommendations for additional committees to be considered for increased board efficiency. A conclusion will be offered as to the direction a corporation should go in order to best utilize the board.
Who are shareholders?
The shareholders are the owners of one or more shares in a corporation, and are sometimes called “stockholders” (Hill, 2005). The benefit of being a shareholder can include receiving dividends for each share as determined by the board of directors or a possible increase in the value of the shares owned. That is why it is important as a voting shareholder to cast your vote for members of the board of directors which you feel will provide the most benefit to the corporation to maximize shareholder value. Your ability to vote also works if a director is not performing their fiduciary duty and shareholders can ban together to have board member(s) removed.
Who are stakeholders?
According to Baldwin and Strandberg (2011) in her article CSR Governance Guidelines she defines stakeholders of a corporation as a “person, group, organization, or system who affects or can be affected by an organizations actions. Stakeholders include customers, employees, communities, government, civil society, investors, and suppliers. The environment and future generations are also considered as stakeholders.” Stakeholders are important in establishing what types of committees a board should consider including for their corporation.
What is a board of directors?
A board of directors is a group of people responsible for governing a corporation. They are elected from a group of nominees by the shareholders of a public corporation or non-profit organization, or in the case of organizations controlled by the government they can be appointed by the minister, for example the minister of education in the case of a post-secondary school.
Directors of a board are usually elected at the first annual shareholder meeting and at each annual meeting for one-year terms or specified terms as outlined in the corporations bylaws or articles of incorporation (Board, 2008).
As defined by David Larcker and Brian Tayan, in their book Corporate Governance Matters: A closer look at organizational choices and their consequences. (2011), responsibilities of the board are in the capacity of providing both advisory and oversight functions. In an advisory capacity, “the board consults with management regarding the strategic and operational direction of the company” (p. 67). In its oversight capacity,
“The board is expected to monitor management and ensure that it is acting diligently in the interests of shareholders. The board hires and fires the chief executive officer, measures corporate performance, evaluates management contribution to performance, and awards compensationThe directors responsibilities are separate and distinct from those responsibilities of management” (p. 68).
What is a committee?
The Wests Encyclopedia of American Law (2008) describes a committee as “an individual or group of people to whom authority has been delegated by a larger group to perform a particular function or duty”. When there are too many or too complex of issues to be handled by the entire board then committees are founded. Standing committees (operating committees) are established for ongoing, major activities. For short-term activities ad hoc committees are created, once the activity is completed the committee is disbanded. Standing committees are generally included in the corporations bylaws.
The committee has a chair who is usually appointed by the board chair. A committee should also be comprised of at least two board members, preferably three. If possible consider having non-board volunteers (mostly common in non-profit organizations) and/or a relevant staff member as a member of the committee as well. For a successful committee, it would be beneficial for committees to make full use of board members expertise and to consider diversity in selection of the committee members (McNamara, n.d.).
Committee chairs and members of corporations are generally compensated for their work. In 2011, 90% of committee chairs were paid a higher retainer than other committee members. With the highest average premium paid to the Audit Committee chair of $18,500 while the average non-audit committee chair retainer being $11,858 (“Corporate”, 2013, p.63). Committee member retainers are substantially lower on average at $5,826 for 2011 which has seen a decrease of 1% on average from 2010 (“Corporate”, 2013, p.68). Not all corporations pay committee member retainers, some only pay a retainer to Audit Committee members, this is becoming more common (“Corporate”, 2013, p.67).
There have been on average for the past seven years nine members on a Canadian board. And 54% of boards had between six and nine members. “In the United States, the average number of directors on a board is nine (“Corporate”, 2013, p. 35)”. “In 2011, 49% of independent directors sat on two committees (“Corporate”, 2013, p. 47).”
Chart (“Corporate”, 2013, p. 75).
Why do we need committees?
The majority