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Board committees and NEDs - Coggle Diagram
Board committees and NEDs
The Code expects certain functions to be carried out through committees comprised wholly of independent NEDs
In the financial services sector boards are also expected to establish a risk committee
There is no statutory requirement in the UK for a quoted company to establish a nomination committee or a remuneration committee but following the implementation of the EU Statutory Audit Directive in 2008, quoted companies are required to have an audit committee
Nomination committee
Function: leading the process for board appointments, ensuring plans are in order for orderly succession to both the board and senior management positions and overseeing the development of a diverse pipeline
Composition: majority of members should be independent NEDs. No minimum number specified
There is no bard to the board chair serving on the nomination committee or chairing it, but they should not chair the committee when it is dealing with the appointment of their successor
Audit committee
Function: Monitoring the integrity of financial statements, reviewing internal controls and risk management, ensuring the independence and effectiveness of internal and external audit functions
Composition: all independent NEDs - in large companies at least 3, in smaller companies at least 2
The chiar of the board should not be a member
At least one member of the committee should have recent and relevant financial experience. The committee as a whole should also have competence relevant to the sector in which the company operates
Remuneration commitee
Function: determining the policy for executive director remuneration and getting remuneration for the chair, executive directors and senior management
Composition: all independent NEDs, in large companies a least 3, in smaller companies at least 2
The chair of the board can only be a member if they were independent on appointment and cannot chair the committee. Before appointment as chair of the committee, the appointee should have served on a remuneration committee for at least 12 months
Risk committee
Comrpised of independent NEDs
Typically perform the risk management functions usually undertaken by the audit committee including the responsibility for oversight and advice to the board on the current risk exposure and future risk strategy and the embedding and maintenance of a supportive culture in relation to the management of risk
The Code requires boards to establish the three main committees in order to ensure that certain important governance functions are undertaken exclusively by independent NEDs to avoid conflicts of interests
The committees are established to make recommendations to the board, the final decision on any matter within the remit of the committees rests with the board
The remuneration committee should have delegated responsibility for determining the policy for executive director remuneration and setting remuneration for the chair, executive directors and senior manager
Boards will rarely override the recommendations of the relevant committee. If they do so, the code sometimes requires the difference of opinion to be made public (eg if the board ignores the audit committees choice of auditor). The FRC guidance recommends that
The chair should ensure that sufficient time is allowed at the board for committees to report on the nature and content of discussion, on recommendations and on actions to be taken
Where there is diasgreement between the relevant committee and the board, adequate time should be made available for discussion of the issue with a view to resolving the disagreement
Where any such disagreement cannot be resolved, the committee concerned should have the right to report the issue to the shareholders as part of the report on its activities in the annual report