This guide is based on UK law as at 1st February 2010, unless otherwise stated. It is part of a series on corporate governance.
The UK Corporate Governance Code requires a board to have three committees: remuneration, audit and nomination. Following the Walker review (see: The development of the UK Corporate Governance Code, an OUT-LAW guide), banks and other financial institutions will usually also have a risk committee.
(Note: the Code does not apply to all companies. See: The reach of the UK Corporate Governance Code, an OUT-LAW guide)
All of these committees should have terms of reference, and these should be publicly available (usually on the company’s website).
In each case, the terms should set out clearly what the committee is to do, stating whether it is to take decisions or merely make recommendations.
A remuneration committee will, in accordance with the Code’s provisions, commonly have delegated authority to set executive pay. Its proposals will be discussed with the chairman and/or chief executive, and there may be a broad policy on directors’ pay agreed with the board, but the responsibility will lie with the committee, not the board. By contrast, the nomination committee will usually make recommendations to the full board and leave the final decision to the board as a whole. Membership of these committees is closely defined by the Code.
For more information, see:
Nothing in the Code prevents executive directors, or indeed any other employee or outside adviser, being invited to attend a particular committee meeting. So the finance director may commonly sit in on audit committee meetings – the Code recognises that their presence will often be necessary and desirable. Likewise, the head of HR will often be needed at remuneration and nomination committee meetings. But neither has the right to attend or vote; they are only there by invitation.
The board may appoint further committees as necessary, either on a continuing basis to deal with ongoing matters (for example, treasury or compliance) or ad hoc to deal with a particular acquisition or matter of strategy. Many companies will have an executive committee made up of the chief executive and those who report directly to him or her but excluding the chairman and the non-executives. It may meet monthly or weekly and will have daily executive responsibility for the company’s affairs.