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Types of Corporate Governance Committees Report

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Updated: Jul 21st, 2021

Executive Summary

This paper describes different types of corporate governance committees to show which of them are necessary for operating a business. Audit, compensation, and nominating (governance) committees are presented as the basis for the corporate committee structure. Additional types of committees are discussed to represent contemporary stakeholder concerns. Finally, several common and specialized committee topics are recommended to address to cover the majority of issues, including some details about the committees’ membership.

Introduction

The control over corporations’ actions has to be shared among its stakeholders to support the levels of the participants – shareholders, management, directors, and other groups. Shareholders and management may hold different views regarding the future of the business, and their conflicts can lead to failed innovations and resistance to change (Larcker and Tayan 8). Thus, a set of committees are organized to control the actions of the board of members as well as the overall direction of the company. This paper examines the various types of corporate governance committees, including audit, compensation, nominating, and other specific groups. The recommendation includes the three main committees (nominating, compensation, and audit) as well as the corporate social responsibility committee to be created at most businesses.

Problem Statement

The full board of directors cannot always adequately address all problems that the company encounters. Moreover, some issues do not require the participation of full members, and time-consuming discussions could take up a significant time of the stakeholders’ workload. Therefore, the delegation of authority is necessary to separate the tasks. However, the creation of committees raises several questions, including the necessity of certain topics being considered in depth. Thus, the problem for companies lies in the discussion of which committees are needed, and which will interfere with the existing processes.

Discussion

To start with, one can consider the three main types of committees that are considered by most businesses. The first is the audit committee that acts as a point of contact between the business and the external auditor (Larcker and Tayan 61). The main purpose of this group of directors is to prevent any tampering or manipulation with the audit’s processes and data. The audit committee chooses and hires the external auditor, assessing their performance and independence from outside influences. Moreover, it creates and maintains channels for whistleblowers as well as ethical issues related to regulatory compliance and control. The duties of the committee require participants to have an in-depth understanding of corporate finances.

The second type is the compensation committee, which is focused on the compensation rates for the CEO and other upper management positions. CEO’s performance is difficult to measure in systems where the CEO also occupies a leading position on the board of members. Although the number of corporations with these dual roles continues to decline, the CEO and other member’s compensation cannot be controlled without bias without external overview. Thus, the duty of the compensation committee is to ensure that senior executive positions are compensated according to their performance-based goals and their achievement.

Finally, the third common type is the nominating committee that is sometimes united with a governance committee. The aims of the two groups are similar – to appoint the CEO and members of the board and monitor the evaluation of executive positions (Soana and Crisci 247). The analysis of the CEO and board members’ performance has to be separate from the usual board members’ meetings to avoid unfair judgments.

Apart from the three described committees, companies can choose to discuss other topics in detail. For example, the issue of corporate social responsibility (CSR) is gaining recognition from stakeholders, including clients and shareholders. According to Saxena, CSR always had an important place in company actions, but the lack of policy does not provide companies with a transparent model for considering ethical issues (41). Some concerns that can be addressed by the CSR committee include benefits for employees, the disclosure of corporate information, ethical performance, and involvement in social programs. Another adjacent topic that is gaining attention is environmental protection.

Recommendations

The three primary types of committees have been implemented in many companies, and their research supports the effectiveness of these entities. Thus, it is possible to recommend all three committees to be created in a chosen company. One should note that the members of each committee should share their decisions and knowledge in order to make informed decisions. Some directors can be a part of several committees to provide a link between the groups for a better discussion. Velte finds that this connection between compensation and audit committees allows for better reporting quality (196). Aside from the three main committees, it is recommended to create CSR and environmental protection committees to address the concerns that are at the center of the public’s view.

Conclusion

Committees are a necessary part of the corporate governance structure. They aid in the delegation of duties and create groups for discussions with a lower risk of bias. Audit committees provide a channel for external auditors and pay more attention to feedback in organizations. Compensation committees are necessary to establish the compensation for CEOs and other executive positions, while governance committees evaluate candidates for the board. Finally, other specialized committees that are recommended are concerned with CSR and the environment.

Works Cited

Larcker, David and Brian Tayan. Corporate Governance Matters: A Closer Look at Organizational Choices and Their Consequences. 2nd ed., Pearson Education, 2016.

Saxena, N. “Corporate Social Responsibility: Issues & Challenges.” International Journal of Research and Scientific Innovation, vol. 3, 2016, pp. 41-46.

Soana, Maria Gaia, and Giuseppe Crisci. “Duties and Responsibilities of the Nominating Committee.” Corporate Ownership & Control, vol. 15, no. 1, 2017, pp. 246-252.

Velte, Patrick. “Do Overlapping Audit and Compensation Committee Memberships Contribute to Better Financial Reporting Quality? Empirical Evidence for the German Two-Tier System.” International Journal of Economics and Accounting, vol. 8, no. 3/4, 2017, pp. 196-214.

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IvyPanda. "Types of Corporate Governance Committees." July 21, 2021. https://ivypanda.com/essays/types-of-corporate-governance-committees/.

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IvyPanda. 2021. "Types of Corporate Governance Committees." July 21, 2021. https://ivypanda.com/essays/types-of-corporate-governance-committees/.

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IvyPanda. (2021) 'Types of Corporate Governance Committees'. 21 July.

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