What is the typical committee structure of the governing body?
The supervisory board may organize committees for different subjects that usually prepare decisions and supervise the implementation of resolutions of the board. Listed companies as well as very big incorporations need an audit committee with one member as financial expert. The audit committee supervises the reporting and accounting of the company, as well as the control systems. According to the Austrian corporate governance code JSTs should also have a nominating committee that prepares elections of new board members and directors of the company. The remuneration committee treats with the remuneration system for directors and their employment contracts.
The committees can be formed by members of the board of directors, executive office, employees of the company of by third parties with a specific expertise to contribute to the relevant committee.
In what refers specifically to the audit committee required by the Novo Mercado Listing Regulation in force, it shall be composed by at least three (3) members: (i) at least one of whom must be an independent member of the company’s board of directors; (ii) at least one of whom must have recognized experience in business accounting pursuant to the rules issued by CVM that govern the registration and practice of independent auditing activities in the securities market and define the duties and responsibilities of the management of audited entities in their relations with independent auditors; and (iii) one of whom may accumulate the qualifications described in the previous two items, (i) and (ii).
As mentioned, publicly traded companies are required to have an audit committee of board members not including any executive officer but including an independent board member with financial, accounting or compliance expertise (although this committee’s functions can under certain conditions be carried out by the board itself). Pursuant to the AFEP-MEDEF Code two-thirds of its members should be independent and no executive officer of the company should be a member; the Middlenext Code suggests only that the chair of this committee be independent. The missions of the audit committee include review of the processes of preparation of the accounts, compliance and risk control.
Other committees can be named by the board. The APEF-MEDEF Code recommends nominations and compensation committees, each composed principally of independent directors and no executive officer (with the compensation committee to include an employee director). Most publicly listed companies have at least compensation and nominations committees (sometimes one committee with both missions) and other committees (such as a strategy committee) are not uncommon.
The role of committees is to make recommendations to the board, which remains responsible for taking the relevant decisions.
The Management Board of a public company usually consists of several members. Each Management Board member is assigned with certain area of responsibility. However, each Management Board member is responsible and therefore liable for the business of the company as a whole and not limited to its own area(s) of responsibility.
Supervisory Boards have typically certain area-specific committees as provided for in its rules of procedure or the company’s articles of association. These include an audit committee, a personnel committee and a nomination committee. The latter generally proposes new Supervisory Board members to the shareholder meeting for election. Each committee must have a chair, shall prepare decisions, may in certain cases even make decisions and must report to the Supervisory Board which is ultimately responsible for any resolutions.
For public companies, Greek law provides the establishment of an audit committee, whose main role is to supervise the internal auditors of the company, to review the disclosed financial information, to audit and evaluate internal control systems, to assess and coordinate audit functions and procedures in accordance with the applicable legislative framework, to select the chartered auditors for each financial year and to evaluate their performance. The audit committee is comprised by at least three members and can be either established by the Board or be an independent committee of the listed company. The members of the audit committee are independent and have adequate knowledge of the industry of the listed company and at least one member is a non-active chartered auditor or has adequate knowledge of accounting and audits.
Other committees provided for in the CGC include the remuneration committee and the nomination committee. The remuneration committee’s main role is to propose to the Board the remuneration of the non-executive members, to review and propose the granting of stock option programs, to suggest performance targets in relation to the stock option programs and in general to submit to the Board any proposal in relation to the remuneration policy of the company. The nomination committee ensures that the process of nomination of the Board candidates is transparent and efficient, by setting the selection criteria and the appointment procedures, submitting proposals in relation to the diversity policy applied by the listed company, evaluating the Board and the desired qualifications of the members and by proposing Board candidates.
The Listing Rules and the Corporate Governance Code require all listed companies to form audit committee, remuneration committee and nomination committee (rules 3.21, 3.25 of the Main Board Listing Rules; rules 5.28, 5.34 of the GEM Listing Rules; paragraph A.5.1 of the Corporate Governance Code). Paragraph D.2 of the Corporate Governance Code requires listed companies to form board committees, including but not limited to, remuneration committee, nomination committee, audit committee and risk committee, with specific written terms of their authority and duties. Each of the committees is responsible for determining different types of policy as follows.
- Remuneration Committee: Responsible for determining the policy in relation to the remuneration of executive directors, assessing performance of executive directors and approving the terms of executive directors’ service contracts.
- Nomination Committee: Responsible for determining the policy for nominating directors, reviewing the structure, size and composition (including the skills, knowledge and experience) of the board, and identifying individuals suitably qualified to become board members and selecting and recommending candidates for directorship. If the nomination committee has a policy concerning diversity, the nomination committee should also determine any measurable objectives set for implementing the policy, and progress on achieving those objectives.
- Audit Committee: Responsible for reviewing the quarterly (if relevant), half-yearly and annual financial results, of the company, as well as the risk management and internal control systems and the effectiveness of internal audit function of the company, if they are not addressed by separate risk committee.
- Risk Committee: Responsible for reviewing the company’s risk management and internal control systems and the effectiveness of its internal audit function.
In the case of a company with an audit and supervisory committee, the company has an audit and supervisory committee, which mainly audits the management of the company by each director and the board of directors. The audit and supervisory committee must have three or more members, and all of them must be non-executive directors. The majority of audit and supervisory committee members must be outside directors.
In the case of a company with three committees, the company has three committees, (a) the audit committee, (b) the nominating committee and (c) the compensation committee. Each committee must have three or more members who concurrently serve as directors, and all members of the audit committee must be non-executive directors. The majority of each committee's members must be outside directors.
Meanwhile, in the case of a company with statutory auditors, there are no statutory committees, and in the case of a company with an audit and supervisory committee, there are no statutory committees specifically established for nomination of and determination of compensation for directors. The CGC, however, encourages these companies to establish voluntary advisory committees for the nomination and compensation of directors. Recently it is becoming more popular to establish these kinds of advisory committees in order to ensure transparency and objectivity of proposals made by the board of directors meeting.
Shareholders of stock companies may set up committees responsible for establishing the corporate bodies’ remuneration.
In turn, the board of directors may set up an executive committee and specialised committees, and the supervisory board may create committees responsible for financial matters (mandatory in certain cases as referred hereabove) and for setting the remuneration of the executive board.
The most typical specialised committees in listed companies are on corporate governance, remuneration/evaluation and nomination matters, as recommended by the IPCG Code. In certain regulated sectors, specialised committees (such as remuneration, risk and selection committees) are also required.
The BOD may establish committee(s), consisting of two or more members, and delegate certain of the BOD’s authority to such committee. Once a committee adopts a resolution, such resolution must be notified to all directors, and any director may request that a BOD meeting be convened for a separate resolution at the BOD level. An exception is with respect to matters resolved by the audit committee, which cannot be subject to separate BOD review for resolution.
In case of a listed Company or a financial institution, the KCC and other applicable laws and regulations mandate the establishment of an audit committee and an outside director nomination committee. For audit committees, at least two-thirds of the members must be outside directors. In the case of a listed company with total assets of at least KRW 2 trillion, the representative of the audit committee must be an outside director, and at least one (1) of the committee members must be an accounting or financial expert. The boards of listed and non-listed companies have discretion to establish other types of committees, but the AOI must provide for the establishment of such non-mandatory committees under the board.
In practice, large Companies generally establish a number of committees under the board to enhance efficiency (e.g., management committee or executive committee composed of executive directors) or for purposes of granting independent decision-making process with respect to certain specific matters (e.g., inter-affiliate transaction committee or compensation committee).
The board of listed companies typically comprises several committees, in particular a compensation, audit and nomination committee. The board may appoint further permanent (e.g., risk, corporate governance) or ad hoc committees. Several tasks may also be combined in a committee.
The OaEC requires a mandatory and annual election by the shareholders of the members of the compensation committee and the articles of association must provide for principle-based rules regarding the powers and responsibilities of the compensation committee. The SCBP recommends that an audit, compensation and nomination committee be established. Other than that, Swiss law does not explicitly provide for mandatory board committees.
Most corporate boards have various supporting committees comprised of directors that make recommendations to the entire board. The typical standing committee structure for a public company includes an audit committee, a nominating and corporate governance committee and a compensation committee. In some cases, the board of directors may choose to add a finance committee, a public responsibility committee or other specialized committee and, occasionally, an executive committee. These committees are most often comprised of directors who have professional experience related to the topic of the committee. The Securities Exchange Act of 1934 and stock exchange listing standards require certain committees to have at least one expert on the committee’s subject matter (i.e. a financial expert on the audit committee) or a certain number of independent directors.
An LLC may or may not have the same committees as a corporation. Whether an LLC has committees will depend on the size of the LLC and the purpose of the LLC. Generally, an “operating” LLC will have a more developed board or committee structure than an LLC created simply to hold the assets of other legal entities. As is the nature of LLCs, an LLC governing body and its committees can be set up as the members see fit.
The UK Corporate Governance Code requires premium listed companies to have three main board committees:
(A) the audit committee, which should comprise at least three (or two for smaller companies) independent non-executive directors (not including the Chairperson), at least one of which should have recent and relevant financial experience;
(B) the nomination committee, which should comprise a majority of independent non-executive directors; and
(C) the remuneration committee. which should comprise at least three (or two for smaller companies) independent non-executive directors. The Chairperson can only be a member if he or she was independent on appointment and cannot chair the committee.
Additional committees may be appropriate in the context of particular companies or industries (for example, a health & safety committee or an M&A committee).
While committee structures can vary widely, examples of common board committees include (i) an audit committee (required for public companies), (ii) a governance and nomination committee, (iii) a compensation committee, and (iv) if necessary, ad hoc special committees assembled on as needed basis to consider conflict of interest matters.
Non-listed and non-supervised entities are not required to implement any committee structure, therefore it is to the by-laws or the board discretion to do so.
Notwithstanding the above, listed companies – pursuant to, respectively, Regulation no. 17221/2010 issued by CONSOB (the Italian securities and markets authority) and the above mentioned CG Code – and banks – pursuant to Circular no. 285/2013 issued by the Bank of Italy – shall appoint the following board committees: related party transactions, appointments, remunerations and risks (the latter in listed companies is called “control and risks”).
According to TCC, BoD is obliged to form a committee aiming to manage the risks by early diagnosis of the reasons that endanger the existence of the company and by taking the necessary measures in companies having their shares traded on the stock exchange. In the other companies, this committee is formed in case the auditor of the company finds it necessary. The committee evaluates the situation, highlights the current risks and presents the remedies by submitting a report to the BoD every two month. This report must be also sent to the auditor (TCC, article 378). The scope of duties, working principles and the members of the committees are determined by the BoD and they are published at Public Disclosure Platform (CGP, article 4.5.2).
Pursuant to CGP, in public companies, the following committees must be constituted as a rule:
- Audit Committee
- Corporate Governance Committee
- Nomination Committee
- Early Detection of Risk Committee
- Price Committee
The obligating to form these committees can vary for the banks. In the event that nomination committee and price committee cannot be formed due to the settlement of BoD, corporate governance committee fulfills the duties of the same (CGP, article 4.5.1).
The committees must include at least two members. In the event that two members are included, both of them must be non-executive members of BoD. If there is more than two members, then the majority of the members must be non-executive members. The head of the committee must be elected among the independent members of BoD. All the members of the committees in charge of auditing must be independent members (CGP, article 4.5.3). The CEO cannot take part in the committees (CGP, article 4.5.4) and care is taken to ensure that one board member does not serve on more than one committee (CGP, article 4.5.5).
The Companies' Act provides that in a SA, the board of directors may decide to create committees, whose composition and remit it shall fix and which shall carry on their activities under its responsibility.
In addition, the law of 23 July 2016 on the audit profession (Loi du 23 juillet 2016 relative à la profession de l'audit) requires an audit committee for public interest companies ("entités d'intérêt public"), such as listed companies, and credit and insurance/reinsurance institutions and which shall be composed of non-executive members of the board, and or the supervisory board or members designated by the general assembly of shareholders.
With respect to qualifying listed companies, the LSE Principles indicate that the board shall establish special committees necessary for the proper execution of its remit. In this respect, the LSE principles recommend that the board ensures that special committees are set up in order to review specific issues determined by the board, and to advise the board on these issues. In this respect, it is indicated that committees shall be composed in such a way to ensure that the membership of the committee is renewed to some degree, and to avoid undue reliance on particular individuals.
The supervisory board in a JSC may establish permanent or interim committees for preliminary analysis and preparation of questions for consideration at board meetings. While such committees are not mandatory for private JSCs, all public JSCs are obliged to set up an audit committee, a remuneration committee and an appointment committee. The two latter committees may be combined in one. Shareholders are free to establish any other committees.
Unless a company's constitution provides otherwise, the directors may delegate any of their powers to committees of the board. For ASX listed companies, it is common, and recommended by the ASX Governance Principles, that boards delegate oversight of certain matters to formal committees, including audit, remuneration and nomination committees. The ASX Governance Principles include comprehensive guidance on the roles and responsibilities of these committees.
The Companies Law does not require certain committees to be established, however, the corporate governance rules include guidance to the establishment of specialized committees supporting the board as follows:
- Audit committee;
- Risk management committee; and