In this alert, we explore the concept of committees, discuss their advantages and disadvantages, and examine how they affect director liability. We don’t deal with specific rules applicable to certain committees that are required and dealt with in other sections of the Companies Act, such as audit and social and ethics committees.

Section 66 requires that the business and affairs of a company must be managed by or under the direction of the board of directors (board), which has the authority to exercise all of the powers and perform any of the functions of the company, except to the extent that the Companies Act or the memorandum of incorporation (MOI) provides otherwise. Section 72(1) provides that, unless specified otherwise in a company’s MOI, the board has the authority to establish multiple committees and may delegate some of its powers, authority and functions to these committees.

In terms of section 72(2)(b) and (c), unless the MOI or a committee-establishing resolution states otherwise, a committee has the authority to seek advice from external sources and is granted full authority by the board about matters referred to it.

Advantages of having board committees

Expertise and specialisation

One of the primary advantages of committees is their ability to bring expertise and specialist knowledge to the decision-making process, especially by involving non-director members – although such members may not vote and must not be ineligible or disqualified from being a director. By forming committees such as compensation, risk and nomination committees, boards can tap into the specialised knowledge and experience of their members. This can lead to more informed and effective decision-making in complex areas.

Enhanced accountability

Committees can help to improve communication and transparency within the company, as they may be required to report regularly to the board on their activities. This reporting process can help to ensure that the board is kept informed of important developments while committee members are accountable for more in-depth attention to committee issues.

Efficient decision-making

Committees streamline the decision-making process. Either by delegating decision-making power to the committee or by empowering the committee to investigate and then bring an informed recommendation or alternatives to the board for decision. For example, the compensation committee may be authorised to determine certain matters, such as starting salaries within a category band, but required to bring annual salary increase percentages to the board for approval. Boards can allocate full board time and resources more efficiently, which is especially important in larger organisations with complex operations and/or specific matters which require substantial attention.

Disadvantages of having board committees

Silo effect

One of the main disadvantages of having committees is that they can create a silo effect. Committee members may become more focused on their own committee’s work and less aware of the overall needs of the company and how parts of the company’s business or affairs inter-relate. This can lead to a lack of co-ordination and an overlap between different committees.

Overreliance

Boards may become overly reliant on committees, leading to detachment from key decisions and a lack of comprehensive oversight. This overreliance can create blind spots and hinder effective governance.

Using board committees as scapegoats

Finally, can the board blame and hide behind a committee? Generally, the answer is no: directors are ultimately responsible for the actions of the committees. The board cannot simply delegate a decision to a committee and then wash their hands of it.

Section 72(3) of the Companies Act provides that the creation of a committee, delegation of any power to, or action taken by, a committee does not alone satisfy or constitute compliance by a director with their required duty to the company, as set out in section 76.

This means that the board remains liable for the proper performance of the delegated duty. Thus, while the board may delegate its powers to a committee, it cannot abdicate its legal responsibility for the conduct of the committee. If the board is reasonably diligent in selecting expert committee members who merit confidence and exercise reasonable oversight, then board members may limit their liability under section 76(4) and (5). 

Tips for effective committee management

We suggest a few tips for boards to ensure the effective management of any committee:

1. Clear terms of reference for each committee. This should ensure that the committee stays focused on its assigned tasks and does not overlap with other committees. These may also include details around member composition, regularity of meetings, quorum, voting and scope of work.
2. Committees should meet regularly and keep minutes of meetings. This will facilitate transparency and accountability.
3. Committees should be required to report regularly to the board on their activities. This should ensure that the board is aware of the committee’s progress and that it can provide guidance and support as needed.
4. Committees are not a substitute for good board governance. Even with committees in place, the board still has ultimate responsibility for the company’s direction.

Conclusion

Committees can be a valuable tool for a company, but they are not without their disadvantages. The board should ensure that any committee is properly structured, and that membership has the correct mix of qualifications and experience. Clear committee terms of reference and policies will facilitate accountability to the board. By following these guidelines, companies can maximise the benefits of committees while minimising the risks.