Many words or terms describe the financial marketplace over the past decade — evolving, volatile, unexpected, shareholder activism, and governance, to name a few. The media regularly portrays corporate scandals, business failings, shareholder unrest and cybersecurity breaches. With all that’s been happening, it calls into question whether change needs to be made in the function and responsibilities of governance committees.
According to the EY Center for Board Matters, the prevalence of engagement between corporations and investors and other economic factors have generated a growing awareness of the need to place a heavier focus on governance as increased risks have become known. Subsequently, the role of governance committees has needed to evolve and expand along with the changes.
Despite the recent enhanced focus on good corporate governance, governance committees are still required to fill their traditional roles. The changes are forcing governance committees to ask many new questions about board effectiveness.
Technology is another area that’s had a major impact on boards and their committees. While cybersecurity will continue to be a major issue in the coming years, technology has also brought digital solutions that support good corporate governance.
Basic Information on Governance Committees
In a review of corporate governance committees, EY reports that some of the responsibilities that were traditionally considered to be governance committee responsibilities, in reality, are often managed by the full board, the independent board chair, a lead director or presiding directors, or other committees.
The intent of the governance committee is to be the main resource on governance for the board. Committee members typically stay current on trends and changes around governance topics. Part of this work entails comparing their corporation’s governance standards with those of competitors and the broader market.
Governance committees support good governance, in part, by promoting the healthy development and functioning of the board, its committees and individual members. In this and other ways, the committee helps the board carry out its due diligence.
Most board committees meet at least quarterly, but they can meet as often as they need to. The CEO is usually a member of the governance committee. All members of the committee prepare regular reports for the full board of directors.
Scope of the Governance Committee’s Work
The scope of the committee’s work pertains to governing itself, advising the board on governance principles and working to compose a diverse, skilled board. In recent years, the role of the governance committee has expanded to include some involvement in shareholder engagement and risk management.
In governing itself, a governance committee is responsible for reviewing and revising the committee’s job description, which normally occurs every two years or so. At this time, the committee may make recommendations to the board to revise the committee’s job description or make other recommendations to the board for action.
The governance committee is the board’s primary resource on governance issues. By staying current on governance trends, the committee monitors the effectiveness of board operations, board performance and governance policies. Duties of the governance committee include recommending action to the board for structural changes to ensure the company is in compliance with its legal and fiduciary duties. The governance committee is accountable for the board’s and the company’s governance guidelines and policies.
Shareholder activism has been on the rise, which is placing a renewed focus on board composition, board diversity and board refreshment. Governance boards take the lead in developing a purposeful process for recruiting and nominating a slate of qualified board members who are best suited for achieving the corporation’s mission. Succession planning is a major activity of governance committees, along with orienting, onboarding, training and evaluating board directors.
In some cases, recent instability in the marketplace has led boards to expand the responsibilities of their governance committees to shareholder proposals and engagement. According to EY, 48% of boards reported that their governance committees oversee such areas as political spending, environmental sustainability, communications, proxy filings and other stakeholder areas. Along those lines, 19% of boards said that they felt their directors should represent the interests of all shareholders and their boards expected their governance committees to shift to a long-term focus.
Governance committees are more inclined to consider candidates recommended by shareholders and management for the nomination pool than in the past, although they acknowledged that they weren’t under any obligation to consider candidates suggested by management.
Another area that boards have been delegating to their governance committees is some degree of risk management. EY states that 15% of the boards reporting stated that their governance committees took accountability for the company’s reputation, non-financial risks, enterprise management risks, business continuity plans and safety strategies. Additional new challenges for governance committees include navigating changes in regulations, technology, workforce demographics and disruptions to the business model.
There’s been a strong increase in board use of digital tools, such as board portals, secure messaging platforms and other software solutions that support good corporate governance. Governance Cloud, by Diligent Corporation, is the industry’s leading, trusted name in board governance software and has a proven track record for excellence. Diligent’s customers can count on being offered innovative governance software solutions that support good governance today and in the future.
Monitoring the Effectiveness of the Governance Committee
Governance committees play a key role in evaluating the board’s performance and educating the board in good corporate governance. The EY report shows that 98% of governance committees perform board evaluations annually. About 70% of governance committees oversee board committee evaluations, and about 35% of governance committees oversee individual director evaluations. A little over half of governance committees oversee or provide for director orientation and continuing board director education.
It’s been a longstanding practice of boards for board directors to serve long tenures. About 38% of the boards surveyed by EY stated that their board directors shouldn’t expect an automatic renomination. Governance boards now consider each director’s performance and contributions during their board tenure before offering board directors a new term.
Governance committees will continue to be bound by the traditional roles of overseeing governance policies and practices. The governance habits of corporations may continue to be heavily scrutinized at least until the marketplace rebounds from one of the worst recessions in history. Corporations are responding to changing trends by giving governance committees additional responsibilities. Small percentages of governance committees are starting to get involved in shareholder engagement and risk management.
Technology will continue to play a major role in governance oversight and governance solutions.