The Importance of Board Independence (IVOR nr. 90) 2012/2.2.2.0:2.2.2.0 Introduction

The Importance of Board Independence (IVOR nr. 90) 2012/2.2.2.0

2.2.2.0 Introduction

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Boards from both structures have the possibility or obligation to appoint board committees, such as an audit committee, remuneration committee and nomination committee.1 As the committees are functionally tasked in areas where conflicts of interest may appear, the independence of a board is enhanced by the establishment of these committees (Gordon 2007: 1490-1491). A board with some specific subcommittees appears to be more independent and therefore a short description of the tasks and responsibilities of these three committees is given in Table 2-2.

Table 2-2: A short description of the tasks and responsibilities of the audit, remuneration and nomination committees.

Name

Task

Audit committee

Bears responsibility for the audit process of the company and for reviewing the integrity of the financial statements, the internal financial control and management systems and the internal audit.

Remuneration committee (Compensation committee)

Bears responsibility for the remuneration policy of the company, including the task to make a recommendation for the composition of the executive remuneration, its structure, contingencies and peer companies.

Nomination committee (Selection committee)

Bears responsibility for evaluating the size, diversity, balance of skills and experience of the board of directors, management board or supervisory board.

The whole board can delegate certain tasks to these board committees and let them prepare decision-making in these fields (Mallin 2007: 128). Notwithstanding the task to prepare decision-making, the whole board of directors or supervisory board remains responsible for the final decision. The composition of the board committees differs between the two board structures. In a dual board structure the board committees are solely composed of SDs, whereas unitary boards can have board committees with executive and non-executive

Requirements regarding when to appoint board committees, requirements concerning board committee composition and the exact formulation of the task of each committee differ across jurisdictions and corporate governance codes. These differences are described in Part II and are not given in this subsection. The next paragraphs only describe the general tasks of the audit committee, remuneration committee and nomination committee. The description of tasks is primarily based on the UK Corporate Governance Code 2010.

Some of the board committees described below are found as combination committees, because companies have decided to combine the tasks of two or more board committees into one single board committee.

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