In its arsenal of tools, committees might be one of a board’s most important. Yet they are often employed poorly. If they are so essential, why are they not used properly? The answer may depend on the maturity of the organization’s strategy development and governance framework.
Committees serve many purposes, but a key reason is managing workloads. A board bears numerous responsibilities, often too many for the time and resources available. It must ensure the directors constantly work to the top of their capabilities and spend their limited time on the most important tasks.
But the long list of directors’ responsibilities can result in more than they can manage. Delegation of some tasks, still under the board’s supervision and control, is necessary. This is where committees come in.
By assigning work to committees, a board can spend its time most productively and still ensure, through the committee’s work, the directors meet their obligations. When this is done properly, effectiveness increases. If not, productivity suffers.
One productivity sinkhole is duplication, creating extra work the board wanted to avoid. A great example is when directors endure the double meeting situation.
Let’s say the audit and finance committee is made up of 5 of a board’s 11 directors. The committee holds its regular meetings, reviews reports like budget and financial statements, debates the issues, hears from management, and does various other things which are part of its responsibilities.
They then report to the next full board meeting. The chair of the committee takes the board through the agenda the committee followed for its meeting, often going into excruciating detail regarding the issues and the discussion. The report may share all the materials the committee originally considered. Whether the directors read it all or not, it massively adds to the board’s document package. Questions might be posed from the six directors not on audit & finance which duplicate many of the inquiries raised during the committee’s session.
In other words, the committee meeting is repeated at the board meeting. While this lets the board get insight into the issues, it is terribly inefficient. It eliminates one reason why there is an audit and finance committee in the first place – to reduce the work burden on the directors. If this happens for every committee report, it is easy to see the board will have little or no time for other business.
You could deal with this through the committee chair just giving a one sentence report at the board level, but this is not sufficient for the non-committee directors. They have no insight into what the committee did, and a brief “everything is fine” report does nothing to satisfy the primary obligation on all directors to gain reasonable assurance that management of the company is being properly handled.
This can be solved through a two-step process, but let’s start with the second stage. As part of the overall governance framework, the committee (along with all other committees and the board itself) must have a well-defined and comprehensive charter. This document defines the committee, its purposes, the areas of oversight it is responsible for, and how it operates. In the case of an audit and finance committee, this will undoubtedly include review of financial reports and supervision of audit functions, but there will be much more. The charter is literally the constitution of the committee, defining everything it does and its powers.
A result of having a complete committee charter is that it can eliminate double meetings. That is because it reframes how the board gains reasonable assurance. Instead of board members painstakingly questioning the committee on the specifics of what they talked about at their meeting, the directors can ask a single question: did the committee follow their charter and cover their required responsibilities? If the answer is yes, the directors have usually complied with their duty of oversight.
This is a simplistic perspective, of course, and not completely accurate. The committee chair will at least want to summarize topics in their report in case they raise questions for the rest of the board. Directors may need to dig into specific issues which the committee covered in its meeting, depending on the topic and questions raised. Directors not on the committee might just be curious about something, as well, so they may rehash a few things. But those instances should be relatively infrequent. If the directors are satisfied the committee did its job according to its charter, and there are no other flags raised, their duty to oversee the committee’s necessary role will be met by relying on the charter’s principles.
For those who have suffered through double meeting situations which seem to go on forever, this difference is game changing. Directors can focus on things which are important, and which are essential to their overall board duties, rather than flail about by essentially recreating another committee meeting. Time and resources are saved, and the committee achieves its goal of reducing the burden on the board.
What is the first step of the solution we skipped over earlier? How does one develop this comprehensive charter which solves the problem? The starting point is ensuring the organization has a well-defined strategy.
The strategy is primarily an organization’s vision, mission, values, and objectives. It includes why the corporation exists, what it wants to achieve, the products and services it wants to offer, and the constraints it works within, along with a collection of other factors. There will be many articles in this series touching on strategy, but for now just recognize that unless this strategic foundation has been created, there cannot be a meaningful direction for the development of anything, charters included. Once strategy is defined, the board’s charter can be developed that identifies all the areas directors are responsible for overseeing in the pursuit of that strategy. These areas of oversight will flow from the particular legal and regulatory framework engaged by the organization’s strategy. Once a charter is defined at the board level, the areas of oversight can then be allocated among its committees through committee charters, providing the foundation for the overall governance framework.
Eliminating committee meeting duplication is just one of the major advantages you achieve from a well-defined strategy. The process is straightforward if those steps are followed. Develop the strategy, understand areas requiring oversight that are engaged by that strategy, then create charters which help the board oversee the organization through its strategic implementation. The time and effort saved, along with the increased effectiveness of board meetings, is off the charts.
This publication is provided as an information service and may include items reported from other sources. We do not warrant its accuracy. This information is not meant as legal opinion or advice. Contact Procido LLP (www.procido.com) if you require legal advice on the topic discussed in this article.