Why and how to develop a Board Committee Charter

Do your Audit, Nomination, Remuneration or other committees have updated charters setting out the roles and responsibilities of each committee? Have these been discussed and agreed at board level?

As described in our recent article What is a Board Charter and why is it important?, Committee Charters (sometimes called Terms of Reference) are just as important as the overall Board Charter.   Charters help ensure clarity and alignment, since it not a “given” that all board members understand the purpose and tasks of the committees.

The purpose of each committee is to support the board by working on specifically agreed tasks, preparing material, and creating recommendations. The committee should bring its recommendations and support material to board meetings and ensure enough time is allocated for the board to discuss and make decisions.

There are many ways to write a Committee Charter, and one good example comes from Pennon Group, a publicly listed British water utility company, with their committee responsibilities listed here.   https://www.pennon-group.co.uk/about-us/board-committees . As can be seen in their charter (Terms of Reference) for the Nomination Committee, the document covers areas such as: how the Committee members and chair will be appointed and for how long; what type of quorum (number and independence) is necessary for conducting committee business; frequency of meetings; notice of meetings; routine for the minutes; how the Committee will engage with shareholders; a full list of the Committee’s duties; and reporting responsibilities.

An important area which many boards forget to cover in the Committee Charter is the area of risk. The board is responsible for handling company risks, so it can be a good exercise for the board to regularly list all major risks and ensure each is delegated to the most relevant committee.  The risk of not having a strong CEO back-up plan is different, for example, than the risk of health and safety issues or the risk of currency fluctuation, so these would each go to the suitable committee to ensure no risks are left unexamined.

The benefits of having updated Committee Charters cannot be overstated. It can be an excellent idea for your board to take time every year to review what your peer companies are doing in this area, in order to benchmark yourselves and strive for continuous improvement.

For more information or for help developing a Committee Charter, please contact us at

reception@leadershipadvisorgroup.com

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