Committees of the Board*

Why Board Committee?Board committees are important tools to make a board more effective. These committee help to make specific idea and in-depth observation in any matter related to the governance of the corporation. Audit committee is one of them.

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Major Committees of the BoardAudit CommitteeThe Executive CommitteeThe Compensation CommitteeNomination CommitteeGovernance CommitteeRisk Management Committee*

How Effectiveness of Different Committees Can be Ensured?When committees of the board are established, their mandate, composition and working procedures should be well defined and disclosed by the board. *

continued.Mandate (Charter) should be clear.Composition should be proper and effective.Working procedure shall be clear and disclosed.Interference from outside shall be avoided.Independent functioning shall be ensured.

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Constitution of Audit CommitteeNon-executive independent directors who are financially literate.3 - 5 members is accepted as ideal number for membership.With written mandate and terms of reference.The chairman of the company should not be an audit committee member.

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HistoryEach domestic company with common stock listed on the Exchange, as a condition of listing and continued listing of its securities on the Exchange, shall establish no later than 30 June 1978 and maintain thereafter an Audit Committee comprised solely of directors independent of management and free from any relation that, in the opinion of the Board of Directors, would interfere with the exercise of independent judgment as a committee member, (New York Stock Exchange (NYSE), White Papers, New York, 1973.)*

In NepalNRB Directive No. 6 first time introduced the concept of Audit Committee in the board of banking companies.The Companies Act, 2063 under section 164 makes provision of compulsory audit committee to listed companies having three crores or more issued capital and any company which have government ownership either whole or partial. *

ObjectiveTo establish formal and transparent arrangements for financial reporting.To establish and make effective internal control mechanism.To maintain an appropriate relationship with the companys auditors (Both Internal and External). *

Independent functioningTo ensure the independent functioning of the committee following matters need to be considered.Member independenceMember qualificationMember characteristics (accountability, informed judgment, confidence, honesty)Dynamic chairpersonAvailability of financial resources*

Continued.No executive should be allowed to present the meeting of the audit committee.Presence of non-member is possible only with the permission of the committee.Consultation of external expert in the expenses of company shall be permitted.Committee should, at least annually, meet the external and internal auditors, without management, to discuss issues arising from the audit.*

Charter of the committeeThe board should provide written terms of reference for the audit committee. the terms of reference should be tailored to the particular circumstances of the company.The audit committee should review annually its terms of reference and its own effectiveness and recommend any necessary changes to the board.The board should review the audit committee s effectiveness annually.Where there is disagreement between the audit committee and the board, adequate time should be made available for discussion of the issue with a view to resolving the disagreement.*

FunctionsFinancial ReportingWhistle blowing policy and implementationInternal Audit ProcessExternal Audit ProcessAnnual Audit CycleReporting*

Financial ReportingMonitor the integrity of the financial statements of the company, and any formal announcements related to the companys financial performance, reviewing significant financial reporting judgments contained in them.Ensure that the reporting practices meet both national and international standards.*

Whistle blowingFormulate necessary policy for the protection of Whistle Blower.Ensure the access of the informed person to the committee.*

Internal Audit ProcessMonitor and review the effectiveness of the companys internal audit function.Approve the appointment or termination of appointment of the head of internal audit.Ensure that the internal auditor has direct access to the board chairman and to the audit committee and is accountable to the audit committee.Review and assess the annual internal audit work plan.*

Continued.Receive a report on the results of the internal auditors work on a periodic basisReview and monitor managements responsiveness to the internal auditors findings and recommendations.Meet with the head of internal audit at least once a year without the presence of management.Monitor and assess the role and effectiveness of the internal audit function in the overall context of the companys risk management system.

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External Audit ProcessThe audit committee is the body responsible for overseeing the company s relations with the external auditor basically in the matter of:AppointmentTerms and remunerationIndependenceNon-audit services

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Non audit serviceCommittee should develop and implement policy on the engagement of the external auditor to supply non-audit services, taking into account relevant ethical guidance regarding the provision of non-audit services by the external audit firm. From which the external auditors are excluded.For which the external auditors can be engaged without referral to the audit committee.For which a case-by-case decision is necessary.Policy for the fee limits generally or for particular classes of work.*

Annual Audit CycleCommittee shall prepare the annual audit cycle.At the start of each annual audit cycle, the audit committee should ensure that appropriate plans are in place for the audit.*

ReportingCommittee shall report to the board, identifying any matters in respect of which it considers that action or improvement is needed and making recommendations as to the steps to be taken.Provide the annual statement containing the responsibilities of the committee and their discharge.Chairman should be present in the AGM to answer the question raised by the shareholders.

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Section 165 of the Companies Act determines following functions of the CommitteeSection 165 of the Act makes provision about functions, duties and powers of the audit committee. Here are some functions of the audit committee determined by this section.To review and examine the integrity of the account and financial statements of the company.To review the companys internal financial control system and risk management systems.To monitor and review companys internal audit function.*

Continued.To suggest the name of probable candidate and conditions of appointment, remuneration to the shareholders for their approval in general meeting, in relation to the appointment of the external auditor.To review and monitor the external auditors independence and objectivity, and the effectiveness of the audit process, taking into consideration relevant professional and regulatory requirements.To develop policy for the selection and appointment of auditors, taking into account relevant ethical guidance, standards and directives.*

Continued.To develop the accounting policy of the company.To fulfil the condition of Long From Audit Report, if it required to follow the directives of any regulatory authority.To do other functions assigned by the board regarding accounting, financial statement and auditing.

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To ensure effectiveness the Audit Committee Companies Act makes other following provisionsInclusion of short report of its functioning, recommendations and response of the board of directors on them, and other matters of audit committee in the report of the board of directors.Power to call any executive directors, CEO, and other officials and auditor (both external and internal) of the company in its meeting for questioning.Implementation of the recommendation of audit committee by the board of directors.Sufficient supply of resources necessary for the effective functioning of the committee.Meeting of the committee can be organised as per the necessity.*

The Executive CommitteeNeed of executive committee can be justified on the basis of necessity to handle serious emergencies between board meetings.This committee is constituted under the chairmanship of fulltime chairman or managing directors of the corporation.Companies which are practicing two tier board system need not to constitute this committee.*

Role and responsibilitiesMonitoring of the exposures (both credit and investment) of the company,Review of the adequacy of the risk management process and up gradation thereof,Internal control systems,Ensuring compliance with the statutory/regulatory framework,Takes decision in case of emergency while Board is not sitting. *

Critiques of this CommitteeExecutive committee with too much muscle, by encouraging the emergence of two tiers board, are obstacles rather than aids to better corporate governance. In essence, directors on the executive committee become the first tier, dominating decision making, while the role of the second tier directors is like that of House of Lords, reduced to giving advice and consent.(Walter J. Salmon, Crisis Prevention: How to Gear Up Your Board, (2002), Harvard Business Review on Corporate Governance) *

In NepalThis committee is not recognized as legal requirement.Some companies are practicing it voluntarily under the authorization of the Companies Act in the name of sub- committees and their article of association.*

The Compensation CommitteeThere was no effective system of determination of remuneration of the CEO and senior management and board members in most of the corporation before the introduction of this committee.The board itself with the endorsement of the AGM used to determine the compensation of the board members and senior management.In all matters, it is also not a subject to shareholders approval. *

Problems where compensation committee is not workingNot having this committee provides opportunity of self determination of compensation which creates problems like;Lack of transparency,Excessive remuneration, andThe poor linkage between performance and remuneration. *

Objective behind this committeeLevels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose. A significant proportion of executive directors remuneration should be structured so as to link rewards to corporate and individual performance. (Combined Code)*

Role and ResponsibilitiesDeveloping a framework for the determination of remuneration package for directors and senior management on the basis of their performance. The compensation committee has to ensure that remuneration packages are appropriate that they are competitive but not excessive. To lend an element of objectivity to the process of determining remuneration package.*

In NepalThere is no provision of compensation committee in law and practice.Power to determine the benefits and remuneration of the directors of a company is vested in general meeting of the company. (The Companies Act, 2063, section 91)Companies are free to establish this committee in their board.*

Nomination CommitteeA key success factor is the quality of leadership of an enterprise. A nomination committee with a written mandate and terms of reference consistent with good practice may ensure the selection of directors and a chief executive officer (CEO) of the highest calibre. Comprising mainly of independent directors, the committee should have a written definition of independence, inclusive of both subjective and objective criteria. (ADB)*

ObjectivesTo break the traditional trend of de facto appointment of directors by CEO or executive director.To incorporate truly independent directors in the board.To determine the prefect succession plan for the board and senior management.*

Duties and ResponsibilitiesRecommendation for the Appointments to the board based on merit and objective criteria.Due care should be taken to ensure that appointees have enough time available to engage to the job. Formation of succession plan for appointments to the board and to senior management, so as to maintain an appropriate balance of skill and experience within the company and on the board.Selection of proper candidate for independent director.

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In Nepal There is no legal provision for this committee.Nomination of directors and senior management is authorised to the AGM or Board based on the provision of respective companies statutory documents.Voluntary practice from the corporation is also lacking.For bank and financial institutions NRB has prepared a list of professionals among which the banking companies have to choose the professional directors.*

Section 86 of Act(1) The directors of a company shall be appointed by the general meeting of the company, subject to the provisions contained in Section 89 and the articles of association.Provided however, that:(1) The directors shall be appointed by the promoters pending the holding of the first annual general meeting of the company.(2) If the office of any director appointed by the annual general meeting is vacated for any reason, the board of directors shall appoint another director in that vacancy.(2) Notwithstanding anything contained in Sub-section (1), in the case of a company any shares in which a corporate body has subscribed, the corporate body may appoint a director in proportion of the total number of directors of the company and the number of shares subscribed by such body and also an alternate director to attend and vote in a meeting of the board of instead of every such director in cases where such director will not be in a position to attend the meeting of the board for any reason

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continued.(3) Where any director appointed pursuant to Sub-section (2) is not able to attend a meeting of the board of directors, such director shall give information thereof to his/her alternate director and the board of directors. In such case, the alternate director shall be entitled to attend, and vote in, the meeting of the board of directors.(4) Except in the case referred to in Sub-section (1), any alternate director appointed pursuant to Sub-section (2) shall not be entitled to attend, and vote in , a meeting of the board of directors.

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Governance CommitteeTo ensure the effectiveness of the elements and principles of corporate governance this committee is expected in every board.This committee is also known as shareholders redress committee.*

Duties and responsibilitiesTo ensure the effective corporate governance.To handle the grievances of the shareholders/investors.To handle the grievances of the stakeholders.Establish mechanism for handling of the grievances.Report to the board about its functioning so that it can be included in annual report.*

In NepalThis committee is not in practice and nor incorporated in corporate law.If shareholders/stakeholders have any problem they have to complain either to the chairperson or the company sectary for the redress.Issues of governance are dealt directly by the board. *

Risk Management CommitteeTo bring effectiveness in the functioning of the board regarding its responsibility to management of risk, Risk Management Committee is recommended by corporate governance principles.Assessment of all risks like, investment risk, market risk, operational risk, credit risk, etc. come under the preview of this committee. *

Duties and responsibilitiesFormulate necessary risk management policy.Advise to the board about different risk associated with the business of respective company.Act for the reduction of the different types of risk.*

In NepalThere is no provision for the risk management committee in the board.The job of this committee is assigned to the Audit committee by the Companies Act.*

Thank You*

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