Secuencia didáctica

It is customary for a board of directors to establish different standing committees since it is difficult for the entire board members to sit together and deal with every issue that seeks its attention. Establishing committees would allow the board to have the division of work and there by maximum use of the board‟s expertise. This would presuppose that each committee should have a clear task and reporting obligation at the appropriate board meetings (Tricker, 2009; Colley et al., 2003; Klein, 1998). Though boards delegate tasks to committees, the ultimate responsibility for the areas rests on the board covered by the committee (Mallin, 2010; Klein, 1998). Most boards have audit, remuneration and nomination committees as principal standing committees. Moreover, depending up on corporate constitutions, other committees such as executive committee, risk management

committee, and governance committee could be formed as need be to meet specific corporate demands (Tricker, 2009). Locke and Fauzi‟s (2012) study revealed that board committees have a positive and significant impact on firm performance.

Audit Committee

The audit committee is the most important sub-committees that play a crucial role in ensuring the protection of shareholders interests in matters pertaining to financial reporting and internal control (Mallin, 2010; Klein, 1998).Colley et al. (2003) argued that the audit committee should be composed of independent directors who should not have been in management or part of management in the last five years, nor is anyone who is a close family or has business ties to management. In line with the above, Klein (1998) in examining the firm performance and board committee structure found the predominance of outsiders on the boards‟ audit committee. Adegbite (2015) emphasizes the independence of the board audit committee as an essential element of good corporate governance and identified moral uprightness and individual integrity as major instruments to ensure independence beyond regulations. A recent investigation by Arif and Syed (2015) on the impact of corporate governance on the performance of financial institutions demonstrates that audit committee independence has significant impact on return on assets.

The audit committee serves as a bridge between the board and both internal and external auditors and ensures that the board gets all relevant audit information (Mallin, 2010; Tricker, 2009). The committee works closely with an external auditing firm and has the responsibility to ensure the accuracy of the financial statements and report properly to outsiders. Its functions include oversight of financial control using internal control and overseeing processes that monitor compliance with laws, regulations, and the corporate code of conduct. It also undertakes risk management tasks by assessing the system and understanding all the risks that the company faces and how they can be managed (Mallin, 2010; Tricker, 2009; Colley et al., 2003). Klein (1998) sees the audit committee as vital in alleviating the agency problem by facilitating a timely release of unbiased financial information by management to shareholders and other stakeholders. The unbiased and timely release of information helps to reduce the information asymmetry between management and all outsiders.

Tricker (2009) affirms that, currently, all codes of corporate governance practices and stock exchange requirements demand listed companies to have audit

committees entirely composed of independent non-executive directors. In spite of this, Tricker (2009) stated that there are some criticisms and concerns about the audit committee that it can get involved in management affairs and interfere in management‟s legitimate responsibilities. Tricker further stated that apart from exercising sound commercial judgment, there is a concern that the audit committee can possibly be bureaucratic and process driven.

Remuneration Committee

It is the sub-committee of the main board that deals with compensation and benefits of board members and executives, possibly, members of senior management. The committee is composed wholly or mainly of outside directors (Klein, 1998; Colley et al., 2003; Tricker, 2009; Mallin, 2010).

Directors‟ remuneration has been a subject of discussion for long as noted by Tricker (2009: 70) that “… investigative media and institutional investors in both the United States and the United Kingdom have been challenging the apparently high levels of directors‟ remuneration. High rewards in companies with poor corporate performance were particularly suspect”. In 1995, a Greenbury Report, which has now been integrated with the UK Combined Code of conduct, looked into the board pay level. The report proposes the formation of a remuneration committee composed of independent non-executive directors with the role to make recommendations to the main board on the compensation package that includes salary, fees, pension arrangements and other benefits that comprise travel costs, housing costs, school fees etc. of executive directors and, sometimes, other senior executives.

Mallin (2010) stated that the formation of the remuneration committee precludes executive boards from determining their compensation packages and the committee should also provide a transparent procedure for setting executive pay levels that includes setting appropriate targets for performance related pay schemes. According to Klein (1998), the remuneration committee‟s primary job is to determine and review the nature and amount of all compensation for the top management group of the company. By doing so the committee helps to reduce the agency problem by designing and implementing compensation packages that better align the interest between top management and owners (shareholders).

Nomination Committee

The nomination committee is a sub-committee of the main board, consisting of wholly or mainly outside directors, charged with the responsibility of identifying

and recommending new members to the board or proposing on replacements to the board. Tricker (2009) noted the time when boards were composed of people known to each other, with similar values and backgrounds that looked like a cosy club where the incumbent members appointed people on same wavelength to join them. The nominating committee serves as a means to prevent the board from becoming a cosy club and serve as a check and balance tool to minimize the possibility of nomination of the dominant boards‟ potential candidate. The nomination committee is expected to heavily engage in search for the best candidates in order to ensure a balanced board composition in terms of executive and non-executive directors, knowledge, skills, qualities, and experience (Mallin, 2010).

The strength of a board depends up on the aggregate capabilities of the members with individual capabilities. Thus, strength of the individual member will have a significant impact up on the strength of the board in general. Therefore, the stronger the individual members in a board, it is highly likely that the board will be the reflection of it. Furthermore, in addition to the individual attributes, members must develop team spirit and be capable of playing active role and reflect different views for the good of the company. In selecting a member it is important to be cautious and every member has to be selected in light of his/her experience, integrity, and also demonstrated performance in areas related to the company‟s activities (Colley et al., 2003). This major job is accomplished by a nomination committee.