Components of Good Governance – Three Committees

Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com

Good governance is as much about the process of governing and the perceptions of those outside the process as the results of the governing body. The failure of character of directors and corporate management led to new regulations and other requirements on corporate America. The government moved in an effort to bolster confidence in our economic system and to inject a sense of fair play into the investing decisions of all Americans. Buy the subtext was clear, management and the boards had failed to live up to high standards of governance – had failed in their responsibility to protect the interests of the shareholders.

In an effort to meet the requirements of regulations such as Sarbanes-Oxley, corporate directors created or strengthened systems of advisory board, including the three most important advisory boards:

• Audit Committee: to review all financial statements, worksheets, corporate documents and the process of generating those documents for clarity and fairness of representation of the corporate position relative to the information being presented. The audit committee is charged with making sure that the financial statements are accurate and that no corners have been cut – no manipulation of the numbers is occurring – no fraud is being perpetrated on either the shareholders or the public.
• Compensation Committee: with responsibilities for corporate management assessment and performance issues. The compensation committee establishes corporate compensation plans, equity incentive pay, establishing motivational criteria and conducting management and board assessments of carrying out the strategies and process established by the board of directors. Compensation committees are also often responsible for establishing leadership development programs and other policies for the personal growth of leaders and directors.
• Succession Committee: with responsibilities for planning for continuity in the long-term leadership. The succession committee developments strategic plans that focus on management retention and development. They are charged with making sure that the company has the right CEO and has several candidates in development to replace that CEO when the time comes. The succession committee also has responsibility for ensuring board composition is independent with broad experiences and with appropriate expertise.

These three committees act as fail-safe or firewalls for the board of directors in combating financial and managerial wrongdoing. The members of the audit committee should be completely independent of corporate management. The members should also have at an ‘arms length’ relationship with any auditing firm doing business with the company, and the committee should have veto power over the audit firm’s ability to contract with the company or its management for any other accounting or financial advisory service. A strong, well-functioning audit committee can act as a motivational factor for corporate ethical standards by conducting a high-profile assessment of all corporate financial matters. The committee is accountable for their performance toy the board of directors as a whole.

The compensation committee also plays a major role in motivating corporate management to provide good governance of the day-to-day activities of the company. The compensation committee must annually evaluate all compensation plans and ensure the plans provide the incentive for corporate management to carry out the board’s strategies and policies. The committee strategy should address issues of retention and recruitment. The compensation committee should have control over awarding any and all incentive payouts to corporate management based on its assessment of the performance levels achieved in the meeting the boards strategy. Total compensation is always a key motivator for all employees, but especially for corporate management striving to attain top leadership positions.

The succession committee is responsible for insuring that the company has the right people in the right positions. This committee is the most difficult to get right because it is dealing with issues which are very important to members of the senior management team. I always recommend that every member be completely independent of any historical connections with members of the senior team. Where the compensation committee deals with the questions of how much they are going to get paid, the succession committee deals with a more sensitive question – whether they are going to have a job to get paid for.

The board directly and through these three committees can set the ‘governance’ and ‘ethical’ tone for the company. Jointly they play a major role in assuring good corporate ethics by ensuring new directors, and directors recommended to serve as an officer of the corporation, have shown a strong sense of ethical behavior in the past. The board – through its committees – deals with very sensitive and important matters. The board’s decisions will effect the interests of the shareholders and determine whether or not they have lived up to their fiduciary responsibility to them. Different aspirations motivate different people. But it is the boards responsibility to assure that the standards of the company are in the best interest of the shareholders and not by any special interest group or faction.

If you want to lean more about my work with boards and board service, send me an e-mail and we will arrange a time to talk.

© Dr. Earl R. Smith II

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Related Articles:

• Good Governance – The Compensation Committee
• Sound Audit Committee Governance
• Corporate Ethics and Compliance – Board Responsibilities
• Corporate Talent – Coaching and Retaining the Best
• The Succession Committee – Selecting Leadership for the Future
• Board of Directors Responsibilities – Compensation Committee
• Succession Committee Imperatives

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