Good Corporate Governance – The Essential Nominating and Audit Committees

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

New York Stock Exchange (NYSE) listed companies must adopt and disclose corporate governance guidelines aimed at protecting stockholders and institutional investors from unethical behavior. These guidelines also protect directors from unintentionally entering into business practices that could be construed as being unethical. The NYSE spells out in detail what the Exchange expects to find in governance guidelines for each company listed on the exchange. These guidelines were established to assist companies in complying with the Sarbanes-Oxley Act of 2002, and to inspire confidence in the financial markets.

The NYSE requires listed companies to have a nominating/corporate governance committee composed entirely of independent directors. No director will qualify as an independent director unless the board of directors determines that the director has no material relationship with the listed company. Companies must make public this determination. The board must consider all relevant circumstances in making this determination. A material relationship can be determined to exist due to commercial, industrial, financial, consulting, charitable or family relationships. Other links to the company determined to exist during the board’s consideration may also lead a prudent board to determine a certain candidate may not be independent.

A board should adopt a written charter for their nominating/corporate governance committee to operate under. According to the NYSE rules, the Charter should address:

the committee’s purpose and responsibilities – which, at minimum, must be to: identify individuals qualified to become board members, consistent with criteria approved by the board, and to select, or to recommend that the board select, the director nominees for the next annual meeting of shareholders; develop and recommend to the board a set of corporate governance principles applicable to the corporation; and oversee the evaluation of the board and management; and an annual performance evaluation of the committee

The composition of a given board of directors directly affects the performance of the board in carrying out its duties. Therefore choosing board members and seating committee members is one of the most important decisions affecting board performance.

Aside from the Nominating Committee, the Audit Committee plays a key role in maintaining ethical behavior by board members. The audit committee is a committee of the board that serves as the conscience of the board. The audit committee should review material looking for accuracy, but also looking for impropriety. The members of the audit committee must dedicate more time and energy over a longer period than most other committee appointments require. A well functioning audit committee will discourage impropriety and encourage ethical financial reporting by in the course of doing its job.

The NYSE has specific qualifications for a director join the Audit Committee of a listed company. Privately held companies are rapidly adopting these qualifications. One requirement is that any member of an audit committee must be financially literate or the company must establish a track to allow the member to become financially literate in a reasonable amount of time. A listed company must also have at least three members on the audit committee and at least one member must have accounting or financial management expertise.

The audit committee must assist the board in oversight of the integrity of the company’s financial statements. The audit committee also must ensure the auditors qualifications, performance and independence. It should consult with the company’s management and internal auditors and use these opinions as a part of their evaluation. The audit committee should report the conclusion of their annual evaluation and any recommendations to the full board of directors.

The audit committee should also discuss among its members the company’s annual audited financial results as well as review the quarterly financial statements with management and the independent auditor, including the company’s disclosures and opinions of the company’s financial position. The committee should also discuss and review the company’s press releases regarding earnings guidance and financial information provided to analyst.

© Dr. Earl R. Smith II

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Related Articles:

• Good Governance – Keeping Ahead of Fast Company

• Governance and Risk Management Strategic Plans

• Governance – Board Culture

• Components of Good Governance – Three Committees

• Managing External Influences on Governance

• Successful Board Assessment Models

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