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New ICSA guidance on terms of reference for board committees

Print publication

01/11/2013

The guidance has been updated to reflect the revised version of the UK Corporate Governance Code and the FRC Guidance on Audit Committees, which apply to Main Market companies for reporting periods beginning on or after 1 October 2012. The guidance includes model terms of reference outlining the roles and responsibilities of each committee. The guidance on matters reserved to the board is intended to help directors and company secretaries to draw up a schedule of matters reserved for determination by the board as a whole.

Some of the principal points to note are:

Audit committees
Changes to the model terms of reference include:

  • a recommendation that ideally, at least one member of the committee should hold a professional qualification from one of the professional accountancy bodies, in addition to the requirement for recent and relevant financial experience
  • a requirement that the finance director be invited to attend meetings of the committee on a regular basis
  • limiting the extension of appointments to the committee to two further periods of three years (following an initial period of appointment of up to three years), provided that the members continue to be independent
  • an obligation on the company secretary to ensure that the committee receives information and papers in a timely manner to enable proper consideration of the relevant issues
  • a requirement for the committee chairman to maintain a dialogue with key individuals involved in the company’s governance
  • clarifying that the decision as to whether it is appropriate to circulate copies of the minutes of committee meetings to all members of the board lies with the committee chairman
  • expanding the duties of the committee to include:
    • advising the board if it is not satisfied with any aspect of the company’s proposed financial reporting
    • reviewing and advising the board as to the content of the annual report and accounts, in particular, whether it is fair and balanced and provides the information necessary for shareholders to assess the company’s performance, business model and strategy
    • ensuring the internal auditor has direct access to the board and committee chairmen
    • ensuring that at least once every ten years the audit service is put out to tender
  • an obligation to evaluate the risks to the quality and effectiveness of the financial reporting process
  • expanding the reporting responsibilities of the committee, including a formal report to the board on how it has discharged its responsibilities, and a requirement to cover certain issues in the report on its activities prepared for the purposes of the company’s annual report

Remuneration committees
Changes to the model terms of reference include:

  • limiting the extension of appointments to the committee to two further periods of three years (following an initial period of appointment of up to three years), provided that the members continue to be independent
  • an obligation on the company secretary to ensure that the committee receives information and papers in a timely manner to enable proper consideration to be given to issues
  • amending the duties of the committee to include:
    • responsibility for setting the remuneration policy for all executive directors and the company’s chairman, including pension rights and any compensation payments
    • recommending and monitoring the level and structure of remuneration for senior management
    • clarifying specific objectives of remuneration policies
  • expanding the reporting responsibilities of the committee to include:
    • ensuring that the provisions regarding disclosure of information, including pensions, as set out in the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and the Code, are fulfilled
    • producing a report of the company’s remuneration policy and practices for inclusion in the annual report and ensuring that it is put to shareholders for approval at the AGM
    • ensuring that the company maintains contact as required with its principal shareholders about remuneration
  • a requirement to consider guidelines published by the ABI and NAPF

Nomination committees
New requirements to:

  • identify any external search agency and explain whether it has any connection with the company
  • a statement of the board’s policy on diversity

Risk committees
Changes to the model terms of reference include:

  • a recommendation that the committee should refer to and take note of the recommendations in the final report of the Kay Review of UK Equity Markets and Long-Term Decision Making published in July 2012, in particular those relating to wider shareholder consultation
  • a recommendation that the committee give due and careful consideration to the findings and recommendations of the Financial Stability Board in its Periodic Peer Review Report on Risk Governance published in February 2013
  • the company’s chief risk officer (CRO) be required at all meetings of the committee
  • a requirement to retain copies of the minutes of the committee’s meetings
  • where there is an overlap in duties that could be undertaken by either the audit committee or the risk committee, a recommendation that the board should err on the side of overlapping duties on critical questions
  • expanding the duties of the committee to include ensuring that the CRO is given the right of unfettered direct access to both the chairmen of the board and the committee
  • a requirement that the directors’ report in the annual report and accounts should set out risk management objectives and policies including in relation to financial instruments
  • an obligation for the committee to arrange periodic reviews of its own performance, review its constitution and terms of reference at least annually and to recommend any changes it considers necessary to the board

Executive committees

  • an obligation to arrange periodic review of its own performance

Matters reserved for the board

  • approving unbudgeted capital or operating expenditure (beyond pre-determined tolerances)
  • approving risk appetite statements
  • approving procedures for the detection of fraud and prevention of bribery
  • overseeing the execution and delivery of major capital projects
  • ensuring a satisfactory dialogue with shareholders based on a mutual understanding of objectives
  • establishing board committees and approving/varying their terms of reference
  • authorising conflicts of interest, where permitted to do so by the articles of association
  • approving policies on bribery prevention, whistleblowing and human resources
  • any decision likely to have a material impact on the company/group from any perspective (financial, operational, strategic, reputational, etc).

WM comment
The recommendations and terms of reference are not publicly available on the ICSA website (they are only available to subscribers). Nonetheless they are likely quickly to become best practice.

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