Another deficiency associated with the one-tier board model in the UK is the control of the CEO over function and composition of board committees. The control over the formation and composition of board committees formally lies in the hands of the board. The audit committee – which may nominate the external auditor for election – may be chaired by the CEO and be composed entirely of executive directors. In addition, the board and the CEO may control the nomination of an auditor at the AGM. According to Boyd (1996:169): “This raises an obvious conflict of interest in that a powerful CEO can effectively choose the auditor who is then supposed to express an independent opinion on the performance of the firm under CEO’s management.” To strengthen the independence of one-tier boards, the Combined Code states that oversight board committees should be composed entirely of independent non-executive directors.
With respect to remuneration committees, Sections B.2.1- B.2.3 of the Combined Code state: “To avoid potential conflicts of interest, boards of directors should set up remuneration committees of independent non-executive directors to make recommendations to the board, within agreed terms of reference, on the company’s framework of executive remuneration and its costs; and to determine on their behalf specific remuneration packages for each of the executive directors, including pension rights and any compensation payments [. . .] Remuneration committees should consist exclusively of non-executive directors who are independent of management and free from any business or other relationship which could materially interfere with the exercise of their independent judgement [. . .] The members of the remuneration committee should be listed each year in the board’s remuneration report to shareholders” (Hampel, 1998b:14).
With respect to audit committees, Sections D.3.1 and D.3.2 of the Combined Code state that corporate boards should establish audit committees with at least three non-executive directors and a majority of independent non-executive directors. Members of the audit committee should also be named in the annual reports of listed corporations. With respect to the nomination committee, the Combined Code provides the provision that such a committee should be formed to make recommendations to the board on all new board appointments (Section A.5.1 of the Combined Code). As with the audit committee, the Combined Code requires that a majority of the committee is composed of non-executive directors. These should be chaired by the chairman of the board or a non-executive director. The composition of the nomination committee should also be disclosed in annual reports.
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