## **Learning Outcomes**

This article explains the key roles and structure of corporate governance committees—specifically audit, remuneration, and nomination committees. You will learn how these committees operate within companies, their main responsibilities, membership requirements, and the reasons for their existence in line with best practice. By the end, you should be able to identify the features of each committee, why they are essential for transparency and accountability, and apply these principles to exam scenarios.

## **ACCA Business and Technology (BT) Syllabus**

For ACCA Business and Technology (BT), you are required to understand the governance structures and committee arrangements within companies, especially those relating to audit, remuneration, and nominations. Focus your revision on the following syllabus areas:

- The purpose and main roles of business committees.
- Types of committee used by business organisations, including audit, remuneration, and nomination committees.
- The composition and independence requirements for such committees.
- Advantages and disadvantages of using committees to oversee business functions.
- The responsibilities of committee members, particularly non-executive directors.
- How committee structures contribute to effective corporate governance and stakeholder confidence.

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. What is the main purpose of an audit committee within a listed company?
2. Who should sit on a remuneration committee according to best practice in corporate governance?
3. True or false? The nomination committee is responsible for overseeing the company’s external audit.
4. State one advantage and one potential problem of using committees to make business decisions.

## **Introduction**

Good corporate governance relies partly on committee structures within a company. Committees—including audit, remuneration, and nomination committees—help boards of directors to divide responsibility and ensure independent oversight of essential business functions. These committees are especially important in large companies where separating decision-making powers reduces risks of conflicts of interest and supports transparency for all stakeholders.

> **Key Term: corporate governance**
> The system of rules, practices, and processes by which a company is directed and controlled, focusing on the interests of owners, management, and wider stakeholders.

## **The Role of Committees in Corporate Governance**

Committees are sub-groups of the board charged with specific duties. Committees operate as checks and balances, supporting the board but also holding it accountable.

> **Key Term: committee**
> A group of individuals given authority to perform particular tasks or decisions on behalf of the board, typically following formal procedures.

### Why use committees

- Allow detailed focus on complex or sensitive issues.
- Spread decision-making and prevent dominance by a small group.
- Support independence, especially on topics with potential conflicts of interest.
- Satisfy regulatory or listing requirements for transparency.

> **Key Term: non-executive director (NED)**
> A member of the board not involved in day-to-day management, responsible mainly for oversight and advice, with emphasis on independence.

## **Audit Committee**

The audit committee is central to reliable financial reporting and assurance of controls.

> **Key Term: audit committee**
> A board committee responsible for oversight of financial reporting, risk management, internal controls, and relationships with internal and external auditors.

### Audit committee responsibilities

- Review and monitor the effectiveness of the internal control system and risk management.
- Oversee the integrity of financial statements.
- Recommend appointment, remuneration, and removal of external auditors.
- Maintain direct lines of communication with both internal and external auditors.

### Audit committee composition

- Comprised exclusively of independent non-executive directors.
- A minimum of three members (or two in smaller companies).
- At least one member with recent and relevant financial experience.

### **Worked Example 1.1**

**A listed company is forming its audit committee. Who should be appointed, and what is their main responsibility?**

> **Answer:** Only independent non-executive directors should be appointed, with at least one having recent financial knowledge. The main responsibility is to oversee financial reporting and ensure strong internal controls are in place.

### **Exam Warning**

> The audit committee's independence is essential. Executive directors should not be committee members, nor should anyone with conflicts of interest relating to financial reporting.

## **Remuneration Committee**

The remuneration committee ensures that directors' and senior management pay is fair, market-aligned, and not set by those who benefit from it.

> **Key Term: remuneration committee**
> A board committee that determines executive director and senior management pay and incentives, ensuring fairness and alignment with shareholders’ interests.

### Remuneration committee responsibilities

- Set the pay and benefits for executive directors and senior management.
- Approve payments such as performance bonuses, share plans, and contractual compensation.
- Prevent directors from deciding their own remuneration.

### Remuneration committee composition

- Only independent non-executive directors.
- Usually three members (two for smaller companies).

### **Worked Example 1.2**

**A CEO is due for a pay review. Why must this be handled by the remuneration committee, and who sits on it?**

> **Answer:** This prevents the CEO from influencing their own pay. Only non-executive directors, independent from management, make these decisions to maintain objectivity and avoid conflicts of interest.

## **Nomination Committee**

The nomination committee manages board appointments to maintain the right mix of skills and independence.

> **Key Term: nomination committee**
> A board committee responsible for identifying, evaluating, and recommending suitable candidates for board appointment, ensuring an appropriate balance of skills, experience, and diversity.

### Nomination committee responsibilities

- Assess and recommend new appointments to the board.
- Evaluate succession planning for directors and senior executives.
- Consider board diversity and skills for effective governance.

### Nomination committee composition

- Majority independent non-executive directors.
- Often chaired by the board chair (unless the chair is under consideration themselves).

### **Worked Example 1.3**

**What would be a key consideration for the nomination committee when a director resigns?**

> **Answer:** The committee will review the current board's skills and diversity needs, identify the required skill set, and oversee a fair and transparent appointment process.

## **Advantages and Disadvantages of Committees**

### Advantages

- Decisions benefit from wider skills and experience.
- Collective responsibility encourages balanced outcomes.
- Can demonstrate transparency and good practice to stakeholders.
- Provide oversight and challenge to executive management.

### Disadvantages

- Decisions may be slower due to more discussion.
- Responsibility can be diluted (“no one individual accountable”).
- Risk of internal politics or conflicts if not managed carefully.
- Potential duplication of work if committee roles overlap.

## **Committee Membership and Independence**

Non-executive directors provide independent oversight. Independence is critical—personal, financial, or previous business relationships can compromise this. Best practice codes and stock exchanges require stringent independence and regular board rotation.

## **Summary**

Committees—especially audit, remuneration, and nomination—are fundamental to strong corporate governance in large companies. They provide independent checks, ensure directors are held to account, and keep decision-making transparent. Composition, independence, and effectiveness of these committees are frequently tested in exams and are central to best practice.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Describe the purpose and main types of corporate governance committees: audit, remuneration, nomination.
- Explain the typical responsibilities and expected membership of each committee.
- State the importance of independent non-executive directors in key committees.
- Compare advantages and disadvantages of decision-making by committee.
- Identify key requirements for committee operations under best practice.
- Recognise the impact of committee work on transparency and effective governance.

## **Key Terms and Concepts**

- corporate governance
- committee
- non-executive director (NED)
- audit committee
- remuneration committee
- nomination committee

Corporate governance principles - Committees audit remuneration and nominations