Board committees, or board-level committees, provide support to the board of directors in the performance of their functions, by carrying out specific tasks that enable the board of directors to make informed decisions that provide strategic direction to corporate entities.¹

Regulatory Framework for the Establishment of Board of Committees

The regulatory framework for the establishment of board committees include the Companies and Allied Matters Act, 2020 (“CAMA”) and the Nigerian Code of Corporate Governance, 2018 (“NCCG”). CAMA specifically permits the directors of a corporate entity to delegate any of their powers to committees, consisting of members of the board, as they think fit. Such committee shall, in the exercise of the powers delegated to it, conform to any regulations that may be made by the directors.²

Likewise, the NCCG specifically recommends that in order to ensure efficiency and effectiveness, the board should delegate some of its functions, duties and responsibilities to well-structured committees, without abdicating its responsibilities.

Other sector specific regulations which also provide for the establishment of board committees are:

• The SEC Corporate Governance Guidelines;
• The Corporate Governance Guidelines for Commercial, Merchant, Non-interest and Payment Service Banks in Nigeria;
• The Code of Corporate Governance for Microfinance Banks;
• The Corporate Governance Guidelines for Insurance and Reinsurance Companies, 2021;
• The Guidelines on Corporate Governance for Pension Fund operators, 2021; and
• The Guidelines on Corporate Governance for the Communications Sector, 2023.

Board Committees as a Corporate Governance Tool

In most corporate entities, committees take the form of either a standing committee or an ad-hoc committee. While standing committees are established to address recurring issues on a permanent basis, ad-hoc committees are established to handle specific concerns as the need arises.³

The NCCG recommends the establishment of the following standing committees to foster corporate governance within an organisation: (i) nomination and governance committee; (ii) remuneration committee; (iii) audit committee; and (iv) risk management committee. This recommendation does not impact the number of standing committees that the board of directors may choose to establish.

The NCCG has no recommendations with regards to ad-hoc committees as the establishment of these committees usually depend on the business of the corporate entity and needs that may arise from time to time. In practice, the most common types of ad-hoc committees are: (i) special investigation committee; (ii) restructuring committee; (iii) credit committee; and (iv) compliance committee; amongst others.

In today’s world, the role of directors has expanded beyond simply ensuring the profitability of the company. In a bid to promote best practices and prevent the board of directors from becoming overburdened with numerous responsibilities, it may be more efficient to establish board committees who will oversee aspects of the business that are not necessarily part of the core business of the organisation.

Board committees contribute vastly to overall board efficiency which in turn contributes to improved company performance and better corporate governance practices. The various ways in which board committees promote corporate governance in an organization include:

• Relevant Skills and Competencies: Due to the specialized nature of board committees, key considerations of the board in deciding on the composition of a board committee, should be the relevant skills, expertise and competencies that the individuals, who are selected, will be bringing onboard. In this regard, board committees act as some sort of ‘focus group’ where the committee delves deeper on the subject matter, before presenting their understanding and recommendation to the entire board of directors. In addition to the skills that the committee members possess, committees may also be permitted to consult with independent consultants and experts, depending on the provisions of their Terms of Reference or subject to board approval.
• Faster Decision-Making Process: Board committees aid faster decision-making processes as the rudimentary issues of the subject matter are dealt with at committee-level. In this regard, once the committee presents their recommendations to the board of directors, the board can decide to accept the committee’s recommendation.
• Provision of Checks and Balances: Board committees provide necessary checks and balances for both the board of directors and management of the organisation. These checks and balances’ function is quite evident in the role of audit committees amongst others. In practice, the audit committee would usually work with both internal and external auditors to ensure proper auditing of an organisation’s financials. At the committee level, the audit committee has the responsibility to raise any question/concerns that it has with regards to the organisation’s finances and make recommendations to the board on ways to mitigate financial risks.

It is pertinent to note that the recommended practice is that the Chairman of the board of directors should not serve as chairman or member of any board committee and the managing director/chief executive officer, or an executive director should not serve as chairman of any board committee.⁴ In addition, best practice is that the Managing Director and Executive Director should not be a member of the committees responsible for remuneration, audit, or nomination and governance. This practice also seeks to ensure transparency and proper checks and balance.

• Succession Planning: Board committees are instrumental in cultivating a robust succession planning culture within organisations. This critical function is particularly evident in the work of the nomination and governance committee, which is responsible for identifying and developing suitable candidates for board and senior management roles. This committee ensures that succession plans and policies remain dynamic and responsive to evolving organisational strategies, goals, and the operating environment. By promoting effective succession planning, board committees foster stability and continuity within an organisation, thereby facilitating seamless leadership transitions and the preservation of institutional knowledge.

Limitations to the Performance of Board Committees

Notwithstanding that board committees enhance the efficiency of corporate boards, they are sometimes faced with challenges, in executing their duties, such as:

• Conflict of Interest: Committee members may have personal or professional interests that do not align with the best interests of an organization. This can create bias and undermine the objectivity of the committee's decisions when ignored. Regular disclosure of potential conflict of interest by all board committee members should be encouraged to mitigate this issue.
• Communication and Coordination Challenges: Poor communication can result in delays in the performance of duties which can adversely affect the board’s performance. To mitigate this, board committees should leverage teleconferencing tools as a means to facilitate communication and information dissemination.
• Over-reliance on Management: Committees may sometimes rely too heavily on the information provided by management. This occurs when committee members fail to conduct independent due diligence or challenge the recommendations provided by management. Encouraging independent research by committee members and engaging external consultants as the need arises, to provide expert opinion on key issues can reduce over-reliance on management.

Best Practices for Effective Board Committees

In other to maximise the function of board committees as a corporate governance tool, below are some recommended best practices that enhance the effectiveness of board committees:

• Board Committee Charters/Terms of reference⁵ : Committees should have well-defined charters or terms of reference that state their authority and responsibilities.
• Committee Leadership: In selecting the chairman of committees, availability, strength of character, and leadership abilities should be a paramount criteria and selection should not be limited to skills and professional qualification.
• Reporting to the board: Regular reports should be provided to the board on committee activities to promote accountability.
• Committee Composition: An appropriately constituted board committee, with sufficient number of directors fosters independence and objectivity in decision making.
• Performance Evaluation: Performance evaluations should be conducted for committees regularly to identify possible areas for improvement.

Conclusion

Well-structured board committees serve as catalysts for promoting ethical conduct in business operations, transparency and accountability which are principles that propel corporate governance practices. By leveraging board committees, boards can promote informed decision-making, strengthen oversight, and enhance corporate governance, thereby enabling effective collaboration in advancing the organisation's best interests, strengthen their governance framework and drive long-term success.

At Adcax Nominees Limited, we pride ourselves in supporting our clients' business in navigating the intricate landscape of corporate governance. From navigating regulations to establishing sound structures ensuring seamless compliance, our expert team is here to guide you every step of the way. Let us ensure your business operates with transparency, accountability, and long-term success in mind. Reach out to us today via email at adcaxnominees.nigeria@dentons.com to learn how we can assist with your corporate governance compliance issues.

1. "The role of board-level committees in corporate governance,” OECD Corporate Governance Working Papers, No. 24, OECD Publishing, Paris, September 15, 2022.
2. Section 305(7) of CAMA, 2020.
3. "What are board committees," Corporate Governance Institute by Stephen Conmy, 2024.
4. Principle 2.9 of the NCCG, 2018.
5. "Board Committee: Structure, Responsibilities and Benefits of Specialized Oversight," Diligent, March 6, 2022.