STANDING COMMITTEES
The term ‘standing committee’ refers to any committee that is a permanent feature within the management structure of an organisation. In the context of corporate governance, it refers to committees made up of members of the board with specified sets of duties. The four committees most often appointed by public companies are the audit committee, the remuneration committee, the nominations committee and the risk committee.
The Syllabus and Study Guide for Paper F1/FAB require students to study only two committees. These are the audit committee and the remuneration committee.
AUDIT COMMITTEE
This committee should be made up of independent non-executive directors, with at least one individual having expertise in financial management. It is responsible for:
. oversight of internal controls; approval of financial statements and other significant documents prior to agreement by the full board
. liaison with external auditors
. high level compliance matters
. reporting to the shareholders.
Sometimes the committee may carry out investigations and may deal with matters reported by whistleblowers.
REMUNERATION COMMITTEE
This committee decides on the remuneration of executive directors, and sometimes other senior executives. It is responsible for formulating a written remuneration policy that should have the aim of attracting and retaining appropriate talent, and for deciding the forms that remuneration should take. This committee should also be made up entirely of independent non-executive directors, consistent with the principle that executives should not be in a position to decide their own remuneration.
It is generally recognised that executive remuneration packages should be structured in a manner that will motivate them to achieve the long-term objectives of the company. Therefore, the remuneration committee has to offer a competitive basic salary and fringe benefits (these attract and retain people of the right calibre), combined with performance-related rewards such as bonuses linked to medium and long-term targets, shares, share options and eventual pension benefits (often subject to minimum length of service requirements).
PUBLIC OVERSIGHT
Public oversight is concerned with ensuring that the confidence of investors and the general public in professional accountancy bodies is maintained. This can be achieved by direct regulation, the imposition of licensing requirements (including, where appropriate, exercising powers of enforcement) or by self-regulation. As the US operates a rules-based system of governance, these responsibilities are discharged by the Public Company Accounting Oversight Board, which has the power to enforce mandatory standards and rules laid down by the Sarbanes-Oxley Act. In the UK, regulation is the responsibility of the Professional Oversight team of the Financial Reporting Council.
SAMPLE QUESTIONS
Candidates may find it useful to consider questions on this topic identified in examiner’s reports as well as the pilot paper. As past question papers are not made available, the following questions are included in this article as examples of typical requirements. It must be emphasised that these questions are not taken from the actual question bank.
Sample question 1: LLL Company is listed on its country’s stock exchange. The following individuals serve on the board of directors:
Asif is a non-executive director and is the chairman of the company. Bertrand is the CEO and is responsible for the day-to-day running of the company. Chan is a professional accountant and serves as a non-executive director. Donna is the finance director and is an employee of the company. Esther is a legal advocate and serves as a non-executive director. Frederik is the marketing director of a manufacturing company and serves as a non-executive director.
Which of the following is the most appropriate composition of directors for LLL Company’s audit committee? A Chan, Donna and Esther B Asif, Bertrand and Frederik C Asif, Esther and Frederik D Chan, Esther and Frederik
The correct answer is D. Executive directors should not serve on the audit committee. This eliminates options A and B. Option D is the best choice, as the audit committee should have at least one director with expertise in finance.
Sample question 2: Which of the following is a duty of the secretary of a listed public company? A Maintaining order at board meetings B Clarifying the terms of reference of the board meeting C Ensuring that all directors contribute fully to discussions at board meetings D Reporting to the board on operational performance for the last quarter
The correct answer is B. Options A and C are responsibilities of the chairman, while option D is the responsibility of the CEO.
Sample question 3: The board of directors of JJJ Company has decided to increase the basic salary of its chief executive officer by 20% in order to bring her pay into line with those occupying similar positions in the industry.
This action will achieve which of the following purposes? A Improve the prospect of retaining the chief executive officer B Increase the productivity of the chief executive officer by at least 20% C Motivate the chief executive officer to achieve long-term targets D Create greater job satisfaction for the chief executive officer
The correct answer is A.
The basic pay offered by a company serves as a beacon to attract applicants, and can also deter the present incumbent of a position from seeking opportunities elsewhere, especially if they perceive themselves to be underpaid at present.
A substantial pay increase is unlikely to achieve a significant increase in productivity or increase long-term motivation (though pay increases can have a short-term impact
on motivation). Job satisfaction is derived from factors other than remuneration, such as challenges inherent in the work and the nature of the tasks performed.
Written by a member of the Paper F1/FAB examining team
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