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The use of board committees

The SOE Guidelines posit that when necessary, SOE boards should set up specialised committees to support the full board in performing its functions. Annotations to the Guidelines further indicate that the setting up of specialised board committees could be instrumental in reinforcing the competency of SOE boards and in underpinning their critical responsibility in matters such as risk management and audit. They may be also effective in changing the board culture and reinforcing its independence and legitimacy in areas where there is a potential for conflicts of interests, such as with regards to procurement, related party transactions and remuneration issues.

SOE Guidelines, Guideline VI.E on board committees

“When necessary, SOE boards should set up specialised committees to support the full board in performing its functions, particularly in respect to audit, risk management and remuneration.”

The use of specialised board committees in SOEs has increased, in line with practices in the private sector. The type of special committees that boards make use of can vary between companies and industries and includes: audit committees, remuneration committees, nomination committees,[1] strategy committees, ethics committees, and in some cases risk and procurement committees. Even in countries where audit committees are not commonly used other board-linked bodies may in practice perform a similar function.

Good practice: Specialised committees can contribute to the efficiency of the board, but should not detract from the responsibility of the full board.

The existence of specialised committees should not deprive the full board of its responsibilities in the matters concerned; however, it can contribute to the efficiency of the board by ensuring that technical issues are dealt with by members who are adequately independent, trained or informed. When setting up board committees, general practice would suggest that they are chaired by a nonexecutive and include a sufficient number of independent members. The proportion of independent members as well as the type of independence required (e.g. from management or from the main owner) depends on the type of committee, the sensitivity of the issue to conflicts of interests, and the SOE sector. The audit committee, for example, should be composed of only independent and financially literate board members.

Good practice: Board committees should be made up of independent and technically literate board members to ensure efficiency.

In most jurisdictions board committees are not mandatory; boards are free to set up such committees, based on the Company Law and according to their governance needs. Where they exist, the composition and duties of committees are defined by the board, and are published in Annual Reports (OECD, 2005). Though not prescribed by concrete reform measures, the ownership agency in France has actively encouraged government-invested companies to establish audit, strategy and remuneration committees. Finland, too, does not require committees, but it has recently (since 2007) has encouraged the establishment of remuneration committees, with the purpose of ensuring competitive and incentive-consistent remunerations in SOEs. In Korea, however, board audit committees are required by law for commercial SOEs (OECD, 2011).

Bibliography

Frederick, W. (2011), “Enhancing the Role of the Boards of Directors of State-Owned Enterprises”, OECD Corporate Governance Working Papers, No. 2, OECD Publishing, http://dx.doi.org/10.1787/5kg9xfg6n4wj-en.

OECD (2005), OECD Guidelines on Corporate Governance of State-Owned Enterprises, OECD Publishing, Paris, www.oecd.org/daf/ca/corporategovernanceofstate-ownedenterprises/ 34803211.pdf.

OECD (2008), Using the OECD Principles of Corporate Governance: A Boardroom Perspective, OECD Publishing, Paris, www.oecd.org/daf/ca/corporategovernanceprinciples/ 40823806.pdf.

OECD (2011), Corporate Governance of State-Owned Enterprises: Change and Reform in OECD Countries since 2005, OECD Publishing, http://dx.doi.org/10.1787/9789264119529-en.

Boards of Directors of State-Owned Enterprises: An Overview of National Practices © OECD 2013

  • [1] The prevalence of nomination committees is briefly discussed in Chapter 2.
 
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