Committees of the Board

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Why Board Committee?
Board committees are important tools to make a
board more effective. These committee help
to make specific idea and in-depth
observation in any matter related to the
governance of the corporation. Audit
committee is one of them.

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Major Committees of the Board
Audit Committee
The Executive Committee
The Compensation Committee
Nomination Committee
Governance Committee
Risk Management Committee
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How Effectiveness of Different
Committees Can be Ensured?
When committees of the board are
established, their mandate, composition and
working procedures should be well defined
and disclosed by the board.
4
continued.
Mandate (Charter) should be clear.
Composition should be proper and effective.
Working procedure shall be clear and
disclosed.
Interference from outside shall be avoided.
Independent functioning shall be ensured.

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Constitution of Audit Committee
Non-executive independent directors who are
financially literate.
3 - 5 members is accepted as ideal number for
membership.
With written mandate and terms of reference.
The chairman of the company should not be
an audit committee member.


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History
Each domestic company with common stock listed
on the Exchange, as a condition of listing and
continued listing of its securities on the Exchange,
shall establish no later than 30 June 1978 and
maintain thereafter an Audit Committee comprised
solely of directors independent of management and
free from any relation that, in the opinion of the
Board of Directors, would interfere with the exercise
of independent judgment as a committee member,
(New York Stock Exchange (NYSE), White Papers,
New York, 1973.)
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In Nepal
NRB Directive No. 6 first time introduced the
concept of Audit Committee in the board of
banking companies.
The Companies Act, 2063 under section 164
makes provision of compulsory audit
committee to listed companies having three
crores or more issued capital and any
company which have government ownership
either whole or partial.
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Objective
To establish formal and transparent
arrangements for financial reporting.
To establish and make effective internal
control mechanism.
To maintain an appropriate relationship with
the companys auditors (Both Internal and
External).
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Independent functioning
To ensure the independent functioning of the
committee following matters need to be
considered.
Member independence
Member qualification
Member characteristics (accountability, informed
judgment, confidence, honesty)
Dynamic chairperson
Availability of financial resources
10
Continued.
No executive should be allowed to present the
meeting of the audit committee.
Presence of non-member is possible only with the
permission of the committee.
Consultation of external expert in the expenses of
company shall be permitted.
Committee should, at least annually, meet the
external and internal auditors, without management,
to discuss issues arising from the audit.
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Charter of the committee
The board should provide written terms of reference for the
audit committee. the terms of reference should be tailored to
the particular circumstances of the company.
The audit committee should review annually its terms of
reference and its own effectiveness and recommend any
necessary changes to the board.
The board should review the audit committee s effectiveness
annually.
Where there is disagreement between the audit committee
and the board, adequate time should be made available for
discussion of the issue with a view to resolving the
disagreement.
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Functions
Financial Reporting
Whistle blowing policy and implementation
Internal Audit Process
External Audit Process
Annual Audit Cycle
Reporting
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Financial Reporting
Monitor the integrity of the financial
statements of the company, and any formal
announcements related to the companys
financial performance, reviewing significant
financial reporting judgments contained in
them.
Ensure that the reporting practices meet both
national and international standards.
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Whistle blowing
Formulate necessary policy for the protection
of Whistle Blower.
Ensure the access of the informed person to
the committee.
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Internal Audit Process
Monitor and review the effectiveness of the
companys internal audit function.
Approve the appointment or termination of
appointment of the head of internal audit.
Ensure that the internal auditor has direct access to
the board chairman and to the audit committee and
is accountable to the audit committee.
Review and assess the annual internal audit work
plan.
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Continued.
Receive a report on the results of the internal
auditors work on a periodic basis
Review and monitor managements responsiveness
to the internal auditors findings and
recommendations.
Meet with the head of internal audit at least once a
year without the presence of management.
Monitor and assess the role and effectiveness of the
internal audit function in the overall context of the
companys risk management system.

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External Audit Process
The audit committee is the body responsible
for overseeing the company s relations with
the external auditor basically in the matter of:
Appointment
Terms and remuneration
Independence
Non-audit services

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Non audit service
Committee should develop and implement policy on
the engagement of the external auditor to supply
non-audit services, taking into account relevant
ethical guidance regarding the provision of non-audit
services by the external audit firm.
From which the external auditors are excluded.
For which the external auditors can be engaged without
referral to the audit committee.
For which a case-by-case decision is necessary.
Policy for the fee limits generally or for particular classes of
work.
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Annual Audit Cycle
Committee shall prepare the annual audit
cycle.
At the start of each annual audit cycle, the
audit committee should ensure that
appropriate plans are in place for the audit.
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Reporting
Committee shall report to the board, identifying any
matters in respect of which it considers that action or
improvement is needed and making
recommendations as to the steps to be taken.
Provide the annual statement containing the
responsibilities of the committee and their discharge.
Chairman should be present in the AGM to answer
the question raised by the shareholders.

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Section 165 of the Companies Act
determines following functions of the
Committee
Section 165 of the Act makes provision about
functions, duties and powers of the audit committee.
Here are some functions of the audit committee
determined by this section.
To review and examine the integrity of the account
and financial statements of the company.
To review the companys internal financial control
system and risk management systems.
To monitor and review companys internal audit
function.
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Continued.
To suggest the name of probable candidate and
conditions of appointment, remuneration to the
shareholders for their approval in general meeting, in
relation to the appointment of the external auditor.
To review and monitor the external auditors
independence and objectivity, and the effectiveness
of the audit process, taking into consideration
relevant professional and regulatory requirements.
To develop policy for the selection and appointment
of auditors, taking into account relevant ethical
guidance, standards and directives.
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Continued.
To develop the accounting policy of the
company.
To fulfil the condition of Long From Audit
Report, if it required to follow the directives of
any regulatory authority.
To do other functions assigned by the board
regarding accounting, financial statement and
auditing.

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To ensure effectiveness the Audit Committee
Companies Act makes other following provisions
Inclusion of short report of its functioning, recommendations
and response of the board of directors on them, and other
matters of audit committee in the report of the board of
directors.
Power to call any executive directors, CEO, and other officials
and auditor (both external and internal) of the company in its
meeting for questioning.
Implementation of the recommendation of audit committee
by the board of directors.
Sufficient supply of resources necessary for the effective
functioning of the committee.
Meeting of the committee can be organised as per the
necessity.
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The Executive Committee
Need of executive committee can be justified on the
basis of necessity to handle serious emergencies
between board meetings.
This committee is constituted under the
chairmanship of fulltime chairman or managing
directors of the corporation.
Companies which are practicing two tier board
system need not to constitute this committee.
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Role and responsibilities
Monitoring of the exposures (both credit and
investment) of the company,
Review of the adequacy of the risk management
process and up gradation thereof,
Internal control systems,
Ensuring compliance with the statutory/regulatory
framework,
Takes decision in case of emergency while Board is
not sitting.
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Critiques of this Committee
Executive committee with too much muscle, by
encouraging the emergence of two tiers board, are
obstacles rather than aids to better corporate
governance. In essence, directors on the executive
committee become the first tier, dominating
decision making, while the role of the second tier
directors is like that of House of Lords, reduced to
giving advice and consent.
(Walter J. Salmon, Crisis Prevention: How to Gear Up Your Board, (2002),
Harvard Business Review on Corporate Governance)
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In Nepal
This committee is not recognized as legal
requirement.
Some companies are practicing it voluntarily
under the authorization of the Companies Act
in the name of sub- committees and their
article of association.
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The Compensation Committee
There was no effective system of determination of
remuneration of the CEO and senior management
and board members in most of the corporation
before the introduction of this committee.
The board itself with the endorsement of the AGM
used to determine the compensation of the board
members and senior management.
In all matters, it is also not a subject to shareholders
approval.
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Problems where compensation committee
is not working
Not having this committee provides
opportunity of self determination of
compensation which creates problems like;
Lack of transparency,
Excessive remuneration, and
The poor linkage between performance and
remuneration.
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Objective behind this committee
Levels of remuneration should be sufficient to
attract, retain and motivate directors of the
quality required to run the company
successfully, but a company should avoid
paying more than is necessary for this
purpose. A significant proportion of executive
directors remuneration should be structured
so as to link rewards to corporate and
individual performance. (Combined Code)
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Role and Responsibilities
Developing a framework for the determination of
remuneration package for directors and senior
management on the basis of their performance.
The compensation committee has to ensure that
remuneration packages are appropriate that they
are competitive but not excessive.
To lend an element of objectivity to the process of
determining remuneration package.
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In Nepal
There is no provision of compensation
committee in law and practice.
Power to determine the benefits and
remuneration of the directors of a company is
vested in general meeting of the company.
(The Companies Act, 2063, section 91)
Companies are free to establish this
committee in their board.
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Nomination Committee
A key success factor is the quality of leadership of an
enterprise. A nomination committee with a written
mandate and terms of reference consistent with
good practice may ensure the selection of directors
and a chief executive officer (CEO) of the highest
calibre. Comprising mainly of independent directors,
the committee should have a written definition of
independence, inclusive of both subjective and
objective criteria. (ADB)
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Objectives
To break the traditional trend of de facto
appointment of directors by CEO or executive
director.
To incorporate truly independent directors in
the board.
To determine the prefect succession plan for
the board and senior management.
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Duties and Responsibilities
Recommendation for the Appointments to the board
based on merit and objective criteria.
Due care should be taken to ensure that appointees
have enough time available to engage to the job.
Formation of succession plan for appointments to
the board and to senior management, so as to
maintain an appropriate balance of skill and
experience within the company and on the board.
Selection of proper candidate for independent
director.

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In Nepal
There is no legal provision for this committee.
Nomination of directors and senior management is
authorised to the AGM or Board based on the
provision of respective companies statutory
documents.
Voluntary practice from the corporation is also
lacking.
For bank and financial institutions NRB has prepared
a list of professionals among which the banking
companies have to choose the professional directors.
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Section 86 of Act
(1) The directors of a company shall be appointed by the general meeting of
the company, subject to the provisions contained in Section 89 and the
articles of association.
Provided however, that:
(1) The directors shall be appointed by the promoters pending the holding of the first annual general
meeting of the company.
(2) If the office of any director appointed by the annual general meeting is vacated for any reason, the
board of directors shall appoint another director in that vacancy.
(2) Notwithstanding anything contained in Sub-section (1), in the case of a
company any shares in which a corporate body has subscribed, the
corporate body may appoint a director in proportion of the total number
of directors of the company and the number of shares subscribed by such
body and also an alternate director to attend and vote in a meeting of the
board of instead of every such director in cases where such director will
not be in a position to attend the meeting of the board for any reason

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continued.
(3) Where any director appointed pursuant to Sub-
section (2) is not able to attend a meeting of the
board of directors, such director shall give
information thereof to his/her alternate director and
the board of directors. In such case, the alternate
director shall be entitled to attend, and vote in, the
meeting of the board of directors.
(4) Except in the case referred to in Sub-section (1), any
alternate director appointed pursuant to Sub-section
(2) shall not be entitled to attend, and vote in , a
meeting of the board of directors.

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Governance Committee
To ensure the effectiveness of the elements
and principles of corporate governance this
committee is expected in every board.
This committee is also known as shareholders
redress committee.
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Duties and responsibilities
To ensure the effective corporate governance.
To handle the grievances of the
shareholders/investors.
To handle the grievances of the stakeholders.
Establish mechanism for handling of the grievances.
Report to the board about its functioning so that it
can be included in annual report.
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In Nepal
This committee is not in practice and nor
incorporated in corporate law.
If shareholders/stakeholders have any
problem they have to complain either to the
chairperson or the company sectary for the
redress.
Issues of governance are dealt directly by the
board.
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Risk Management Committee
To bring effectiveness in the functioning of the
board regarding its responsibility to
management of risk, Risk Management
Committee is recommended by corporate
governance principles.
Assessment of all risks like, investment risk,
market risk, operational risk, credit risk, etc.
come under the preview of this committee.
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Duties and responsibilities
Formulate necessary risk management policy.
Advise to the board about different risk
associated with the business of respective
company.
Act for the reduction of the different types of
risk.
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In Nepal
There is no provision for the risk management
committee in the board.
The job of this committee is assigned to the
Audit committee by the Companies Act.
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Thank You
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