Given the importance of board committees to the corporate governance landscape, it is essential that boards of directors understand their right to delegate to, and rely on the decisions of, committees. This article examines those delegation and reliance rights and identifies the matters that boards should cover when establishing committees.
Board committees are commonly used by large companies to assist the board of directors to deal with, and make decisions on, complex or specialised matters. They play an important role in a company’s corporate governance and enable directors to use their time more efficiently and effectively.
The ASX Corporate Governance Principles and Recommendations advocate the establishment of various board committees as part of a corporate governance framework, namely, an audit committee, a nomination committee, a remuneration committee and a risk committee. These Principles and Recommendations also identify the suggested composition, operation and responsibility of these committees. Under the ASX Listing Rules, ASX listed entities are required to benchmark their corporate governance practices against these recommendations.1 Audit committees are mandatory for listed entities included in the S&P All Ordinaries Index2 and listed entities included in the S&P/ASX300 Index are also required to have a remuneration committee.3
As discussed in more detail in the following sections of this article:
- The law supports the right of boards of directors to delegate functions and powers to board committees.
- The board as a whole can rely upon the conclusions reached and powers exercised by a committee, subject to directors satisfying themselves on certain matters relating to the competency of the committee.
- There are, nevertheless, certain matters that courts have indicated cannot be delegated by a board.
- When a committee is established, the board of directors should clearly identify its composition, functions, delegated powers and decision making procedures.
The powers and functions of the board of directors
The principal decision-making organs of a company are its board of directors and its shareholders in general meeting. The acts and decisions of the board of directors, within the limits of its powers under the company’s constitution and the Corporations Act 2001 (Cth) (Corporations Act), are the acts and decisions of the company itself. This notion that the board acts as an embodiment of a company, supersedes the earlier characterisation of the board of directors as the agent of the company.4
Powers vested in the board of directors are exercisable by the directors acting collectively as a board5, subject to any delegation to an individual director or other person. The most common example of this is the power to manage the business of a company, which is typically vested in the board of directors6 and then delegated to a chief executive officer.
The board’s right to delegate
Section 198D(1) of the Corporations Act states that, unless the company’s constitution provides otherwise, the directors of a company may delegate any of their powers to:
- a committee of directors;
- an individual director;
- an employee of the company; or
- any other person.
Once a power is delegated by the directors under section 198D(1), the exercise of that power by the delegate is as effective as if the board of directors had exercised it.7 Accordingly, there is no legal need to ratify or adopt the decision of the delegate.
Section 198D, which was included in the Corporations Act by the Corporate Law Economic Reform Program Act 1999 (Cth) (CLERP Act), removed uncertainty about the right of boards to delegate tasks and powers and supports the modern notions of corporate governance. The Explanatory Memorandum to the CLERP Act noted that uncertainty about the circumstances in which it was appropriate for a director to delegate to, or place reliance on the advice of, others could lead to an overly conservative approach to management and could impede the decision-making processes within a company. This, according to the EM, is a less than optimal outcome and not conducive to the development of sound corporate governance practices such as putting in place appropriate board committee systems.8
A decision by a board to delegate a power does not reduce the authority of the board, which remains entitled to exercise the power. A board can also alter or revoke a delegation at any time.9
On its face section 198D is unqualified, except to the extent that delegation is limited by a company’s constitution. However, Australian courts have taken the view that there are certain matters which cannot be delegated by a board of directors, such as approving the company’s financial statements10 and important market announcements.11 These non-delegable duties were characterised by the court in the Centro case as reflecting a “core, irreducible requirement of directors to be involved in the management of the company”.12
There may also be matters in respect of which delegation needs to be carefully crafted on the basis that legislation imposes certain minimum responsibilities on individual directors in relation to those matters.13
Unless expressly authorised by the board, a board committee with delegated power cannot sub-delegate that power.14
The effect of delegation
If the board of directors delegates a power under section 198D(1), then subject to the following, the directors will remain responsible for the exercise of the power by the delegate as if the power had been exercised by the directors themselves.15 Section 190(2) of the Corporations Act qualifies this by providing that a director will not be responsible if:
- the director believed on reasonable grounds at all times that the delegate would exercise the power in conformity with the duties imposed on directors of the company by the Corporations Act and the company's constitution (if any); and
- the director believed:
- on reasonable grounds;
- in good faith; and
- after making proper inquiry if the circumstances indicated the need for the inquiry, that the delegate was reliable and competent in relation to the power delegated.16
An assessment of whether “reasonable grounds” exist under section 190(2)(a) must have regard to the director’s duty of care and diligence.17 While the reasonableness of each delegation must be determined in each case, the following are important considerations:
- the function that has been delegated is such that it may be left to the delegate;
- the extent to which the director has been, or should reasonably have been, put on inquiry;
- the reasonableness of the director’s belief that the delegate is trustworthy, competent and someone on whom reliance can be placed;
- the nature of and risk associated with the delegated matter;
- the steps taken by the director to confirm the trustworthy nature and competence of the delegate.18
The powers delegated
Board committees can be established with different levels of delegation:
- Advisory committees – This type of committee is asked to investigate or consider a particular matter and to report back or make recommendations to the board. The committee may be a convenient or efficient means by which the board investigates or conducts enquiries about a matter, with the board itself ultimately making any required decision based on the findings or recommendations of the committee.
- Committees with delegated power – This type of committee has the power to make decisions and exercise the powers delegated by the board.
Board committees in Australia tend to be a combination of both. That is, they exercise decision making powers in relation to certain matters and make recommendations for the board to make the ultimate decision in relation to other matters. For example, an audit committee will usually review and make recommendations to the board in connection with the company’s financial reporting processes and liaise with internal and external auditors in relation to the company financial statements, with the power to approve financial statements resting with the board. A nomination committee may be constituted to assess the desired board composition and review potential candidates, with the board retaining the ultimate power to appoint directors or recommend candidates to shareholders at the AGM.
Reliance on information or advice
Where a board committee investigates and reports to the board on the matter and the board, itself, makes the required decision, section 189 of the Corporations Act provides that, unless the contrary is proved, it is reasonable for each director who did not serve on the committee to rely on the information or advice provided by the committee if the reliance was made:
- in good faith; and
- after making an independent assessment of the information or advice, having regard to the director’s knowledge of the corporation and the complexity of the structure and operations of the corporation.19
The extent of what a director must do in order to undertake an “independent assessment” does not require the director to redo the task themselves. Directors are entitled to rely on others but should apply an enquiring and unbiased mind to the information brought to them. The practicalities of what this will require depend on the particular matter and the nature of the information.20
Decision making by board committees
The composition of a board committee should be determined upon its establishment by the board and documented in the committee’s charter. The committee charter should also clearly identify the committee’s role, any delegated powers and the committee’s meeting procedures including the manner in which decisions of the committee are made.
Most board committees comprise only directors. However the board may also set up committees which have non- director members, including employees or external advisers.21
Company constitutions typically provide little detail around the procedures for board committees. In some cases, constitutions will provide that the provisions relating to the board meetings also apply, “mutatis mutandis”, to meetings of board committees. However, the application of board meeting procedures to committees, including the quorum requirements, can be ambiguous22 and the better approach is for the procedures for meetings of the committee to be determined by the board upon the formation of the committee. If the quorum of a board committee is not identified, the default position is that all committee members must be present and, if there is disagreement, the majority view prevails.23 The rationale for this, as noted by Young CJ in Hedges v Australasian Conference Assn Ltd24, is that the appointors have evinced the intention that the power is only to be exercised by the whole body and not by some of the members of it.
In accordance with the same principle that applies to all board and general meetings, meetings of a board committee must have a chair before they can conduct any business.25 Accordingly, the identification of the person to act as chair or a procedure for appointing a chair should be included in the committee charter.