Board Committees: Separate Meetings or Not?

In my book, The CFO’s Guide to Good Corporate Governance, I write about adopting mandates for the various committees of the Board of Directors. I also have a chapter that focuses exclusively on the Audit Committee meeting. In doing so, I made the assumption that all companies formed appropriate committees and held periodic meetings. While true for all public companies, I recently came to learn my assumption was incorrect.

I was introduced to a private company that had not formed any committees and elected to use their board meeting as a catch-all. While the company was receptive to forming committees and adopting committee mandates, it pushed back on separate meetings. The company felt comfortable covering everything in one meeting per quarter. What follows is my argument that a company should hold committee meetings separate from its Board of Directors meeting.

In the past few weeks I have written about the importance of corporate governance and putting together an effective board of directors. A major goal of every company should be to avoid making significant strategic mistakes that reduce shareholder returns (it is often easier to destroy value than it is to create value). An effective Board of Directors helps achieve this goal by understanding in depth management’s strategic options and helping management shape an optimal strategy.

Management can best achieve this goal by utilizing its time with the Board to discuss strategy. If I assume a typical Board meeting runs three hours *, the question is how to fill those 180 minutes?

* Also a bad assumption. The company I referenced earlier historically limited its meetings to 60 minutes.

If a company elects to hold one meeting per quarter, roughly half the time will be used to review the financial statements and talk about the results with the auditors. Compensation committee matters might take up another half hour or more, leaving just enough time for management to go through a variety of departmental updates.

Perhaps I am exaggerating slightly, but you can see that there is not much time to talk about strategy. If the company instead holds a separate Audit Committee and Compensation Committee meeting, that frees up roughly 100 minutes in the agenda (the 120 I estimate above less 10 minutes for each committee to report to the rest of the Board).

Those 100 minutes are a really nice chunk of time to discuss the company’s performance, management’s forecast for the future, the critical assumptions in that forecast and a few scenarios should those assumptions be incorrect. Devoting significant time to a strategy discussion forces disciplined decision making on management. It is very easy to become enthralled with a new idea or a new market. Without discipline, it is easy to commit significant capital on a new venture. The difficulty is overcoming poor strategic decisions to deliver strong shareholder returns.

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