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Revised ICSA Guidelines on Committee Terms of Reference

Earlier this year the Institute of Chartered Company Secretaries (ICSA) published its revised guidance on the terms of reference for audit, nomination, remuneration, risk and executive committees, together with updated guidance on matters reserved for the Board. The guidance incorporates the current edition of the UK Corporate Governance Code (the “Code”), which was released in September 2012.

As part of the guidance, ICSA have updated their model terms of reference for each of the committees and their suggested list of matters reserved for the Board; the key amendments and additions to which are summarised below.

Changes to the Model Terms of Reference for Audit Committees

Akin to other ICSA guidance notes, the Model Terms of Reference for Audit Committees draws on the experience of company secretaries and is based on best practice adopted by some of the UK’s largest listed companies.

The following represents a summary of changes to the terms of reference as compared to the previous October 2010 version. These updated terms incorporate both the Code and certain revisions made by Financial Reporting Council (FRC) in its Guidance on Audit Committees (published contemporaneously with the Code).

Constitution and role of officers
  • Extension of appointments to the committee is limited to two further periods of three years (following an initial period of appointment of up to three years), subject to the condition that the members continue to be independent. This limitation is also included in the Model Terms for Remuneration Committees
  • At least one member of the committee should hold a professional qualification from a professional accountancy body (ie ACA/ACCA), in addition to the requirement for recent and relevant financial experience
  • The finance director should be invited to attend meetings of the committee on a regular basis
  • The company secretary should ensure that the committee receives information and papers in a timely manner to enable proper consideration of the relevant issues; this requirement is also included in the Model Terms for Remuneration Committees
  • The committee chairman should maintain a dialogue with key individuals involved in the company's governance (including, the chairman of the Board, chief executive officer, finance director, external audit lead partner and the head of internal audit)
Duties of the Audit Committee

The duties of the audit committee should include (amongst other things):

  • reporting its views to the Board if it is not satisfied with any aspect of the proposed financial reporting by the company
  • ensuring the internal auditor has direct access to the Board and committee chairman, and is accountable to the committee, and
  • ensuring that at least once every ten years the audit services contract is put out to tender and in this regard, overseeing the selection process and ensuring that all tendering firms have the necessary access to information and individuals throughout the tendering process.
Reporting by the Audit Committee

The reporting responsibilities of the audit committee should include:

  • an obligation to formally report to the Board on how it has discharged its responsibilities, and
  • a requirement to cover certain issues (as required by the Code) in the report on its activities prepared for the purposes of the company's annual report.

Changes to Model Terms of Reference for Remuneration Committees

The only changes to the Model Terms of Reference for Remuneration Committees relate to the duties and reporting responsibilities of the committee, as summarised below. 

Duties of the Remuneration Committee

The duties of the remuneration committee should include (amongst other things):

  • responsibility for setting the remuneration policy for all executive directors and the chairman of the Board. Remuneration of the non-executive directors should be a matter reserved for the Board itself or, if required by the company's articles of association, the shareholders
  • recommending and monitoring the level and structure of remuneration for senior management, and
  • clarifying that, when determining remuneration policies, the objective of the policy should be to attract, retain and motivate executive management of the quality required to run the company successfully without paying more than is necessary, having regard to views of shareholders and other stakeholders, the risk appetite of the company and alignment to the company’s long term strategic goals.

A significant proportion of remuneration should be structured so as to link rewards to corporate and individual performance and be designed to promote the long-term success of the company.

An express requirement for the remuneration committee to give due consideration to guidelines published by the Association of British Insurers and the National Association of Pension Funds, as appropriate.

Reporting by the Remuneration Committee

The reporting responsibilities of the remuneration committee should include:

  • ensuring that the provisions regarding disclosure of information, including pensions, as set out in the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and the Code, are fulfilled
  • producing a report of the company’s remuneration policy and practices for inclusion in the company’s annual report and ensuring that it is put to shareholders for approval at the AGM. If the committee has appointed remuneration consultants, the annual report of the company’s remuneration policy should identify such consultants and state whether they have any other connection with the company, and
  • ensuring that the company maintains contact with its principal shareholders about remuneration.

Changes to Model Terms of Reference for Nomination Committees

There were minimal changes to the Model Terms of Reference for Nomination Committees. Nonetheless, it is worthwhile noting that it remains the case that, unlike other Board committees, the chairman of the Board can be chair of the nomination committee.

The Code provides that a majority of members should be independent, rather than all: therefore membership can include executive directors, such as the chief executive.

The sole change to the terms of reference concerned the report prepared by the nomination committee for the purposes of the company's annual report. This report must:

  • identify where an external search agency has been used and, where such an agency has been used, whether its has any connection with the company, and
  • include a statement of the Board's policy on diversity, including gender, any measurable objectives that it has set for implementing the policy and progress on achieving the objectives.

Changes to Model Terms of Reference for Risk Committees

  • A number of significant changes were made to the constitution and role of officers as well as the risk committee’s duties
Constitution and role of officers
  • The company's chief risk officer (CRO) should attend all meetings of the risk committee
Duties of the risk committee
  • The risk committee should refer to and take note of the recommendations in the final report of the Kay Review of UK Equity Markets and Long-Term Decision Making published in July 2012, in particular those relating to wider shareholder consultation
  • A recommendation that the committee give due and careful consideration to the findings and recommendations of the Financial Stability Board in their Periodic Peer Review Report on Risk Governance published in February 2013
  • Where there is an overlap in duties that could be undertaken by either the audit committee or the risk committee, the Board should err on the side of overlap (rather than underlap) on critical questions, such as the capability of the executive team to manage and control risks within agreed parameters
  • The duties of the risk committee are expended to include ensuring that the CRO is given the right of unfettered direct access to both the chairman of the Board and the chairman of the risk committee
  • The committee should carry out periodic reviews of its own performance, review its constitution and terms of reference at least annually and recommend any changes it considers necessary to the Board; this amendment equally applies to the Model Terms of Reference for Executive Committees, and is the sole substantive change to such terms of reference

Changes to List of Matters Reserved for the Board

The list of matters reserved for the Board has also been expanded and should now include:

  • approval of material unbudgeted capital or operating expenditures (outside pre-determined tolerances)
  • approving the company/group’s risk appetite statements
  • approving procedures for the detection of fraud and the prevention of bribery
  • overseeing the execution and delivery of major capital projects
  • ensuring a satisfactory dialogue with shareholders based on the mutual understanding of objectives
  • establishing Board committees and approving their terms of reference and material changes to them
  • authorising conflicts of interest where permitted by the company’s articles of association
  • approval of policies on bribery prevention, whistleblowing and human resources, and
  • any decision likely to have a material impact on the company or group from any perspective, including, but not limited to, financial, operational, strategic or reputational matters.

Listed companies, both AIM and main market, should review the suitability of their current committee terms of reference and, following consultation with their legal advisers, NOMAD or Sponsor (as appropriate), seek to update such terms accordingly at the next general meeting of the company.

For more information please contact Mark Howard on +44 (0)20 7203 8902 or at mark.howard@crsblaw.com