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Board committees - how many is too many?

Wednesday 1st May 2019

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NZX companies have more separate board committees than they used to and are increasingly paying directors extra fees for serving on them, according to a recent report.

But companies need to make sure board committees aren’t making directors too inward-looking, diluting the focus on strategy and returns, one of the report’s authors says.

The 2019 New Zealand Corporate Governance Trends and Insights report, produced by law firm Chapman Tripp, suggests paying extra committee fees used to be rare in New Zealand, but has become increasingly common during the past two years.

Two-thirds of top 75 NZX companies paid extra committee fees in 2018, with the chair of the audit committee particularly likely to get additional remuneration.

Chapman Tripp partner Roger Wallis, one of the report’s authors, says the extra remuneration largely reflects the increased workload board members have with additional committee roles.

“If those are going to require directors spending an additional two or three days a month on their roles - doing site visits, for example - that could increase their workload from three days a month in the past to five days. It makes sense they should be paid more.”

In New Zealand, health and safety legislation passed in 2015 has prompted more H&S committees, and financial culture and conduct probes on both sides of the Tasman could potentially spawn risk committees, as has happened in Australia.

Under NZX listing rules, companies on the main board must have an audit committee, and NZX recommends a remuneration committee. Both should have a majority of independent directors.

Otherwise, NZX’s corporate governance code suggests only “other board committees as the board considers appropriate, depending on the nature of the businesses”.

Wallis says there are potential downsides to companies having more board committees - particularly if they are reactionary rather than forward-looking. This could be the case with boards focusing on health and safety, for example, or risk.

Some directors might be spending too much time getting involved in matters that "shouldn’t be on the board agenda", he says

“You can spend a lot of time focusing on culture, conduct and risks, and those topics are important. But directors need to continue to ensure they are focused on what they are there for - delivering good outcomes for their shareholders. That’s about strategy and return.”

Wallis’ views were backed up by veteran Australian director David Murray. In a hard-hitting speech in August last year, highlighted in the Chapman Tripp report, Murray said excessive use of committees can promote "too much focus on management, risk and external audit issues – distracting the board from taking a broader strategic view, and making it less effective”.

Still, committees have their place. In his February judgment in the case against the former directors of Mainzeal, Justice Francis Cooke was highly critical of Mainzeal's governance arrangements, including the lack of audit and risk committees. Nor was there any formal risk register, Cooke said.

"This would not matter if risks were otherwise appropriately addressed. But... they were not."

Chapman Tripp acts for some Mainzeal directors in the court battle with the liquidators, meaning Wallis couldn’t comment on the Mainzeal judgment. However, he said as a general principle companies should be more proactive around risk when they are in trouble.

“When there is a crisis, you would expect directors to do more and solve the crisis - delve into operational management more. But when that’s not happening, there’s a worry that boards could spend too much time looking at risk and not looking forward.”

The Corporate Governance Trends and Insights report shows the average number of committees for top-75 listed companies in New Zealand is three, with two- and four-committee structures also popular.

Five companies have five board committees and two have six. Five have only one committee and one company, the recently-transitioned Foley Family Wines, had no committees.

Twenty-two issuers had a dedicated health and safety committee in 2018, the report says, and eight had a due diligence committee.

NZX has six committees; soon-to-be-delisted Trade Me had only one. Trade Me was the 18th-largest company on the stock exchange, with revenue of $250 million in the year to June 30, 2018 and net operating profit of $96.6 million. NZX is the 58th largest company, with 2018 revenue of $67.5 million and net profit after tax of $11.6 million.

Why the difference in the number of committees?

“It would be a legitimate question to ask [NZX chair] James Miller,” Wallis says.

The NZX 2018 annual report notes that each of its six committees “reviews its performance at least annually. The board also reviews each committee’s performance at least annually.”


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