The Stanford Closer Look Series has just issued a well presented piece of literature entitled "A Meeting of the Minds: How Do Companies Distribute Knowledge and Workload Across Board Committees?" dated December 8th 2014. This paper presents an accessible framework for thinking about board committee structure and the pro's and con's of different approaches to committee overlaps. The authors include David F Larcker, Brian Tayan, and Christina Zhu of Stanford's corporate governance research initiatives. Larcker in a senior faculty member at its Rock Center of Corporate Governance.
Committee structure is an important practical issue for boards to consider and workloads are an important factor when considering such decisions. The paper explains that key issues such as audit, succession, and compensation are often carried out in committee structures and can generate heavy workloads for its members. Audit Committees oversee financial reporting, disclosure, monitor accounting policy and ensure internal regulatory and compliance controls, an area of growing importance in financial services firms for example. Compensation Committees focus on CEO compensation, establishment of performance related goals, supporting the CEO on compensation of executive management including serving as a sounding board, and setting board compensation.
Some firms have no overlap (26%) in committee membership while other firms have a signficant overlap of members, according to data presented and referenced to Equilar. The paper investigates the issues related to overlapping membership on both the Audit Committee and the Compensation Committee, including the benefits of overlap (better understanding of financial goals and accounting adjustments that can positively or otherwise distort earnings quality) and identifies limited academic research in this area exists at the present. On the other hand, the dis-advantage of such overlaps is the time commitment involved and notes there is "considerable research" indicating that busy directors may result in lower governance quality, and references "Are Busy Boards Effective Monitors?" by Fich and Shivdasani (2006).
The concept of Committee of the Whole, in which in the exteme case all NEDs stand on each board committee, is introduced which effectively disseminates knowledge across the board and arguably encourages joint responsibility for all boardroom decision making. The use of Committee of the Whole represents just over 3% of companies in the Equilar survey population, including Goldman Sachs and Moody's.
I wonder about the trade off of the benefits of Committee of the Whole versus the workloads placed upon directors and if such attempts to broadly syndicate responsibilities results in more effective governance performance? This paper also raises the question in my mind the issue of busy directors related to committments associated with one firm versus the issue of busy directors who shoulder light loads at one firm level but hold many directorships overall, and how measuring the performance of each situation can be misleading to governance reasearchers?
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