Corporate Governance Role of the Board Committees in India

Introduction

The establishment of board sub-committees has been strongly recommended as a suitable mechanism for improving corporate governance, by delegating specific tasks from the main board to a smaller group and harnessing the contribution of non-executive directors. The effectiveness of the board depends on its composition and size and also its internal administrative structure (John & Senbet, 1998). Constitution of board committees leads to the division of responsibilities within the board and shows a systematic approach to handle issues on the agenda. Board decisions initially originate in the board committees. Hence, it is expected that the effective use of committees by the board shall have a positive effect on firm performance (Vig & Datta, 2018). As each committee functions only for a specific issue and the expertise and professions of the independent directors on different committees are varied, they can contribute to the performance of the company from different dimensions. For a Board of Directors, its committee structure symbolizes its method of operation.

Harrison (1987) makes an analysis of the roles of board sub-committees and recognises them as strategic tools, fulfilling board responsibilities of maintaining corporate legitimacy, protecting directors from excessive exposure to liability and contributing to the formation of corporate strategy. He argued that audit and remuneration committees, with a monitoring and oversight brief, contributed to the first – establishing and maintaining organisational legitimacy in the eyes of external resource providers. Some other scholars identify a corporate strategy role for the board committees (Andrews, 1981).

The Anglo-Saxon model of governance (adopted by UK, USA and also India) has recognised the importance of the unitary board structure, while providing for boards sub-committees to focus on specific aspects of governance which have been identified as important but difficult, such as financial reporting quality, directors’ remuneration and board appointments. The codes of governance all over the world have recommended the establishment of audit, remuneration and nomination committees for improving corporate governance standards. There is ample literature in the area of corporate governance where various researchers have conducted studies on these Board committees mainly required to be constituted by various corporate governance codes.