As a result of the increasing and ever-evolving responsibilities falling on the shoulders of boards of directors, the traditional three key committee model (covering audit and financial reporting, executive compensation, and director nominations and board succession planning) can be inadequate. The creation of additional committees has been one way to manage the burden. According to EY in its recent Board Matters post entitled “Board committees evolve to address new challenges”, the prevalence of additional committees reflects “changing board priorities and pressures, boardroom needs and company circumstances.”
The statistics support this: more than 75% of S&P 500 companies have at least one additional board committee, up from 61% in 2013. A review of the S&P SmallCap 600 board committee structure reveals that 46% of smaller companies have at least one additional board committee. A review of EY’s findings is summarized in more detail below.
Executive Committee Additions Lead the Way
S&P 500 companies most frequently (37% of the time) added an executive committee. Executive committees are generally permitted to exercise the authority of the board when the board is not in session, except in cases where action of the entire board is required by law. Following closely behind, 31% of the S&P 500 companies added a finance committee, 12% a compliance committee, and 11% a risk committee. In turn, the top five additional committees at smaller companies were executive (18%), risk (7%), finance (7%), strategy (6%) and compliance (5%).
Highest Growth: Compliance, Risk and Technology Committees
Between 2013 and 2016, compliance committees grew by 3%, risk and technology committees by 2% and M&A committees by 1%, while executive, finance, and public policy and regulatory affairs committees decreased by net 1%. For S&P SmallCap 600 companies, risk committees recorded the highest year-on-year growth at 3%.
Notably, while boards responded to some issues with the creation of new committees, others were assigned under the umbrella of existing committees. For example, of the 15% of companies that disclosed a committee focus on cyber, digital and information technology, over half assigned this responsibility to the audit committee.
In six out of ten industries – telecom, utilities, financials, health care, industrials, and materials – over 75% of companies have added at least one additional committee. The unique compliance, risk and operational challenges of these sectors plays a part in this. Among the companies listed on the S&P SmallCap 600 index, utilities companies most frequently add additional committees (82%) followed by financial services in second place (68%).
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The author would like to thank Hugo Margoc, articling student, for his assistance in preparing this legal update.