Identify 2 Key Board subcommittees that are mentioned in the case study and guided by their roles and duties, discuss how their ineffectiveness contributed to the company’s demise.
Introduction
The board of directors as a whole has a responsibility to clearly outline and make sure that each standing committee to which the board delegates some of its responsibilities despite still being accountable, does have a charter that ultimately states the terms of references of each of the committees. The charter and the terms of references of the board do stipulate the roles and duties of the committees.
In the case of Steinhoff, a risk manager or corporate governance practitioner, in general, would expect the roles and duties of the members sitting on the committees and the committee as a whole to be clearly stated in the charter or the terms of references. This part of the essay seeks to highlight the roles and duties of the nomination and audit and risk committees, as a standard guide that can be expected from any board or company. In addition, to this part of the essay, we highlight the infectiveness that existed in the Steinhoff standing committees and thus led to the failure of the board.
Nomination Committee roles and duties
According to McCarthy & Stone Plc, the role of the Nomination Committee is to develop and maintain a formally rigorous, and transparent procedure for making recommendations on appointments and re-appointment to the board of the company. To a larger extent, another role of the Nomination Committee is to guide the development and implementation of the succession plan of the board, as expected by the King IV Report. Guided by Part 5.3, Principle 8 of King IV, which states that the governing body should ensure that its arrangements for delegation within its own structures promote independent judgment, and assist with balance of power and effective discharge of its duties.
- Promote Independent Judgment -Part 5.3, Principle 8 of King IV, strike on the heart of the roles and duties of the nomination committee in the sense that, a recommendation made for board appointment, should be evaluated and judged against the independence criteria set by the nomination committee in agreement with the body. Further-more the independence does not rest only upon new appointees rather it goes over to the succession plan and retirement of directors as they stand for re-election on each AGM.
- Failure of the Steinhoff might have been attributed to lack of independence on the majority of non-executive directors. The lack of independence, despite not listed in the case might have emanated from staying too long on the board, close business relations that can be defined as material interests between the directors and the company. Thus, the nomination committee seemed to have failed in discharging its duties and roles, for it should have advised the whole board in regard to the need of having a succession plan and maintenance of independence at whatever cost.
- Achieve Balance of Power – Part 5.3, Principle 8 of King IV went on and highlighted the need for a balance of power within the whole body as well as within the standing committees. The role of the Nomination Committee is to advise the body in terms of the composition of the board, as this will also determine the composition of the committees. King IV emphasized the need for diversity of membership, looking into gender representation, race, and age.
- In short, the nomination committee of Steinhoff failed to discharge its duties, as it should have advised the board that more non-executives, with more being independent should have been appointed to the board. The case stated that only 5 non-executives were available for standing committees, in which case the Chairman of the board cannot sit on the audit committee, but can chair the nomination committee. Assuming Chairman Christo Wiese and Claas Daun only on one committee, which can be this nomination committee, it would mean that, only three non-executive directors were available for the audit and risk committee. Given the amount of work expected on the audit committee of a listed company like Steinhoff, more non-executive directors should have been recommended to this committee, let alone the board decided to combine the audit committee and risk committee which then made the amount of work of the committee quite overwhelming, and thus the reason for failure to discharge the required duties. The roles and duties of the audit and risk committee are discussed in the following paragraph.
- Lastly, the Nomination Committee is responsible for the overall annual board evaluation. In this regard, given the weakness and ineffectiveness of Steinhoff, one would acknowledge that the Steinhoff nomination committee failed in conducting its board evaluation roles and duties. Have it conducted its roles and duties in an amicable manner, some of the problems could have been avoided.
Audit and Risk committee roles and duties
As per JSE Listing Requirements, King IV report, and the companies Act of 2008, the audit committee and the risk committee were supposed to be separated given the amount of work required on a listed company. The roles, composition of the audit committee are stipulated in the Companies Act, however, the audit committee to a larger extent oversees the risk governance of the organization. The primary task of the audit and risk committee assumed it is combined like the Steinhoff case is to oversee the relationship with the external auditors, so as to ensure the quality of the company’s financial statements. As a result, the role of the audit risk committee is to monitor the integrity of the financial statements and related announcements of the Company and its subsidiaries. The fact that there was a large transaction that went through Steinhoff undetected, and possibly contributed to the failure of the company, illustrates that the company’s audit risk committee did not perform its roles and duties effectively, and thus did contribute to the failure of the company.
In addition to this, the other role of the audit committee includes making recommendations on the appointment and reappointment of the external auditors, as well as looking at the remuneration of the external auditors, and lastly their terms of engagement. In the case of Steinhoff, it appears that the committee failed to execute its duties, mainly because there is a major transaction as stated in the case that went unnoticed, given that the company should have had internal control systems managed by the internal audit team, as well as having external auditors to verify the financial statements.
The issue of dominant personality could have encouraged the CEO to work with unfettered power, and thus allow him to conceal the larger transaction, probably with the knowledge of few individuals. The audit and risk committee should have noted this and the risks that were available due to the dominant personality, and thus have assisted the company in managing its risk. From this, one would say lack of members or lack of independence could have led to the ineffectiveness of the audit-risk committee and thus lead to the failure of Steinhoff.
Another role of the audit and risk committee is to review and make recommendations to the board of the Company on the adequacy and effectiveness of the Group’s internal control and risk management systems. In addition to the above, another major role of the audit committee is to provide a link between the internal and external auditors. In this case, the role of the audit committee will be to receive reports from the internal auditors, and through its relationship with external auditors, the audit and risk committee will then provide recommendations to the board. In short, one will then conclude that the role of the audit and risk committee hinges on the integral part of a company’s risk management and internal control systems. The bypassing and circumventing of internal control systems, as the executives hide certain transactions, clearly shows that the audit-risk committee was not well-performing in carrying out its roles and duties.