UK listed boards combine executives and independent, non-executive directors (NEDs). The Code recommends that at least half the board, excluding the chairman, comprises independent NEDs. The Code also recommends that there is a clear division of responsibilities at the head of the company and so practically all boards separate the roles of chairman and chief executive.  Most boards maintain an audit committee, a remuneration (compensation) committee and a nomination committee. Other committees that might be constituted by the board are a risk committee, sustainability or a Environmental, Social and Governance (ESG) committee and a disclosure committee (in general the disclosure committee is formed to deal with the Market Abuse Regulation).

In January 2024, the Financial Reporting Council (FRC) issued the 2024 Code with supporting guidance which will become effective from 1 January 2025. The guidance includes a section on how to successfully manage board committees i.e. those required by the Code (nomination, audit and remuneration) and additionally risk and sustainability committees.  All references to the Code on this page are to the 2018 Code unless otherwise stated.

The Audit Committee

Certain companies have to comply with the requirements of the Disclosure Guidance and Transparency Rules (DTR) issued by the Financial Conduct Authority. DTR applies to all issuers that have securities admitted to trading on a UK regulated market. This applies regardless of the country in which the issuer is incorporated. The DTR includes details of the minimum functions of the audit committee. The Code also includes provisions on the composition and role of the audit committee and these are fully compatible with the DTR requirements. The Code recommends audit committees be comprised of at least three members, all of whom should be independent non-executive directors and one of whom should have recent and relevant financial experience. The chairman cannot be a member of the audit committee, even for smaller companies outside the FTSE 350, which are permitted to have two audit committee members only. The Disclosure Guidance and Transparency Rules expects the audit committee to have at least one member with experience in accounting and/or auditing, but indicates that this requirement can be met by meeting the Code composition requirements for recent and relevant financial experience. There is also a requirement for the audit committee as a whole to have competence relevant to the sector in which the company operates. Under the Competition & Markets Authority’s final Order (relevant to FTSE 350 companies), the audit committee has increased responsibilities in relation to supervision of the external audit relationship, which largely puts existing best practice on a statutory basis. 

In May 2023 the Financial Reporting Council (FRC) issued a minimum standard for audit committees in relation to their oversight responsibilities for the external audit. This follows the Government’s Response to its ‘Restoring Trust in Audit and Corporate Governance’ consultation and was driven by a specific recommendation from the Competition & Markets Authority’s Statutory Audit Services Market Study that the FRC “should have the power and a requirement to mandate minimum standards for both the appointment and oversight of auditors”.  The FRC has asked audit committees to make a “comply or explain” statement regarding their application of the Minimum Standard. 

The 2024 Corporate Governance Code, effective for accounting periods beginning on or after 1 January 2025, incorporates the Minimum Standard into the roles and responsibilities of the audit committee and will require all Code companies to describe how the audit committee has applied the Minimum Standard.   

The Remuneration Committee

Executive pay remains a topic of considerable debate in the UK. Investors keep close watch on pay schemes that exceed accepted norms.  Share option schemes are common, as are restricted share unit schemes. Service contracts for chief executives are also watched to ensure that payouts on departure do not exceed one year's remuneration.  Some investors require pension contributions to be capped at a similar percentage to the company's workforce, which is reflected in the requirements of Provision 38 of the Code. Shareholders have sought to increase their power over remuneration through binding votes. In August 2013, new Directors' remuneration regulations were approved by Parliament and the remuneration policy report is also now subject to a binding shareholder vote.  As a result, the remuneration committee is being made more accountable to shareholders for directors’ remuneration. 

The Code also includes provisions on the composition of the remuneration committee. The committee should be com­prised of a minimum of three independent non-executive members of the board. Smaller companies outside the FTSE 350 are permitted to have two remuneration committee members only. The chair of the board should not chair the re­mu­ner­a­tion com­mit­tee, but may be a member if they were independent on appointment. Under the 2018 Code, before ap­point­ment the chair of the re­mu­ner­a­tion com­mit­tee should have served on a re­mu­ner­a­tion com­mit­tee for at least 12 months.

The Companies (Miscellaneous Reporting) Regulations 2018 require quoted and UK registered companies with more than 250 UK employees to annually publish and justify the pay difference between chief executives and their staff – known as ‘pay ratios’. Such companies also need to illustrate the effect of future share price increases on executive pay outcomes to inform shareholders when voting on long-term incentive plans.

The Nomination Committee

Together with the audit and remuneration committees, the nomination committee makes up the three standing committees of a listed company’s board of directors. This committee is charged with the critical role of enhancing the quality of nominees to the board through effective succession planning analysis, setting policy around board appointments, including diversity, and specifying descriptions of the role and capabilities required for board appointments in light of existing skills and experience of current board members.  The nomination committee is receiving more attention due to shareholders and regulators questioning the integrity of board appointments from a quality and diversity perspective.  

The Code also includes provisions on the composition and role of the nomination committee. The committee should only comprise members of the board. The majority of the members should be independent non-executive directors. In many cases the chair of the board will also chair the nomination committee, failing which an independent non-executive director should be the chair. The chair of the board should not chair the nomination committee when it is dealing with the appointment of their successor as chair of the board.

The nomination committee should describe in the annual report how the board evaluation has been conducted, the nature and extent of an external evaluator’s contact with the board and individual directors, the outcomes and actions taken, and how it has or will influence board composition, which is driven by Provision 23 of the Code.

The Risk Committee

Significant banks and insurance firms are required to have a separate board risk committee under the rules of the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA). The Companies Act provides the board with the power to appoint board committees, and to delegate to such committees any of the authority of the board. Companies that are not otherwise required to have risk committees may create such a committee where the board considers that it will benefit from a risk committee separate to the audit committee.

The role of the risk committee should be set out in terms of reference and will usually cover matters including: oversight of the risk policy and plan, determining the company’s risk appetite and risk tolerance, ensuring that risk assessments are performed regularly, and ensuring that the company has and maintains an effective on-going risk assessment process, consisting of risk identification, risk quantification and risk evaluation.

Membership of the risk committee will ordinarily include at least three independent non-executive directors. Those members of senior management responsible for the various areas of risk management should attend the meetings. Members of the risk committee, taken as a whole, should comprise people with adequate risk management skills and experience and sufficient sector expertise to equip the committee to perform its functions. Some risk committees invite independent risk management experts to attend the meetings in order to sup­ple­ment the committee’s own risk man­age­ment skills and ex­per­i­ence.

The ESG / Sustainability / Business Responsibility Committee

As the requirements for sustainability-related reporting and disclosure continues to develop rapidly, some boards have created a separate sustainability committee with the primary responsibility of creating, reviewing and/or monitoring sustainability-related reporting including, but not limited to climate-related disclosures (e.g. Task Force on Climate-related Financial Disclosures (TCFD)), ESG related KPIs (e.g. for remuneration or funding), net zero targets and transition plans. When establishing such a committee, the board should take care that the terms of reference are clear about the delineation of responsibilities with other existing board committees, such as the audit or risk committee, and about how information should be shared between key committees.

The role of this committee is to report back to the board and inform the board on key matters. The Sustainability Committee might have responsibility for feeding back to the board relevant findings or details regarding the externally available sustainability or ESG data, for example as applying to the Annual Report or a separate sustainability report. They may also have oversight or management responsibility per the TCFD requirements. In terms of composition, there should normally be at least three members. Typically, the committee will include non-executive directors with some executive representation as well, and should include members with suitable sustainability skills / experience (provided via training where appropriate).