Boards set up committees to delegate activities, provide detailed analysis on technical issues and make recommendations, which the full board typically must approve. The board retains full responsibility for the issues delegated. Committees allow directors to focus on particular areas, including those in which they may have special expertise. Committees report back to the board and also filter management proposals so they become strategic issues when presented to the board for decision.

Of the many committees a board may set up, the principal ones are:

• Audit — selects and oversees auditors’ work

• Compensation or Remuneration — recommends how much the company should pay top management in cash, shares and other incentives

• Nominating — seeks, evaluates and recommends qualified candidates for election or appointment to the board of directors

• Corporate Governance — reviews policies and suggests reforms where needed. Boards may also establish an Executive Committee, which exercises the board’s power between meetings, and a Risk Committee, to anticipate and plan for potential risks.

In the financial sector, it is increasingly common for banking laws and regulations to prescribe that the board establish certain committees and even spell out their composition and functions, particularly for risk management. Companies may also appoint permanent or ad hoc committees on such matters as ethics, crisis management, environmental policies, labor issues and technology.

In special circumstances, a committee may be formed to examine a potential conflict of interest or a possible acquisition, when an independent opinion of non-interested board members is necessary.

Certain committees, particularly audit, nomination, compensation and corporate governance, should comprise primarily independent directors, according to corporate governance best-practice guidelines. Reviewing the composition of these committees may raise red flags. For example:

• Does the chairman tightly control all decision-making?

• Do conflicts of interest exist? (For example, do any Audit Committee directors have separate business ties with the auditor? With major shareholders?)

• Is board expertise adequate? (Does the Audit Committee include members with financial and accounting expertise?)

For other red flags on board committees, see: http://bit.ly/HGJADd