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- 12 Marks
Question
Sawaba Telco Ltd is a recently listed local company that is in the process of reorganizing its corporate governance structure to reflect its status as a public company. At the first board meeting after the listing, the board chairman raised the issue of setting up sub-committees of the Board. The Board agreed to start with two sub-committees: the Remuneration Committee and the Audit Committee. The board chairman is unsure how the remuneration committee of the board should be composed, its functions, and other related matters. As a corporate governance consultant, the board chairman has written to you for advice on various issues regarding the remuneration committee.
Required:
Write a report to the board chairman advising him on the following:
i) The composition of the Remuneration Committee. (3 marks)
ii) THREE functions of the Remuneration Committee. (3 marks)
iii) THREE factors to be considered in the remuneration of executive and non-executive directors. (6 marks)
Answer
i) The composition of the Remuneration Committee:
The Remuneration Committee should comprise a majority of non-executive directors. Executive directors who are members of the committee should exclude themselves from deliberations concerning their own remuneration. This ensures that there is no conflict of interest and that decisions are made objectively and fairly.
(3 marks)
ii) Functions of the Remuneration Committee:
- Establishing a formal and transparent procedure for developing policy on executive remuneration: The committee is responsible for setting the framework for executive pay, ensuring it is aligned with the company’s objectives and shareholder interests.
- Ensuring that a proper system of long-term and short-term compensation is in place: The committee ensures that performance-oriented incentives are provided to management, balancing between rewarding short-term achievements and fostering long-term value creation.
- Scrutinizing executive contracts: The committee examines executive contracts to ascertain any potential inordinate losses the corporate body may incur in the event of an early termination of services, protecting the company’s financial interests.
(2 marks for each point, Total 6 marks)
iii) Factors to be considered in the remuneration of executive and non-executive directors:
- Level of experience: The remuneration levels of directors should reflect their experience and the level of responsibilities they undertake within the company. More experienced directors may warrant higher compensation due to the value they bring to the organization.
- Exclusion of the concerned director: The board as a whole should determine the remuneration of non-executive directors, with the individuals concerned excluding themselves from deliberations on the matter. This helps maintain objectivity and fairness in the decision-making process.
- Commitment of non-executive directors: The remuneration of non-executive directors should be fixed at a level that ensures their commitment to the duties and obligations they are required to discharge. Adequate compensation can incentivize directors to fully engage with their roles, contributing effectively to the company’s governance.
(2 marks for each point, Total 6 marks)
- Tags: Board Responsibilities, Corporate Governance, Remuneration Committee
- Level: Level 2
- Topic: Corporate governance framework
- Series: NOV 2017
- Uploader: Theophilus