Governance Committee: Driving Board Performance

Foreword from the Chair: Governance at a Crossroads

Responsibility for a corporation’s governance, long treated as secondary to the more important task of nominating directors, has finally come into its own as an oversight area worthy of standing committee status. 

Today governance committees are at the crossroads of a change that can have significant impact on corporate performance and ethics. The challenge for the governance committee is to focus on performance rather than mere compliance.

Transcending conformity with governance rules and regulations, the committee can and should become the board’s performance committee, helping directors across their range of responsibilities to contribute value on a continual basis to the board and to the corporation.

Reasons for Greater Prevalence of Governance Committees

Governance committees (in contrast to a narrower “nominating” committee) are still relatively new, but they are far more common today in part because stock exchanges now require them. But aside from these requirements, boards have practical reasons for forming governance committees.

• First, the definition of “governance” has evolved over the years, becoming broader in its meaning to include both internal board operations and external stakeholder relations.

• Second, the relationship between corporate governance (and by association, the governance committee) and corporate performance has become more evident, both on the upside and downside. The presence or absence of good governance practices can contribute to economic strength or weakness. To date, most of the proof has been on the negative side: lack of truly effective governance contributed to the downfall of several major companies at the beginning of this decade. But a growing number of studies—numbering in the hundreds—are exploring the positive economic benefits of effective governance—a topic for future NACD research.

• Third, the definition of “corporate performance” itself is evolving. An increasing number of boards are looking at nonfinancial measures of corporate value, including the value of reputation. Strong governance can be an important component in building that value.

• Also, the increased workload of boards is forcing the delegation of many of their responsibilities to committees. The governance committee plays a key role in allocating the work of the board to various committees, helping to keep board structure, makeup, and operations finely tuned.

• Finally, shareholders have been asking for a greater voice in director nominations and elections, forcing boards to prove that they are indeed doing a good job in nominating directors—one of the key functions of governance committees.

A Distinguished Commission

Understanding the importance of the governance committee, NACD published a handbook on this subject shortly after the passage of Sarbanes-Oxley. Today, with so many pressures facing the committee, NACD decided to convene a Blue Ribbon Commission (BRC) to maximize the potential of this important committee. This report, like others in the ongoing BRC series, provides up-to-date guidance on best practices in the current environment, and takes stances in some controversial areas.

For this purpose, NACD recruited a group of individuals well qualified to serve on this BRC. Diverse experience yields the deepest wisdom, so we sought individuals who have served on or advised corporate governance committees in a variety of companies and sectors.

Earning the Right to Serve

The era of entitlement is long past. Directors collectively and individually must earn the right to serve. The governance committee, by helping the board deliver maximum value to the corporation, helps directors earn that right.

We hope that you will find this report useful as you structure and improve governance committees and boards that will be valued by all stakeholders, and especially stockholders. As such, we trust that through you, the reader, this report will make a significant contribution to the “crossroads of change,” where governance progress makes its home.

John A. Krol, Chair

NACD Blue Ribbon Commission on the Governance Committee