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The makeup of board committees are changing, and so are their responsibilities

May 20, 2022, 12:02 PM UTC

The traditional board committee model is changing.

“Committees have changed a lot over the years,” Bill McNabb, former CEO and chairman of Vanguard, said at a Tuesday panel hosted by EY’s Center for Board Matters. “I think we’re in the process…of seeing another major shift in the responsibilities within various committees.” 

Most boards, if not all, typically have a finance or audit committee, a compensation committee, and a nominating & governance committee. These three committees are mandated by the New York Stock Exchange and they’re the most common on S&P 500 boards. Today, companies are adding new committees and also reshaping the responsibilities of existing ones.

Not all committees are built the same. About one-third of board members in attendance at the EY panel rated their committee structure as “very effective.” Twelve percent said their committee structure was not effective and over half said it was “somewhat effective.”

S&P 500 boards have an average of 4.2 committees, a total which has not changed much over the last decade, according to a report by Spencer Stuart. While 28% of boards have three or fewer committees, 31% have five or more. The number of committees is positively correlated with the growth in size of boards. Data from The Conference Board, in partnership with ESGAUGE, found that the average board size among Russell 3000 companies grew from 9.2 to 9.8 within 2022.

Paul Washington, executive director of The Conference Board’s ESG center, says that when boards find good candidates, they don’t want to wait for an opening to add them, so “they need to increase their size, to increase the functional expertise, to increase the diversity of the board.” 

Not only are boards taking on more responsibilities than ever before, Washington adds, in some cases, they’re adding new committees. “And even if they’re not adding committees, each committee is taking on a greater workload.”

McNabb, who is conducting research on board innovation in partnership with the National Association of Corporate Directors, has a few suggestions for restructuring committees, which includes adding talent and execution of company goals to the compensation committee’s remit.

“As we talked to a lot of people who were serving on some of these committees,” McNabb explains, “the comp stuff was too formulaic and there was less in depth understanding of what was driving the results.”

Michele Hooper, a board director at UnitedHealth Group and United Airlines, has observed more nom-gov committees taking on ESG oversight, noting that she approves of this development because those committees are well-equipped to make changes to the company governance models to account for the new reporting and public standards around sustainability, community and environmental impact, and talent.

McNabb’s other suggestions include the formation of ad-hoc committees and a new strategy & risk committee.

Ad-hoc committees in particular can help boards address pressing matters faster, allowing them to explore an issue in depth, and preventing all directors from getting into the weeds on granular topics that are not as valuable a use of time for the broader board, McNabb says.

It also gives the full board more time to focus on big-picture issues such as talent, strategy, and risk at a high level.

“The best performing boards, at least that I’ve had experience with, have these just incredible dialogues around these topics,” McNabb says. “If the committees are doing the work well, then the boards can really be freed up for these higher level discussions.”

Aman Kidwai
aman.kidwai@fortune.com

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Justin Tang for Fortune

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