Is Your Board a Good Candidate for a Finance Committee?

Board Finance Committee

Over the past few years, we’ve seen more boards extending beyond the standard three board committees (i.e., Audit, Compensation, Nominating & Governance) to build a unique governance and oversight structure that’s tailored to their needs. In a recent C-Suite Magazine article, TK Kerstetter and Equilar revealed that there were 800+ uniquely named board committees across the Russell 3000 with names and functions ranging from “Digital Transformation” to “Airline Safety” to “Environmental, Safety & Sustainability”.

While a Finance Committee is certainly one of the more common non-traditional committees, it should not be established without proper board consideration or purpose. In a recent episode of Inside America’s Boardrooms, we sat down with Cynthia Hostetler, Finance Committee Chair for the board of Vulcan Materials Co., to understand the inner workings of a Finance Committee and why a particular board might be a “good candidate” for creating one.

“Board governance and board committee governance is not a one-size-fits-all…” emphasized Hostetler. “[Yet], we find that for companies with a Finance Committee, there are some [like] characteristics.”

Qualifying Characteristics

According to a research study cited by Robert Pozen of MIT’s Sloan School of Management, about 30% of S&P 500 companies have a Finance Committee. When you look at the top 6,000 U.S. companies, said Hostetler in her episode, roughly 12% have a committee with a financial function. What are some qualifying characteristics for your board to consider?

The company is large-cap and/or public. Boards with a Finance Committee tend to be public companies with large market capitalizations.

The company oversees a complex balance sheet. Companies with a Finance Committee often have multiple or intricate financings and are usually highly levered.

The Audit Committee is overburdened. As Audit Committee duties continue to grow in number and complexity, it may be advantageous–or even necessary–to parse out certain areas of oversight so nothing falls through the cracks. “Some [boards] will strip out the finance duties [that] are more forward-looking and form a Finance Committee [for] strategy, forecasts, and acquisitions,” explains Hostetler.

Types of Oversight

What types of oversight does a Finance Committee perform? If your board is in the consideration phase, it’s important to understand the specific/potential functions that could fall under the committee’s purview. For the board of Vulcan Materials Co., Hostetler describes three classifications of oversight: (1) Previewing board materials, (2) Reviewing and making recommendations, and (3) Independent oversight.

1. Previewing board matters before they reach the full board. Several duties fall under this category, which includes (a) previewing financial results (e.g., Why might we be exceeding our goals or expectations? What is dragging us down?), (b) previewing one- to five-year forecasts (e.g., What kind of capital expenditure will be needed to promote growth?), and (c) monitoring equity ownership (e.g., Who’s buying and selling our stock? Any investor or activist communications in the last three months?). At this level, the Finance Committee provides valuable background for full-board assessment.

2. Reviewing items in depth and making recommendations to the full board. For oversight areas such as financial planning or capital expenditure budgeting, a Finance Committee will often conduct a deep dive, then present its recommendations to the board for final approval.

“Another important issue [at this level] would be the appropriate capital structure,” explains Hostetler. “What does your debt portfolio look like? How much fixed debt do you have vs. floating? What [are the] appropriate targets for debt and equity? What [are the] appropriate ratios for debt to EBITDA?”

3. Overseeing matters independently. The Finance Committee for Vulcan Materials Co. deals with certain items that don’t require full-board approval. Retirement plans, for example, will often stay at the committee level, with the Finance Committee overseeing retirement plan funding, vendors, and impact on the balance sheet.

Finance Committee Skill Sets

While the CFO or other senior finance officers may play an integral part in committee proceedings, Hostetler explains that the Finance Committee is usually comprised of independent directors.

“We think it’s better to have a mix of backgrounds on the Finance Committee,” explained Hostetler, as she outlined several valuable roles and desirable skill sets:

  • A sitting CFO of a similar-sized company or related industry
  • A senior commercial banker for his/her knowledge of the private debt markets
  • An investment banker or research analyst for his/her knowledge of the public markets
  • A senior leader in asset management for his/her knowledge of mutual funds and institutional investors

While Hostetler’s overview provides a good template for boards, it’s important to keep in mind that Finance Committee structure and composition will likely vary by company. As business today grows increasingly complex, many companies are finding Finance Committees to be a valuable tool for “deep dives” and “closer looks” on issues of financial strategy. For more information, don’t miss Hostetler’s full episode, and be sure to check out other resources on our Board Governance resource page.

2018 Predictions: What’s Ahead for Boards This Year?

Board governance predictions for 2018

2018 may be the “Year of the Dog”, but it also promises to be a year of shareholder empowerment, digital transformation, and board composition. Paula Loop and TK Kerstetter outline key governance predictions and priorities for the coming year.

5-Minute Read