Committees can be valuable resources of any corporation, but care must be taken in creating and delegating authority to committees.
All states’ corporation laws allow a corporate board of directors to create committees and delegate to those committees any authority of the board under state corporation laws or the corporation’s governing documents (e.g., its articles or certificate of incorporation and any bylaws or regulations governing the board).
Composition of Committees
In some states, committees are required to be composed solely of directors. In other states, a committee may be composed of directors as well as non-directors, but the corporation laws or court decisions of those states generally require that the board must reasonably believe that any non-director is reliable and competent to participate in exercising the delegated authority of the committee.
Protection of Directors When Relying upon Committees
All states’ corporation laws protect directors when they rely upon committees of which they are not members but only for matters which fall within the committee’s designated authority and for which the directors believe the committee merits confidence. In some states, such as Ohio, if the committee is composed of non-directors, a director is protected in relying upon a committee only if the relying director reasonably believes the non-directors are reliable and competent to participate in exercising the delegated authority of the committee.
Because under most states’ corporation laws decisions of a board must be made by persons who have the duty of care, duty of loyalty and duty of confidentiality applicable to directors and executive officers, many corporations do not allow non-directors other than executive officers to be members of a committee upon which the board wants protection of the right of reliance. Some corporations desiring expertise on a committee not present among the corporation’s directors and executive officers may enter into an agreement with those outside members obligating them to exercise the same duties of care, loyalty and confidentiality as directors of the corporation. Other corporations, to avoid this requirement regarding duties, require that any decision made by a committee that includes non-directors must be approved by a majority of its members who are directors.
Types of Committees
Committees may have different authority, including the following:
Indemnification and D&O Insurance
Executive: Having all authority of the board for the responsibilities delegated to the committee, and
Executive committees direct or oversee the actions or authorizations they approve, reporting the results to the board. Examples are audit and executive compensation committees.
- Any action or authorization by the committee with executive authority shall be effective for all purposes as the act or authorization of the board,
- Unless the board otherwise determines or directs by not less than majority vote of those directors having no financial or personal interest in such action or authorization.
Recommendation: Having authority to recommend actions to an executive committee or the board itself
Examples are investment, finance and succession planning committees.
- With the expectation being that the recommended action will be approved or authorized by the executive committee or board,
- Unless it is believed that the recommendation does not merit confidence or is not within the recommendation committee’s authority.
Advisory: Having only the right to give advice to an executive committee or the board itself which the executive committee or board has no obligation to adopt or carry out.
Oversight: Having authority to oversee matters critical to the health of the organization for its various stakeholders, such as
- Accuracy of its financial statement,
- Reasonableness of its compensation,
- Appropriateness of its actions taken for succession, and
- Management of risks to the enterprise, especially solvency.
Any corporation having a committee composed of outside members who are neither directors nor executive officers of the corporation should agree to indemnify those outside members at least to the same extent that directors and executive officers are indemnified and to add such outside members as additional insureds to any D&O insurance protecting directors and executive officers.
The most important matter in creating and delegating authority to a committee is the negotiation of the committee charter. This should be a negotiation between those directors who are not members of the committee but want the protection of being able to rely upon the committee, and those directors and others who will be members of the committee, but cannot rely upon it because of being committee members. The composition, the right of reliance, the authority, the type of committee, and indemnification and D&O coverage should all be negotiated between the relying directors and the committee members.
If care is taken as described in this posting in creating and delegating authority to committees, committees can be valuable resources of any corporation.