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Committee Charters: Your Most Important Governing Documents The most important, and often most ignored, governing document of any organization with a governing board are the committee charters. The charter of any committee should be discussed, if not negotiated, between the directors who are on the committee and the remaining directors who will rely on the committee. A charter not only protects non-committee members from liability, but also imposes that liability on the committee members. One of the most important protections of directors from liability is the state-law right of reliance of directors upon committees of directors of which they are not members. However, a director may rely upon a committee only for matters within the committee’s designated authority for which the director reasonably believes merits confidence. However, the committee to which such authority is delegated has a legal duty of care to carry out that authority as an ordinarily prudent person in a like position would do under similar circumstances and a legal duty of loyalty to do so only in, or not opposed to, the best interest of the organization. Accordingly, committee charters should be in writing. More importantly, these charters should be periodically reviewed and discussed by directors. Therefore, care should be taken in reviewing, discussing and drafting any committee charter to balance both (i) the interest of non-committee members to be protected from liability for the matters delegated and (ii) the competing interest of committee members not to be imposed with unreasonable liability. Someone familiar with the legal rights and obligations of directors should lead the review and discussion of charters. This is often a regular function of a governance committee (a governance committee is often part of another committee such as the nominating committee or corporate compliance committee). Legal nature Each committee charter should establish the committee’s legal nature or type, which is often in a purpose clause. Committees may be executive, oversight, recommendation, or advisory:
If the committee is properly composed, the right of reliance entitles non-committee directors to rely upon an executive, oversight or recommendation committee, but not an advisory committee because advisory committees are not statutory. Composition Under most states’ laws, directors are entitled to rely upon committees only if the committee is composed of directors. This does not mean that there cannot be non-voting members of committees, such as non-director officers, but only those members who are directors may have the right to vote. Voting members, accordingly, must have all rights to receive notice, attend, present and consider matters, vote and otherwise participate in any proceedings of the committee. Non-voting members can be entitled to be present in person, to present matters for consideration and to take part in consideration of any business by the committee at any meeting of the committee, but non-voting member members cannot be counted for purposes of a quorum nor for purposes of voting or otherwise in any way for purposes of authorizing any act or other transaction of business by such committee. Proceedings Although not legally required, it is recommended that each committee’s charter contain provisions as to how it conducts its proceedings, such as: Who can call meetings, the notice requirements for meeting, how meetings can be held (including written consents in lieu of meetings), etc. Responsibilities The most important provisions of a committee’s charter are the committee’s responsibilities. These should be written in terms of what is expected of the committee keeping in mind the balance of both (i) the interest of non-committee members to be protected from liability for the matters delegated and (ii) the competing interest of committee members not to be imposed with unreasonable liability. Example responsibilities of an executive committee are “to transact all of the business of the organization and shall have and exercise the authority of the board in the management of the organization during the interim between meetings of the board, subject to any restrictions established by the board.” Example responsibilities of a “carry-out” oversight committee, such as an audit committee, are “to carry out the board’s oversight responsibilities for the integrity of the organization’s financial statements and reports, including to (i) retain and terminate the organization’s public accounting firm responsible for auditing and providing an audit report on the organization’s financial statements; (ii) to approve the scope of all auditing services and the compensation and other terms of engagement of the External Auditor. . .” Example responsibilities of a recommendation committee, such as a finance committee are to “periodically before each fiscal year or other appropriate period review, made changes in, proposed operating and capital budgets of the organization and recommend to the board adoption of those budgets for such period . . .” Independent Advisers As a result of the Sarbanes-Oxley Act, one of the most important authorities of any oversight committee is the right to retain, at the organization’s expense, such independent counsel or other advisors as it deems appropriate. This is particularly important for “carry-out” oversight committees. Typically, this may not be an express authority of an executive or recommendation committee and is infrequently an express authority of an advisory committee. Self Evaluations Self evaluations by the committee of its proceedings as well as the skills and experience of its members are important to the governance of not only the committee, but also the board and the organization itself. Typically, committees are now required to conduct a periodic evaluation of the provisions of its charter, its performance under those provisions and each committee member’s contribution to that committee’s performance. Amendment Finally, each committee charter is a governing document of the board as a whole, and it may not be amended except by the board. Accordingly, any considerations of the board in its self evaluation become recommendations to the board. The board may defer such recommendations for consideration of a governance committee. Conclusion Individual directors should review the charters of committees of which they are members as well as those of which they are not with the following questions in mind:
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