It is very common for an executive committee to be authorized to take action on behalf of the board on all matters in between regular board meeting. Delegating the full power of the board to an executive committee may be very useful, particularly when the board is composed of a large number of directors who don’t or are otherwise unable to meet regularly as a board. But without appropriate limitations to the executive committee’s authority, the board is at best disempowering the directors who are not on the executive committee (the “Other Directors”) and at worst encouraging the Other Directors to abdicate their governance responsibilities.
The directors on an executive committee that has been delegated with too much authority (the “EC Directors”) may look at themselves as the ultimate decision-makers and the Other Directors as merely advisory. This structure may result in an executive committee that makes major decisions without any action or oversight by the board. In many cases, the executive committee may act without even informing the Other Directors.
While the board is certainly permitted to delegate the authority of the board to a board committee (including a typical executive committee), subject to certain limitations, state law generally requires that the activities and affairs of the corporation be managed and all corporate powers be exercised under the ultimate direction of the board. Accordingly, a board should provide direction to its executive committee regarding major governance decisions delegated to the executive committee and oversee such decisions. If such decisions are inconsistent with the board’s directions, values, or goals, the board should take appropriate actions, which may include limiting the executive committee’s authority or even removing some of its members.
Disengaged board members
An executive committee with too much power can leave the Other Directors feeling disengaged and cause them to become complacent. The Other Directors may believe that there is little reason for them to keep informed or to regularly attend board meetings at which they expect to listen to progress reports and discuss matters that will have little impact on the organization. This situation will likely lead to high levels of board member dissatisfaction and hurt the board’s ability to recruit valuable board members.
Potential legal liability
All board members have a fiduciary duty to the organization. They must act with good faith in the best interests of the organization and exercise reasonable care in all decision-making. If the executive committee takes over the decision making role without adequate direction and oversight from the board and makes negligent decisions that harm the organization or a third party, it is possible for the Other Directors to also be liable for these decisions. This will be the result if it is determined that the Other Directors had abdicated their fiduciary positions by inappropriately delegating away their duties without due care and oversight and without being adequately informed.
Using an executive committee
Executive committees can continue to serve an important role for many boards, but in delegating any authority to an executive committee, all board members should be aware that the board cannot delegate its oversight obligations. For that reason, a board should appropriately limit the executive committee’s authority. Such limitations may be based in part on:
- applicable laws that limit a committee’s authority;
- the board chair’s discretion of whether a matter requires a board action;
- the ability to convene a board meeting or obtain a majority or unanimous written consent of the directors (depending on applicable state law); and/or
- the dollar value or type of obligation involved in an agreement.
Other factors for the board to consider:
- the executive committee’s composition and collective knowledge, skills, experiences, and perspectives; and
- the ability of the board to reverse the executive committee’s action.
Additionally, the board must stay informed about its executive committee’s actions and assess whether they should be ratified or possibly mitigated or reversed (if possible). Executive committee meeting minutes and reports should be distributed to all board members in a timely manner and reviewed and discussed at the immediately following board meeting. These steps will help all board members meet their duty of care and keep the organization’s governance on track.
Role of the Executive Committee (Creating the Future)
Executive Committees: The Good, The Bad and The Ugly (Charity Lawyer Blog)
Revisiting the Role of the Executive Committee (McDermott Will & Emery)
– Gene Takagi & Michelle Baker
Michelle Baker is a San Francisco-based attorney interested in social impact.