The following guest post takes a look at the role of the Executive Committee of a corporate Board of Directors. This article was written by H. Stephen Grace, President of H.S. Grace & Company, Inc.; Susan Koski-Grafer, Member of the Board of Advisors of Grace & Co.; and S. Lawrence Prendergast, Member of the Board of Advisors of Grace & Co. This article draws on the article authored by these authors in the July 2020 edition of ABA Business Law Today titled Why a Company Should Consider Using an Executive Committee of Its Board of Directors. I would like to thank the authors for allowing me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is the authors’ article.
Today a company’s senior management and board of directors, including its general counsel and the CFO, are in the crosshairs more than ever. 2020 has proven to be a year of exploding pandemic issues, economic problems, and social unrest. Fast-moving business developments and problems are occurring in every sector.
As a company’s management grapples with these challenges, its board of directors is similarly faced with the challenge of keeping up with responsibilities for oversight and governance. The creation and use of an “executive committee” as a subset of the full board of directors is one approach that can aid both management and the board in carrying out responsibilities for corporate governance. Effective corporate governance in an organization can help minimize operating and financial risk and favorably affect D&O liability.
What is a Board Executive Committee?
Boards of directors have a wide range of obligations to oversee and govern the organization. To assist in carrying out these obligations, public company boards typically have three standing committees that are mandated by regulators and listing exchanges, i.e., an audit committee, a nominating and governance committee, and a compensation committee. The responsibilities of the standing committees are defined in regulation and stock exchange listing requirements and are usually described and discussed in a company’s public disclosures.
Companies of all types may have other working subgroups of the board to specialize in areas such as risk, technology, safety and security, environmental and social issues, and other matters. Some companies have also created an “executive committee” to specialize in matters that may require monitoring and attention between regularly scheduled board meetings.
Three Reasons to Consider the Use of an Executive Committee
- Boards of directors typically meet a small number of times a year at regularly scheduled intervals, while business challenges and developments occur continuously. A board executive committee is a flexible resource that can monitor a wide range of developments on a continuous basis and react quickly. Operating without the necessity for scheduling and travel, and by making use of technology, such a subgroup can stay abreast of internal and external developments and watch for matters that should be brought to the attention of the chief counsel and the full board.
- A board executive committee can serve as a sounding board for a company’s general counsel, CEO, or individual directors, enabling consultation and discussion to explore an issue or concern without making a presentation to the full board. Having a small knowledgeable group with whom “a conversation is not a board presentation” enables preliminary evaluation of a matter to take place in a less-formal manner, which can thereby provide expert and useful advice to a CEO, general counsel, board chair or other directors. It also facilitates definition and preparation of matters that do go forward to the full board. A “monitor, discuss, and advise” function within the board of directors can assist the full board and senior management in carrying out effective oversight and governance.
- The effectiveness of the overall corporate governance structure and process in a company – the system of “governing the corporation” – is heavily dependent on creating the right checks and balances and information flows. A board executive committee can define and dictate a flexible information flow that uniquely supports its mission, and it can vary this information flow whenever needed. Working with a company’s CEO, CFO, Chief Counsel and other senior officials and staff organizations, it can be efficient and economical in getting the right information at the right time, without burdensome or excessive regular reports.
The use of an executive committee of the board of directors may be beneficial in any company dealing with complex business challenges, and can be especially helpful in turbulent times.
Some Caveats for Creating and Using an Executive Committee
It is important to distinguish between “monitor, discuss, and advise” versus “make decisions.” In creating an executive committee, a company must not create an undesirable “two-tier” power dynamic inside the board, whereby the executive committee takes on decision-making authority that under the bylaws properly belongs with the full board. To minimize this risk, the committee should have a well-defined charter with clearly described delegations, along with its own internal set of checks and balances.
An executive committee’s processes for information gathering should be relevant, timely, and efficient, as well as cognizant of the need to avoid placing unnecessary burdens on management. The committee’s reporting to the full board should similarly be efficient, using written summaries to advantage to avoid taking up time on routine matters in periodic board meetings.
An executive committee should be small, generally not more than three to five people, including the CEO. It should include independent directors who have relevant experience and business knowledge, as well as a mix of desirable personal and professional attributes.
An executive committee’s attention to information flows and timely discussion of developments can contribute to effective corporate governance by strengthening the checks and balances in an organization. Due to an interplay that exists between governance issues and litigation, effective governance can help to lower the risk of adverse legal outcomes, as well as minimize financial and operating risk and favorably affect D&O liability.
For additional information on corporate governance, information flows, impact on financial and operating risk and D&O liability, the following related articles are available in the links below.
The Interplay between Corporate Governance Issues and Litigation
Board Oversight and Governance: From Tone at the Top to Substantive Checks and Balances
Corporate Governance and Information Gaps: Importance of Internal Reporting for Board Oversight
Why a Company Should Consider Using an Executive Committee of Its Board of Directors
This article was authored by H. Stephen Grace, Jr, President of H.S. Grace & Company, Inc. (HSG) and members of the HSG team.