None of the Delaware General Corporation Law (DGCL), the Model Business Corporation Act, and the NYSE and NASDAQ listing standards requires a board of directors to create an “executive committee.” Only a small minority of major corporations currently appear to have such a committee.
In fact, executive committees are barely referred to in the policy statements of major institutional investors and proxy advisors, and are not discussed at length in reported state or federal decisions—although it does seem that minutes of executive committee meetings are just as available for production to shareholders as are minutes of board meetings. See Cain v. Merck & Co., Inc., 415 N.J. Super. 319, 323 (App. Div. 2010) (holding that under the relevant New Jersey statute, “the qualified right of inspection. . . extends to the minutes of the board of directors and the executive committee”); Monaco v. Bear Stearns Residential Mortgage Corp., 2011 WL 13124505 (C.D. Cal.), at *6 (not distinguishing between board minutes and executive committee minutes, in this context).
Yet an executive committee typically and traditionally is authorized to exercise the full power of the board between regular board meetings, to the extent that any committee can legally do so. (Under DGCL Sections 141(c)(1)—or 141(c)(2), for companies incorporated after July 1, 1996, or that were incorporated before that date but have chosen to be governed by that provision instead—subject to some exceptions, committees generally cannot unilaterally approve, adopt, or recommend to shareholders any action or matter required by that statute to be submitted to shareholders for approval; nor can they amend the corporation’s bylaws.)
Perhaps one reason for the relative and recent scarcity of executive committees is that—beyond the ability of directors to take action without a meeting under DGCL Section 141(f)(1), by unanimous consent “in writing, or [since 2000] by electronic transmission”—directors who are now very familiar with Zoom (and equivalent teleconferencing technologies) may consider it less of a burden than ever to participate in regular or special meetings of the full board.
In that sense, the typical reference in executive committee charters to the committee’s having been formed to take actions “when the board is not in session” may now be outmoded. (In an early joke, stand-up comedian Steven Wright mentioned complaining to the worker he found locking the front door of a grocery store: “The sign says you’re open ‘twenty-four hours.’ He said, ‘Yes, but not in a row.’”)
But a board that currently has, or is contemplating the creation of, an executive committee might not only carefully clarify (as with executive sessions and executive chairs) the term’s sometimes-ambiguous connotations, but also consider the following issues:
First, which directors should be on the committee ex officio (i.e., by virtue of their other positions in the corporation)— the CEO (if also a director), the board chair, the lead independent director (if any), and/or the chairs of specific committees (such as the audit, nominating/governance, compensation, and risk committees)? Cf. Memphis Health Center, Inc. v. Grant, 2006 WL 2088407 (Tenn. Ct. App.), at *9 (noting that “the Bylaws provide that the Chief Executive officer, as an ex-officio member of the Board, is considered ‘an ex-officio member of all committees except the Executive Committee.’” [emphasis added])
Second, does the board chair, if she is also a member of the executive committee, automatically become the chair of that committee? If not, how is the executive committee’s chair chosen (or changed), and by whom?
Third, does an executive committee, by its nature, have any “regular,” as opposed to “special,” meetings? Which directors and/or officers can call an executive committee meeting, of either type?
Fourth, how would (and should) the executive committee’s composition and role be affected by the activation of a corporation’s emergency bylaw provisions, if the company has them?
Fifth, should a company’s bylaws and/or its executive committee’s charter specifically prohibit that committee from taking certain types of actions, in routine and/or emergency situations, that would otherwise be permitted to it under the state of incorporation’s corporate statute?
Sixth, should a company’s bylaws require that a certain number and/or proportion of the members of the committee be independent directors? That the presence of a certain number and/or proportion of independent directors is required to constitute a quorum?
Seventh, should the committee’s voting protocols depart from the default “one-director, one vote” and “majority rules” practices, which could concentrate committee (and thus, board) power in the hands of a very small number of directors? Should an executive committee charter adopt variable voting and/or supermajority (or even unanimity) rules for some or all of its decisions?
Eighth, can the executive committee create a subcommittee of itself? Can the executive committee, as the full board generally can under DGCL Section 141(c), create new board committees and/or subcommittees of those new, or of previously existing, committees?
Ninth, is it a recommended practice for the executive committee, rather than the full board, to determine, on the basis of a Special Committee’s investigation and report, not to pursue a shareholder’s allegations of wrongdoing by agents of the corporation? Scattered Corp. v. Chicago Stock Exchange, Inc., 701 A.2d 70 (Del. 1997), at 72 n.1 (setting out facts) and 75 (finding the arrangement appropriate).
Tenth, is it a recommended practice for the executive committee itself to create such a Special Committee? See id. at 76 (upholding, and quoting, the Court of Chancery’s conclusion that for purposes of a motion to dismiss, “the only legal issue was whether the complaint alleged particularized facts creating a reason to doubt that the investigation of the demand was reasonable and conducted in good faith,” and that whether the Special Committee had been created by the executive committee or by the full board (as turned out to be the case) “has no logical or legal bearing on that issue”).
Eleventh, would it ever be appropriate for the executive committee (as permitted by DCGL Section 141(c)) to consist of only one director? For a subcommittee of the executive committee to consist of only one director?
Twelfth, is it a recommended practice for the executive committee, rather than the full board, to hire, or to fire, the CEO/President? See, e.g., InterFirst Bank Dallas, N.A. v. FDIC, 808 F.2d 1105, 1106 (5th Cir. 1987) (“After several meetings, the Executive Committee of First National offered, and Mr. Wageman accepted, employment as the bank’s new president and chief executive officer”); In re Capitol Spouts, Inc. (Capitol Vial, Inc.), 640 N.Y.S.2d 688, 688 (App. Div. 1996) (noting that the individual serving as “the president and chief executive officer of both companies. . . was removed from his executive position [at one of them] by [the other’s] executive committee.”)
Thirteenth, is it a recommended practice for the “executive committee” itself to supplant the CEO? See Crossborder Resources, Inc. v. Keybanc Capital Markets, Inc., 2014 WL 12531161 (N.D. Tex.), at *3 (observing that Crossborder’s “Chief Executive Officer position was put under the control of an executive committee chaired by . . . the Chairman, President, and CEO of” a company with a “significant ownership” interest in Crossborder.); Kuo v. Sun, 2009 WL 162730 (Cal. App.), at *2 (indicating that a “three-member executive committee of the board. . . took over the day-to-day operations of [a company] and performed the duties of a CEO” during a “long transitional period”); Shaw and Associates, Inc. v. American Contractors Indemnity Co., 2006 WL 8444536 (D.N.M.), at *4 (noting that a company “created a three-person Executive Committee. . . to act as CEO”); Travis v. Kurron Shares of America, Inc., 272 F.Supp.2d 816, 818 (D. Minn. 2003) (indicating that a company “created an Executive Committee that possessed the powers of a CEO”).
Fourteenth, can any other committee create its own executive subcommittee, to exercise the power of that committee between that committee’s regular and special meetings?
Fifteenth, by what procedures and on what timetable should an executive committee report its actions to the full board and/or to other committees?
Sixteenth, should the full board be required to formally and affirmatively ratify any, any specific types, or all of the decisions of the executive committee? Or, can at least some of the committee’s decisions be deemed to have been ratified tacitly by the board, if no objection has been raised by any board member (or, by a majority of the directors?) within a specific time?
[Portions of this post were adapted from Section 3.08B of my book on corporate governance.]