Understanding Executive Committees in Delaware Corporations
A Delaware corporation is ultimately controlled by its board of directors. However, the board of directors can delegate power and decision-making authority to an executive committee comprised of a sub-set of its members, often directors that are officers of the company involved in its day-to-day management and a minority of independent directors. Executive committees are formed to make decisions quickly and efficiently regarding pressing corporate matters between full board meetings, which generally are only held quarterly (or in some cases annually), subject to the limits of the authority delegated. For nimble action, both private and public companies use executive committees. Boards must understand and carefully articulate the power given to an executive committee – subject to limitations under Delaware law – and ensure the committee is properly created. This article addresses the creation, use, and documentation of such executive committees.
Powers and Creation of Delaware Corporate Committees
The original 1899 Delaware legislative act that evolved into the modern Delaware General Corporation Law (“DGCL”) provided for the use of executive committees.[1] That act provided: “The Board of Directors may, by resolution passed by a majority of the whole, board, designate two or more of their number to constitute an executive committee, who, to the extent provided in said resolution or in the by-laws of said company, shall have and exercise the powers of the Board of Directors in the management of the business and affairs of the company[.]”[2] Thus, the executive committee is a well-established option for Delaware corporate boards.
An executive committee generally has the broadest powers among commonly-used board committees. Public companies are required to have a nominating, audit, and compensation committee to address specific functions, but none of these have the same breadth of authority as the executive committee. Private companies also use committees at times for similar purposes and issues. The utility of an executive committee comes from its flexible authority, but the board must understand the powers it is delegating and how to properly create and monitor such authority.
The modern DGCL does not specifically reference executive committees, but provides more broadly for a corporate board’s creation of, and delegation of authority to, committees determined by the board.[3] A committee may consist of one or more board members, as established by the board. Thus, boards should understand the modern Delaware law framework governing committees in general. The DGCL states that a properly formed committee may “exercise all the powers and authority of the [board] in the management of the business and affairs of the corporation” subject to certain limitations set forth. The DGCL provides that a committee cannot:
• Amend the certificate of incorporation (which requires a vote of the full board),
• Approve a merger or full asset sale,
• Recommend dissolution of the corporation,
• Amend the bylaws of the corporation, or
• Unless expressly provided in the resolution establishing the committee, the bylaws, or the corporation’s certificate of incorporation, declare a dividend or authorize issuance of stock.
Establishing a Committee of the Board
Committees can be established in the corporation’s certificate of incorporation or its bylaws (at formation or by an amendment), or may be created “by resolution [of the board] passed by a majority of the whole board[.]” This includes an executive committee, among others. Notably, the board vote to create a committee is not a majority of a quorum of the board – as with standard corporate actions. Instead, the DGCL specifically states that the resolution authorizing a committee must be passed by “a majority of the whole board.”[4] Therefore, if a board, for example, is comprised of seven members, four must vote for the creation of a committee, whereas ordinarily a majority of a quorum (usually 4 or 5 directors in the case of a seven-member board) could otherwise authorize corporate action.
Further, a board should create a committee prior to a conflict or board dispute, referred to as creating it on a “clear day.” For example, a board should not create an executive committee with the purpose of freezing out one or more directors from decision making on a specific vote or issue, or to freeze out the director from voting generally amidst a conflict. Creating a committee for such a purpose could be deemed bad faith and a violation of the board’s fiduciary duties to the corporation, as Delaware caselaw illustrates.
A committee, including an executive committee, should be governed by a charter adopted by the board that provides for its rules and the manner of its operations.
Use of and Terms Governing Executive Committees
Language Delegating Powers to an Executive Committee
The language establishing the executive committee, whether in the certificate of incorporation, bylaws, or a resolution, should clearly define the scope of the delegated powers and authority, and any limitations on the executive committee. The establishing language should ensure in a broad delegation of authority that it appropriately limits the committee as required by the DGCL, as set forth above. The board should carefully consider the language of such delegation and, frequently, would be prudent in seeking legal counsel. Creation of an executive committee is an act subject to the fiduciary duty of care and often creates a powerful subset of directors, and the directors should ensure they are properly informed and have given careful consideration to the delegation of authority. Ultimately, of course, the board remains responsible for oversight of the corporation and the actions of the executive committee, as Delaware law provides that the board cannot abdicate its responsibilities.
Board Formalities
An executive committee should follow certain formalities of boards generally. For example, an executive committee should provide prescribed notice of meetings to members (generally an abbreviated process given the committee’s purpose) and maintain board minutes and board records.
Composition of the Executive Committee
Executive committee members must be members of the corporation’s board of directors. The flexibility of an executive committee comes from its inclusion of officers (who are also directors) who are involved in day-to-day management. Often, an executive committee will include three members – two officer/directors and one independent director. The inclusion of an independent director is an important check on overreach and actions by the committee.
Reporting and Accountability to the Board
An executive committee should be required to report to the full board after taking action in order to keep the board apprised of its actions. This can be through transmission of board minutes or resolutions adopted by the executive committee after taking action. The broader board has the ability to overrule executive committee action.
Examples of Committee Charters
The following are publicly available charters of executive committees of public corporations which can provide insight into the form and structure of committees.
- CVS -- https://investors.cvshealth.com/investors/corporate-governance/committee-composition/Executive-Committee/default.aspx
- Amgen -- https://www.amgen.com/about/how-we-operate/corporate-governance/executive-committee-charter
- Par Pacific -- https://www.parpacific.com/executive-committee-charter
- Western Digital -- https://documents.westerndigital.com/content/dam/doc-library/en_us/assets/public/western-digital/collateral/company/western-digital-executive-committee-charter.pdf
- Brown-Forman Corporation -- https://www.brown-forman.com/sites/default/files/team_resources/2024-10/Executive_Committee_Charter_5-2019-03-28.pdf
[1] An Act Providing a General Corporation Law, Chapter 273, Volume 21, Laws of Delaware (1899) (the “Delaware 1899 Act”), available at https://legis.delaware.gov/SessionLaws/Chapter?id=40673.
[2] Delaware 1899 Act, Section 9.
[3] See DGCL §141(c)(1).
[4] Id.
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