United States: Carefully Review Creation And Composition Of Your Executive Committee

Nonprofit organizations often have sizable boards of trustees, reflecting their wish to have significant contacts in the community and in the corporate world, as well as to have available a breadth of experience. Most nonprofit boards also have an Executive Committee, consisting of a smaller number of trustees who act on behalf of the full board. However, as often as not, the Executive Committee may have been informally established over time without necessarily following the formalities required under state corporate law or the organization's governing documents.

For many reasons, it is important to ensure that an Executive Committee has been properly established pursuant to the requirements of applicable state corporate law and the organization's charter and bylaws.

First, the general purpose of an Executive Committee is to enable a smaller group of trustees legally to act on behalf of the full board between board meetings. This may be important when certain board approvals or other board action needs to be taken and the mechanics and timing of convening an in-person or telephonic formal board meeting are impractical.

For example, an organization proposes to obtain a new bank loan or other financing, which requires board approval of the particular loan transaction and financing documents, but the next scheduled board meeting is two months away. Management is often reluctant to assemble an in-person or telephonic board meeting, particularly when the trustees may have considered and broadly approved such financing at its last regular meeting. In this instance, assuming a duly constituted and authorized Executive Committee exists, the Executive Committee may be in the position to provide all required approvals of the final transaction and transaction documents.

In addition, chief executive officers often have ongoing matters they wish to review and discuss with a representative group of trustees, and at times to approve proposed actions that the chief executive officer wishes to take. Having a properly constituted Executive Committee not only provides an established audience and sounding board for the chief executive officer, but this group will also be viewed by the full board as the appropriate representative group to consider and act on matters with the chief executive officer. Where a less formal group of trustees is consulted, issues often arise (i) as to who is and who is not included in that group and (ii) regarding the perceived authority of an informally selected group of trustees.

1. Membership of the Executive Committee.

In order to ensure that the Executive Committee is properly constituted and authorized, the membership of the Executive Committee needs to be set, either by a resolution of the board or by an appropriate provision of the organization's bylaws. Membership on the Executive Committee may be by "title" (such as a committee consisting of the organization's chairman, vice chairman and chairs of each of the principal named committees of the board) or by a board resolution naming the particular members of the committee. Where specific trustees are named by a board resolution, care must be taken to ensure that the membership of the committee at any time is consistent with the most recent board resolution. Caution should be exercised; often what a board and management believe is the current makeup of an Executive Committee may not in fact be consistent with the most recent board resolution.

Authority of the Executive Committee.

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The authority of an Executive Committee likewise needs to be established by the organization's bylaws or by board resolution -- which generally would mean having the equivalent authority of the board to act on matters between board meetings. However, the authority of an Executive Committee to act on behalf of the full board has limits, generally set by state statute. For example, under the nonprofit statutes of many states, an Executive Committee may not enact, modify or repeal any bylaw of the organization. Likewise, Executive Committees often do not have statutory authority to elect or appoint any new trustee, or to remove any trustee or any officer of the organization. Removal of an officer is often a highly sensitive action and is not broadly communicated for obvious reasons. Accordingly, obtaining the appropriate approvals for the removal of an officer should be carefully considered and effected.

Non-Trustees on the Executive Committee.

The applicable state statute and the organization's governing documents should also be reviewed to determine whether non-trustees may be members of the Executive Committee. If, for example, the chief executive officer or executive director of the organization -- who often is not a board member -- is designated as a member of the Executive Committee, the applicable state statute and the organization's bylaws should be reviewed to determine whether a non-trustee is permitted to be a member of the committee. If an Executive Committee is not properly constituted, that may impair actions or approvals of the Executive Committee.

Although the existence of an Executive Committee may be beneficial for a nonprofit organization, it is important to carefully review the creation and composition of the committee to ensure that it is properly constituted under applicable law and the organization's governing documents. Deficiencies should be corrected so that inopportune challenges or questions as to the authority or makeup of the Executive Committee are avoided.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.