Printer Friendly

Executive committees: the stealth board body; They typically operate without the laser focus given to the audit, compensation, or governance committees. And their place in the governance structure varies widely.

UNDER THE GUIDELINES established by the listing exchanges (NYSE, Nasdaq) and those mandated by the Sarbanes-Oxley Act (SOX), standing committees of boards of directors must meet certain requirements. The audit, compensation, governance, and nominating committees, for example, must be totally composed of (and chaired by) independent directors. Such committees also should have written charters in which their mission/purpose, authority, and roles and responsibilities are set forth.

Yet there are other board committees that are not required to adhere to these guidelines, including executive, finance, investment, environmental and public policy, planning, M & A, and technology committees. It should be noted that few companies have any of these committees, and rarely would they have more than one. The clear exception among these is the executive committee. In fact, 46% of the Fortune 500 have executive committees. Notably, less than half of these (42%) provide a written charter.

Moreover, we are not familiar with any general source that one could consult for guidance on the establishment of a best-in-class executive committee--its membership, efficacy, authority, and roles and responsibilities. There are a host of issues for which there is absolutely no consensus that might be constructively considered in evaluating such committees.

Mission and purpose

The mission of executive committees is essentially standard. Altria's language provides a typical example: "The Executive Committee has authority to act for the Board during intervals between board meetings to the extent permitted by law." While other statements are more extensive, they capture the same elements. Consider Dow Chemical's: "During the intervals between the meetings of the Board of Directors, the Executive Committee ... shall possess and may exercise all of the powers of the Board of Directors in the management and direction of the business and affairs of the Company to the fullest extent allowed by the General Corporation Law of Delaware and other applicable regulations and statutes." Other than in the Mission/Purpose sections of executive committee charters, there are few common themes.

Membership and composition

Based on our review, membership and composition standards for executive committees are anything but standard. We found one company (Lehman Brothers) with only two executive committee members. In several other companies (e.g., Lockheed Martin, Valero, Wal-Mart), the executive committees could have, pursuant to their charter rules, consisted of two members, although there were more. Setting aside Lehman Brothers, the minimum number of executive committee members we observed was three, with the distinct majority (96%) of executive committees comprising between three and seven members. The composition of that membership, however, takes many forms.

In some cases (e.g., Altria, Bell South, Coca-Cola, Georgia-Pacific, Johnson Controls, Rite Aid, St. Paul Travelers, TJX, United Air Lines, WellPoint, Weyerhaeuser), the executive committee is appointed by the full board and serves at its pleasure. Other companies are more directive and note, for example, that the CEO and chairperson of the board must be a member of the executive committee. Usually in such cases, this person will chair the executive committee as well (e.g., Abbott Laboratories, Aetna, Archer Daniels Midland, ExxonMobil, Raytheon, Sprint Nextel, Target, UnitedHealth).

Interestingly, in a few cases the CEO is not a member of the executive committee (e.g., Delphi, WellPoint). At Delphi, Intel, and Tyson Foods, for instance, the lead independent director serves as the executive committee's chairperson. Another approach, irrespective of the executive committee's choice as chairperson, is that the remaining members of the executive committee be the chairpersons of the standing committees (e.g., Albertson's, ConocoPhillips, Delphi, Eastman Kodak, International Paper, SBC). Target has an unusual model in which the board chairperson is the executive committee chair and the remaining executive committee members include all of the independent directors.

As noted, while executive committees need not comply with the board independence guidelines set forth by SOX or the listing exchanges, many companies have established such guidelines for their executive committees. Valero (as well as Abbott Laboratories, Anheuser-Busch, Dana, Sunoco, and TJX) states that a majority of the executive committee members "shall meet the independence requirements of the NYSE and any other standards prescribed by applicable law." Georgia-Pacific and Comcast provide that their executive committees will be composed solely of nonmanagement members of the board, each of whom must be an independent director.

Most executive committee charters are silent on the issue of independence. We identified only one case (Aflac) in which there was an affirmative declination: "... it is the sense of the Board that a majority of the Executive Committee need not consist of independent directors."

Resources

Most executive committee charters are entirely silent on the matter of committee resources. Those charters that do address resources use language similar to that used for standing committees (e.g., audit, compensation, governance, nominating). This includes sole authority to retain/terminate, as the executive committee deems necessary or appropriate, consultants or advisers to assist its duties.

In some companies, the executive committee enjoys total discretion in the matter of funding. Target is one example (Albertson's, P & G, and WellPoint are others): "The Corporation will provide appropriate funding, as determined by the Committee, to compensate such consultants or other advisors." Altria, too, is quite specific on this point: "... sole authority to approve fees and terms of any counsel or other experts and consultants that it retains" (emphasis is ours). Perhaps the most assertive example is WellPoint, which notes that its funding authority derives "... without seeking approval of the Board or management."

Authority

As noted in the "Mission/Purpose" section, the authority of executive committees is broad and comprehensive, including, variously stated, all of the powers of the board of directors. That inclusive mandate, however, is apparently too expansive for the comfort of at least some boards. Consider, for example, Sunoco, whose charter notes that "no action shall be taken by the Executive Committee if any member of such Committee has voted in opposition thereto." ExxonMobil provides another example: "Whenever at any meeting of the Executive Committee any member of the Committee expresses the judgment that any matter under consideration should be referred to the Board for consideration, it shall be so referred."

P & G provides yet another example of ceding power back to the board of directors: "The board may ... limit or qualify the powers of the committee at any time, and may rescind any action of the committee...." Moreover, P & G's executive committee, by majority vote, has the right to determine that any matters under consideration by the executive committee should be deferred for discussion by the entire board. (As our study was being conducted, P & G was in the process of disbanding its executive committee. As explained in its proxy statement for the October 2005 meeting of shareholders: "Modern communications technology, such as audio conferencing, permits meetings of the full Board to be held on relatively short notice. Elimination of the Executive Committee will ensure that matters requiring Board action or review will receive the attention of at least a majority of the Directors.")

At the other end of the "authority" continuum, the executive committee of Staples may authorize any acquisition of a business or businesses if the cost of the transaction is less that $50 million. Also, the Staples executive committee may authorize any single sale of assets as long as the value of these assets does not exceed $50 million. At the very end of the authority spectrum is American Express: "All acts done and powers conferred by the Executive Committee shall be deemed to be and may be certified as being done or conferred under authority of the Board of Directors." That is authority, writ large.

Other aspects of executive committee authority vary widely from firm to firm. While there are several examples from which we could choose, consider policies for dividends and stock. Valero's executive committee, for example, has broad authority: it can declare dividends and authorize the issuance of stock. Staples' executive committee, by contrast, is specifically not authorized to declare dividends or to issue stock. Intel's executive committee can issue shares of common stock; Anheuser Busch's cannot issue stock.

Dominion over boards' standing committees?

An element clearly related to the authority of executive committees is the extent to which they are able to act, or specifically restricted from acting, in roles normally assigned to boards' standing committees. While most companies with executive committees are silent on this matter, there are notable exceptions. Sprint Nextel, for example, provides that its executive committee will not exercise the powers reserved in the charter of another board committee. UAL, too, holds that its executive committee shall not have and may not exercise the powers that are granted to other committees of the board. ConocoPhillips is another example in which the executive committee has the power to exercise all power and authority of the board of directors excepting "those matters which are expressly delegated to another committee of the board."

By contrast, other executive committees seem to enjoy some authority over matters that are normally the province of standing committees. WellPoint's executive committee, for instance, has the responsibility for long-term succession plans for the CEO and executive officers of the company. Target's executive committee apparently has a direct role in executive compensation: It receives recommendations concerning compensation policies and programs from the compensation committee and then takes appropriate action.

Some boards have established guidelines for their executive committees' reporting requirements. For ExxonMobil (as well as Staples), the chairperson of the executive committee must report regularly to the full board on the committee's activities, findings, and recommendations. ConocoPhillips, too, has similar guidelines under which all actions of the executive committee must be reported at the next regularly scheduled meeting of the full board; moreover, minutes of executive committee meetings must be kept and distributed to all board members (a UAL requirement as well).

Quorums/subcommittees/board liability

One fascinating--perhaps sobering--finding concerns executive committees' reliance on quorums and subcommittees. Coca-Cola, St. Paul Travelers, and Sunoco, for example, provide that a majority of executive committee members constitutes a quorum. Consider that the great majority of executive committees (96%) consist of three to seven members. Notably, however, just over 35% of executive committees have three to five members. A quorum in these cases could be two or three individuals. It seems, given the typical charter of executive committees, that the full board would need a large measure of faith in those few members.

Coca-Cola advises that "the [executive] committee may form and delegate authority to subcommittees when appropriate." WellPoint, too, notes that its executive committee "may, in its discretion, delegate all or a portion of its duties and responsibilities to a subcommittee of the [Executive] Committee." Presumably, a subcommittee would comprise a subset of the executive committee's membership. If executive committees, as suggested in their charters, meet in intervals between board meetings because the full board cannot be reasonably assembled, what is the role of subcommittee? If there is time for the judicious work of a subcommittee, why would there not be time to include the full board?

This concern may raise a more generic question about the liability of the full board. As noted earlier, American Express would seem to be the only company that has directly addressed this issue in its charter statement that "All acts done and powers conferred by the Executive Committee shall be deemed to be and may be certified as being done or conferred under authority of the Board of Directors." The extent to which an entire board would be liable for the acts of an executive committee subcommittee remains an open--and, we think, an interesting--question. It may be the case that since the subcommittee is part of the executive committee charter--a charter that has presumably been approved by the entire board--liability is assumed. But since so few companies with executive committees actually operate with formal charters, their boards may wish at some point to address that question.

Understanding the variances

While there will always be honest differences of opinion regarding best practices for executive committees, there may less debate about whether corporate constituencies should be aware of the executive committee practices at corporations in which they have an interest. Observers may question why some companies' executive committees lack formal charters. At the very least, the creation of such charters may provide an opportunity for the full board to formally review the role and performance of its executive committee.

We should note that we mean no disrespect to any firms used as examples in this analysis. Also, our examples are not exhaustive. The inclusion of a given firm does not suggest that other firms do not rely on similar guidelines.

Obviously, the firms of the Fortune 500 are an elite group. Since executive committees are not regulated, one would expect great variance in how they are composed and enabled. This overview of the range of options is intended to inform those evaluating their executive committees (according to their charters, some executive committees are subject to an annual review) as well as those weighing the merits of establishing or maintaining an executive committee.

The authors can be contacted at dalton@indiana.edu and cdalton@indiana.edu.

Dan R. Dalton is director of the Institute for Corporate Governance and Harold A. Poling Chair of Strategic Management at the Kelley School of Business, Indiana University, Bloomington, Ind.

Catherine M. Dalton holds the Kelley School's David H. Jacobs Chair of Strategic Management and is the institute's research director.

[ILLUSTRATION OMITTED]

[ILLUSTRATION OMITTED]

RELATED ARTICLE: A model for the future?

For years, those who have decried the need for/use of executive committees have warned about the perception of a dual board--an elite board structure that focuses only on a subset of the board's membership. An affirmative declaration of the board's support of the executive committee may reduce that perspective. Lockheed Martin's executive committee charter, for example, notes that the board of directors may, by resolution, provide for an executive committee. The "Authority" discussion in the main article above cites a host of examples whereby boards proactively modified executive committees' traditional blanket authority and were presumably more comfortable with the resulting role of the executive committee as a complement to the role of the full board.

While we have underscored several examples of firms seizing the corporate governance high ground through their executive committee guidelines (e.g., transparency in executive committee charters, delineating executive committee authority, attention to independence of executive committee membership and leadership, maintenance of standing committee provinces), we would be remiss by not describing the seminal example provided by Georgia-Pacific Corp.

Georgia-Pacific has combined its executive and governance committees. In so doing, the company treats that committee as a standing committee of the board, and as such is compliant with SOX and the guidelines of the listing exchange. A review of the committee charter reveals that it, indeed, reflects the authority, roles, and responsibilities that one would expect by the combination of the executive and governance committees. It is an interesting and unprecedented model. (Georgia-Pacific was in the process of being acquired by Koch Industries as this article went to press.)

Perhaps the listing exchanges would consider allowing a nonindependent member (presumably the CEO or board chairperson, or both when the positions are held simultaneously) on a combined executive/governance committee. Perhaps there would also be a provision that the nonindependent member of this committee could not serve as its chair. With these modifications, would you expect that other companies would adopt a similar committee structure?

--Dan Dalton and Catherine Dalton
COPYRIGHT 2006 Directors and Boards
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2006 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:BOARD PRACTICES
Author:Dalton, Dan R.; Dalton, Catherine M.
Publication:Directors & Boards
Geographic Code:1USA
Date:Jan 1, 2006
Words:2571
Previous Article:What it now means to 'direct': being a director in an era of reform doesn't mean micromanaging. It means taking the high ground--and forging a closer...
Next Article:Director's guide: report on interim management; Given today's increased demands on directors and the challenge of finding the right CEO, it's not...
Topics:


Related Articles
A solid start for a spinoff board. (Spencer Stuart Governance Letter).
Improving the 'director value proposition.' (Governance Letter).
Conducting a committee assessment: as more work is given to board committees, comprehensive committee assessments are growing in importance.

Terms of use | Privacy policy | Copyright © 2019 Farlex, Inc. | Feedback | For webmasters