© 2013 Lewis and Roca LLP
This article originally appeared in the May 16, 2013 AzHHA Connection Newsletter.
?“The board is so large that we never seem to accomplish our goals. What can we do?”
Nonprofit corporations often expand the membership of the board of directors to include many constituents and stakeholders, including donors, but as the size of the board increases, there can be a point of diminishing returns from the standpoint of decision-making. Some nonprofit boards may wish to require that all material decisions require action by the full board. However, for the same reasons that a republic has advantages over a pure democracy, an executive committee of the board of directors may lead to more effective and efficient governance.
This article describes some legal considerations in the authorization of an executive committee. First, let’s look at a sample resolution of a board of directors establishing an executive committee.
Creation of executive committee:
As permitted by the bylaws of the corporation, the board of directors hereby establishes an executive committee consisting of at least ___ or more directors. Members of the executive committee shall serve at the pleasure of, and may be removed with or without cause at any time by, the board of directors. If a vacancy occurs on the executive committee, the vacancy may be filled only by the board of directors. The executive committee shall have the authority and may exercise the powers of the board of directors, but shall not take any of the actions set forth in A.R.S. Section 10-3825.E or any successor or amended statute. The board of directors may further restrict the power and authority of the executive committee. All members of the committee must be given at least ____ hours/days notice of meetings either by mail or by personal communication, either by telephone, facsimile, email, text or other electronic communication. A majority of the members of the committee shall constitute a quorum, and action may be taken by the executive committee upon the approval of a majority of the members present at any meeting at which a quorum is present.
The following directors are hereby appointed to the executive committee: Mr. X, Ms. Y, Mr. Z and Ms. A.
?____________ is appointed as Chair of the committee;
?____________ is appointed as Vice-Chair.
This resolution should not be treated as a cookie-cutter, one-size-fits-all solution, but as a starting point for consideration of several issues:
?1. Check the existing bylaws: Do they permit an executive committee, or constrain its membership? Bylaws amendments may be needed. The sample resolution states, “As permitted by the bylaws of the corporation, . . .” If the bylaws do not authorize an executive committee, or if they specify a composition that is not what the current board wants (for instance, perhaps the committee should always include the president), the bylaws need to be amended. (Bylaws amendments required board approval, which may require special notice.) Note: although it is unlikely that the articles address board and executive committee authority, check the articles, too.
?2. How many executive committee members are needed to take action? The bylaws may already contain a provision saying that a majority of the members of any committee constitutes a quorum (or otherwise defining a quorum) and that valid action by a committee requires the affirmative vote of a majority of a quorum. If not, the board should adopt these provisions as a part of a resolution or a bylaw amendment.
Note: The executive committee can act by written consent without a meeting, but only if ALL members sign the consent. If even one signature is missing, the action is not valid.
Example: “Action required or permitted to be taken pursuant to authorization voted at a meeting of the board of directors or a committee of the board may be taken without a meeting if, before or after the action, all members of the board or of the committee consent thereto in writing.”?
?3. Appointment and Removal. Most would agree that the full board should appoint and remove executive committee members (but your board may want the bylaws to guarantee a seat for the president, or for some other important constituent). Example: “Members of the executive committee shall serve at the pleasure of, and may be removed with or without cause at any time by, the board of directors. If a vacancy occurs on the executive committee, the vacancy may be filled only by the board of directors.”
?4. Powers: what can the executive committee do? Aside from explicit limits or limits required by law (discussed in the next section), what are the general powers of the executive committee?
To act only between meetings of the full board? (Example: The executive committee shall have the authority and may exercise the powers of the board of directors “between meetings of the board of directors.”) This means the full board has oversight over everything, the executive committee being empowered to act only when the full board is not available. This may not be appropriate where full board action may be difficult due to its size.
Does the executive committee’s power apply only to “routine” matters? (Example: “The executive committee shall meet whenever necessary to consider important matters pertaining to the corporation prior to their presentation to the board of directors, and shall also be authorized to take final action in the name of the board of directors on matters of routine and non-controversial nature in the interim between board of directors meetings.”)
Will the executive committee be authorized to act with the full power of the board in emergencies?
?5. Limitation on Powers:
a. Limits imposed by law: What are these legal prohibitions? According to A.R.S. 10-10-3825.E1?, an executive committee may not: “1. Authorize distributions; 2. Approve or recommend to members any action that requires the members' approval under this chapter; 3. Fill vacancies on the board of directors or on any of its committees; 4. Adopt, amend or repeal bylaws; or 5. Fix the compensation of directors for serving on the board of directors or any committee of the board of directors.” Although limits and prohibitions required by law will apply whether or not the bylaws or the resolution reference them, including a reference is often useful. A generic reference is appropriate (such as, “the committee shall not possess any authority of the board of directors prohibited to it by law,” or “shall not take any of the actions set forth in A.R.S. Section 10-3825.E or any successor or amended statute”), but it may be even more useful to include a descriptive warning of these limits (”may not (a) authorize distributions, (b) submit to the members any matters, (c) fill any vacancy on the board of Directors, or (c) adopt amendments to the Articles of Incorporation or to the Bylaws, or (d) fix the compensation of directors for serving on the board of directors or any committee of the board of directors”). Although this approach has the disadvantage that statutes might change and the bylaws would then become obsolete. Note: other laws may also limit the authority of an executive committee.
b. Optional limitations: The board may wish reserve the right to impose limits later: “The board of directors may, by resolution, further restrict the power and authority of the executive committee.”?
?6. Some additional considerations:
a. In the indemnification provisions of the articles or bylaws, make sure that members of committees are entitled to the same indemnification as board members.
b. The full board probably always has some obligation to oversee what the executive committee is causing the corporation to do. (10-10-3825.F. “The creation of, delegation of authority to or action by a committee does not alone constitute compliance by a director with the standards of conduct described in section 10-3830.”)?
c. The Arizona statute gives flexibility on appointing committee members that can “fill in” if others are absent: “G. The board of directors may designate one or more directors as alternate members of any committee who may replace any absent member at any meeting of the committee.”?
In summary, executive committees are a common and viable solution to the need for more efficient operations on nonprofit boards of directors. Board members should be aware that a carefully prepared resolution consistent with the corporation’s bylaws (as well as its articles) are needed to define the composition, authority and limits of the committee. Statutory limits on executive committee action and the continuing liability of the full board for all delegated decisions may mean that advice of legal counsel is prudent in specific circumstances.
?Here is the relevant text in ARS 10-3825.
Committees of the Board
A. Unless the articles of incorporation or bylaws provide otherwise, the board of directors may create one or more committees and appoint members of the board of directors to serve on them. Each committee shall have one or more members, and each member of a committee shall serve at the pleasure of the board of directors.
B. The creation of a committee and appointment of members of the board of directors to it must be approved by the greater of:
?1. A majority of all the directors in office when the action is taken.
?2. The number of directors required by the articles of incorporation or bylaws to take action under section 10-3824.
C. Sections 10-3820 through 10-3824 governing meetings, action without meetings and notice, waiver of notice, quorum and voting requirements of the board of directors also apply to committees and their members.
D. Subject to the limitations set forth in subsection E of this section, each committee of the board may exercise the authority of the board of directors under section 10-3801 to the extent specified by the board of directors or in the articles of incorporation or bylaws.
E. A committee shall not take any of the following actions:
?1. Authorize distributions.
?2. Approve or recommend to members any action that requires the members' approval under this chapter.
?3. Fill vacancies on the board of directors or on any of its committees.
?4. Adopt, amend or repeal bylaws.
?5. Fix the compensation of directors for serving on the board of directors or any committee of the board of directors.
F. The creation of, delegation of authority to or action by a committee does not alone constitute compliance by a director with the standards of conduct described in section 10-3830.
G. The board of directors may designate one or more directors as alternate members of any committee who may replace any absent member at any meeting of the committee.