Executive committee: a vestigial appendage; In the post-Sarbanes-Oxley era, is there any rationale for having an executive committee of the board, or is it an artifact of a past era of governance?

• Author: Kenny, Roger M.
• Position: EXECUTIVE COMMITTEE

TODAY, COMPANIES ARE making an unprecedented effort to ensure board independence, and especially board committee independence. These nonexecutive directors are becoming the "high priests" of all boards. It is to these nonexecutive directors that we entrust the continuation of the corporation on behalf of the owners and its various constituencies (employees, shareholders, communities, vendors, etc.). It is these "independents" who oversee the strategy and all major actions of the company. Oversight is the directors' firm responsibility, as there can be no higher authority limiting their duties of loyalty, care, knowledge and, now, good faith.

Today, each of the three most important committees of the board--audit, compensation, and governance and nominating--conducts the business of the board, and reports to the whole board and not to any executive committee of the board. Still the majority of the Fortune 500 companies--about 260 of them (and decreasing each year)--list in their materials some form of executive committee, either as a regular committee of the board or an ad hoc committee. Most of those committees include both executive and nonexecutive board members, and some include officers who are not on the board. In recent years, particularly since the NYSE's and the Sarbanes-Oxley Act's emphasis on independence and transparency, many if not most of these executive committees have not been functional.

A number of situations have recently arisen that cause us to question the need for an executive committee.

First, when we recruit directors to boards, we find there is a negative sensitivity toward any company that requires an executive committee, particularly one that is active. The existence of such a committee implies that there may be more than one class of director, or even that this might be a way for a strong management team to hinder the true spirit of committee independence and real oversight. On the other hand, many potential directors tend to go along, saying, "Well, it really doesn't meet, anyway."

Second, another new activity of boards where the need for an executive committee is raised is the annual assessment of the board's performance and effectiveness, particularly when the directors are clarifying for themselves the role of the board and the roles of the principal committees vis-a-vis management. In those situations where the decision is to keep the executive committee, even though it is not used, we refer to this committee as the "vestigial appendage."

Third, the board governance review process inevitably strengthens the activities of the three independent committees, each having a much stronger role to play along with the lead director and/or chair, making it clearer that there is increasing redundancy in the executive committee concept.

Fourth, the executive committee has historically had the effect of limiting the board's role. Our firm's advisory board members--17 former CEOs who have served on multiple boards--remember more active executive committees in the 1970s and '80s. Some of these executive committees, like IBM's, met for a few hours before each board meeting, and some, like Texaco's, would meet more frequently. There definitely were two classes of directors then, and the executive committee was writing the script for the whole board--in many cases allowing the CEO and chairman to set the board's real agenda and to pre-establish decision making on key matters. Presumably all board members were notified in advance and consented to delegate their powers. Unfortunately, this wasn't always the case.

Fifth, the required self-evaluation of each committee today would, by its natural process, reject any form of an active executive committee that would seem to be a higher authority over the board itself.

A disappearing act

So, the executive committee is really an artifact of a past era and is disappearing--or, if it's not disappearing, it is at least not active. (Executive committees of companies in highly regulated industries might be exceptions.) Our experience suggests that if you don't...