7.4 Board Committees

A typical board of directors and its committees can be diagrammed as follows:

All members of a board of directors serves on the board and attends board meetings. In addition, board members are organized into subcommittees, all of which will be discussed in detail in later chapters. The three required committees, which must all be compromised of independent directors of NYSE companies are the audit committee, the compensation committee and the nomination/governance committee. In addition, a board of directors may have other committees, both permanent and temporary. For example, companies operating in the transportation industry (freight , logistic, airlines, trucking, boating, trains, etc.) usually have safety committees. Pharmaceutical companies usually have research committees and government relation committees. Most financial institutions have an executive committee. Boards of directors also create temporary committees to deal with specific issues and responsibilities. Committees are helpful because they allow a subset of the board (usually those with the best backgrounds to address the problem) to consider issues that pertain to the temporary committee's charge. Examples of temporary committees include committees formed to recruit a new CEO, work with bankers to determine the final terms of a financing transaction, negotiate the sale of all or part of the company, investigate a possible impropriety, etc. Having a special subcommittee increases effectiveness by reducing the need for every board member to research and exert energy on every issue that arises.