Clients use the word “charter” to mean several different things, and the first task when one lands on my desk is figuring out which document the organization needs.
Sometimes “board charter” means a governance statement describing how the full board intends to operate. More often, the work involves a set of committee charters, one for the audit committee, one for finance, one for governance or nominating, and so on.
How much a charter needs to do depends on the organization’s governing statute, articles of incorporation, bylaws, and existing board resolutions. Where the bylaws establish a standing committee, the charter usually adds detail to a committee that already exists. Where the board forms a special committee, the board resolution adopting the charter may also establish the committee, define its purpose and membership, and specify the scope of its authority.
Sorting that out comes before any provision gets written. A charter that assumes authority not validly conferred under the governing statute, articles, bylaws, and board action creates questions about whether the committee was properly constituted and whether its decisions are valid.
The board charter and where committee charters take over
Some organizations do want a single board-level charter, and it can be useful. It can place in one document how directors are expected to prepare for meetings, what the chair’s role includes, what attendance and conflict standards the board expects, how directors interact with management, and how the board reviews its own performance.
For a board that has outgrown informal practice, that document can be worth having.
Much of the drafting work, however, concentrates at the committee level, because that is where the board divides its attention and, in some cases, delegates authority.
A board acts as a body. Its committees allow it to devote sustained attention to areas that require more work than the full board can reasonably perform during regular meetings. Each committee therefore needs a charter that states what it may decide, what it may only recommend, and how it keeps the full board informed.
Some committees are permanent standing committees. Others are special committees formed for a defined assignment and dissolved when the work is complete. That distinction concerns the committee’s duration and purpose. It does not, by itself, determine whether the committee may exercise board authority.
The charter is where the committee’s purpose, authority, limits, composition, reporting duties, and duration should be made clear. The balance of this article focuses primarily on committee charters, because that is the work clients most often bring to counsel and where drafting mistakes can create the greatest legal and governance problems.
The legal line many committee charters blur
State nonprofit corporation laws commonly distinguish between a committee of the board and an advisory committee.
A committee of the board may exercise delegated board authority only if it is created and composed in the manner permitted by the governing statute, articles, and bylaws. In many jurisdictions, that means the committee must be composed entirely of directors because its authority comes from functioning as a subset of the board.
The rule is not uniform. Some states permit non-directors to serve on a committee that exercises board authority if specified composition requirements are met. Illinois, under 805 ILCS 105/108.40, permits certain committees exercising board authority to include non-directors if the committee includes at least two directors and directors constitute a majority of its membership.
An advisory committee may include members, employees, subject-matter experts, or outside volunteers, but it ordinarily studies issues and makes recommendations rather than exercising the authority of the board.
The charter therefore has to be drafted against the law of the organization’s state of incorporation rather than a general national assumption. A mixed-membership committee may be purely advisory in one jurisdiction and capable of receiving limited delegated authority in another. A charter that gets that distinction wrong can call the committee’s actions into question.
The governing statute also limits what a properly constituted committee may do. The particular list varies by state, but powers commonly withheld from committees include:
- Filling vacancies on the board or on committees that exercise board authority
- Electing or removing directors or officers
- Amending the articles of incorporation or bylaws
- Approving a merger, dissolution, plan of distribution, or sale of substantially all assets
- Approving, adopting, or recommending actions that the statute, articles, or bylaws require the voting members or full board to consider
A committee charter should identify the applicable limits rather than assume everyone knows them.
This matters especially for an executive committee, which bylaws sometimes authorize in broad terms to act for the board between meetings. That breadth is precisely where problems can develop. An executive committee operating under a vague grant of authority can make consequential decisions without sufficient involvement from the rest of the board and, in some cases, without timely notice to it.
A well-drafted executive committee charter identifies what the committee may decide, what matters must be referred to the full board, what circumstances justify action between board meetings, and how quickly the committee must report what it has done.
Delegation does not, by itself, discharge the directors’ applicable duties of oversight, although state law may permit directors to rely reasonably on a properly constituted committee and on the information and reports it provides. The charter should preserve that relationship rather than suggest that a delegated function has disappeared from the board’s responsibility.
What a committee charter should contain
The details change with the committee, but most committee charters address a similar framework.
The purpose section states why the committee exists and what falls within its remit.
The authority section is the most important. It draws the line between what the committee may decide, what it may investigate or oversee, and what it may only recommend to the board. It should also identify matters that remain reserved to the full board, the members, or another governing body.
The composition section addresses the committee’s size, who is eligible to serve, whether non-directors may participate and in what capacity, how members are appointed and removed, and how the chair is selected.
The operating section covers meeting cadence, notice, quorum, voting, participation by remote means, written consents where permitted, and how the committee documents its work.
The reporting section states how and how often the committee reports to the full board. Reporting is what keeps a delegated or specialized function under board oversight rather than allowing it to operate as an independent center of authority.
For a special committee, the charter should also state what ends the committee’s work, whether completion of a transaction, delivery of a report, resolution of a particular matter, or the arrival of a fixed date.
A standing committee charter should include a periodic review provision so the committee revisits the document on a regular cycle. That keeps the charter from drifting out of step with the bylaws, board policy, statutory requirements, and actual practice.
Boilerplate is worth avoiding where the committee has no intention of following it. A charter that describes practices the committee does not observe may later be used as evidence of governance expectations the organization established for itself but failed to meet.
The committees that most often need a charter
The audit committee is usually the committee with the greatest need for careful drafting because its independence is part of what makes the function valuable.
Its charter typically addresses oversight of the financial statements and independent audit, the committee’s relationship with the outside auditor, internal controls, auditor independence, and, where relevant, whistleblower complaints and investigations.
Keeping the audit function distinct from routine financial oversight can strengthen the independence that makes the audit process useful. Separation may also be required for some organizations under applicable state law. Other organizations use a combined audit and finance committee, but the charter should preserve the access to the auditor, authority, independence, and reporting relationships necessary for meaningful audit oversight.
The finance committee’s charter typically addresses its role in budget development, financial monitoring, liquidity, reserves, investments, and long-term financial planning.
Its authority section requires particular care because budget approval is not necessarily a power the committee holds by default. Whether the committee recommends a budget for board approval or has limited authority to approve specified adjustments should be assigned deliberately through the governing documents, board policy, and charter.
The governance or nominating committee’s charter commonly addresses board recruitment, nominations, director education, board evaluation, succession planning, and periodic review of the governance documents.
In a membership organization, the charter must account for whatever rights the members hold under the statute, articles, and bylaws. Members may have the right to elect directors or officers directly, approve amendments, or take other specified actions. Where those rights exist, the committee’s role may be to recruit, evaluate, nominate, or recommend rather than to appoint.
The compensation committee’s charter, where an organization has one, addresses the process for reviewing and setting executive compensation. Because compensation decisions can create tax, conflict-of-interest, reputational, and governance exposure, the charter should support a defensible process rather than merely assign the task to a group of directors.
How tax-exempt status shapes the drafting
Tax classification matters most where a committee’s responsibilities touch federal tax requirements. It does not, by itself, determine the organization’s committee structure or membership rights.
For public charities and other Section 501(c)(3) organizations subject to the intermediate sanctions rules under Section 4958, a compensation committee charter can support a process designed to establish the rebuttable presumption of reasonableness. The IRS framework requires advance approval by a conflict-free authorized body, reliance on appropriate comparability data, and adequate, timely documentation.
Private foundations are generally governed by a different set of excise-tax rules and should not simply import public-charity language into their compensation committee charters.
Section 4958 generally does not apply to Section 501(c)(6) organizations. Trade associations, professional societies, and chambers of commerce remain subject, however, to the prohibition on private inurement and to the requirement that their activities advance a common business interest rather than primarily provide particular services to individual persons.
A 501(c)(6) charter might therefore support a conflict-free, informed, and documented compensation process appropriate to the organization’s actual tax status and governance structure.
Beyond compensation, committee responsibilities may need to reflect restrictions applicable to the organization’s exemption category. A finance committee may oversee restricted charitable funds, grant compliance, unrelated business activity, or financial controls associated with exempt programs. A governance committee may need to account for voting-member rights or for a structure in which directors are selected by particular constituencies.
Those features result from the combined effect of tax law, state corporation law, the governing documents, membership rights, and the organization’s actual operations. They should not be inferred from the subsection alone.
Cross-reference operating policies
Conflict-of-interest, whistleblower, investment, document-retention, and executive-compensation policies can carry operational detail below the charter level. Where those policies already exist, cross-referencing them is preferable to restating their rules in slightly different language. Otherwise the documents can drift apart and leave directors unsure which version governs.
Review the provisions that change authority
An attorney drafting a charter is not there to make the document longer. The value lies in identifying where a well-meant sentence grants unintended authority, imposes a procedure the committee will not follow, or conflicts with the organization’s governing framework.
Those defects become consequential during a leadership transition, significant transaction, internal investigation, or governance dispute. The review should establish whether the committee was validly formed, whether its composition supports the proposed authority, and which decisions remain reserved elsewhere.
About the author. Dan Liutikas is the founder of Org Law, PLLC, where he advises private and nonprofit organizations on governance, board authority, and tax-exempt compliance. He has served both as outside counsel and as in-house general counsel to global organizations.
See the Association Governance Guide for related questions about bylaws, delegation, member rights, and oversight. Contact Org Law to discuss a charter review.
