A committee charter is the written governing document that sets out why a board committee exists, what decisions it can make on its own, who serves on it, and how it operates. For publicly traded companies, exchange listing rules and federal securities regulations make written charters mandatory for audit, compensation, and nominating committees. Private companies and nonprofits face no equivalent mandate, but a charter still clarifies authority, prevents overlap between committees, and creates a record that protects directors if their decisions are later challenged.
What a Charter Must Cover
Think of a charter as the committee’s operating manual. At minimum it addresses four things: purpose (why the committee exists), authority (what it decides on its own versus what it recommends to the full board), membership (how many seats, who qualifies, how members are appointed and removed), and procedures (meeting frequency, quorum, record-keeping). Stronger charters also cover the committee’s right to hire outside advisors, its access to internal company records, and a schedule for reviewing the charter itself.
Detail matters. A charter that says the compensation committee “advises the board on pay” gives the committee almost no operational guidance and leaves directors exposed if shareholders later argue that no one was actually minding executive compensation. A charter that specifies the committee approves the CEO’s total compensation, reviews pay-equity data, sets performance targets for incentive plans, and reports to the full board after each meeting is what turns the document from filing-cabinet paperwork into something that actually shapes behavior.
Legal Limits on Committee Authority
No matter how broadly a charter is written, state corporate law draws hard lines around what a board can delegate. Under the approach followed by most states, a committee cannot approve matters that require a shareholder vote and cannot amend the company’s bylaws. In jurisdictions following older versions of the corporate code, the restricted list is longer and typically includes adopting merger agreements, recommending a sale of substantially all company assets, recommending dissolution, and declaring dividends.
A charter that purports to grant a committee authority to approve a merger would be unenforceable, and any action taken under it could be challenged. The safest drafting approach is a blanket acknowledgment that the committee’s authority is subject to the limits imposed by applicable state law, rather than trying to list every restriction.
Rules for Public Companies
The SEC does not technically require public companies to adopt committee charters, but it does require them to disclose whether they have one. Under 17 CFR 229.407, a company must state in its proxy filing whether its nominating, audit, and compensation committees have adopted charters. If a charter exists, the company must either post it on its website or include it as an appendix to the proxy statement at least once every three fiscal years, or whenever the charter has been materially amended.1eCFR. 17 CFR 229.407 – Corporate Governance The practical effect is that almost every public company adopts charters, because disclosing that you chose not to invites shareholder scrutiny and proxy advisor criticism.
The stock exchanges go further and require the committees themselves. The New York Stock Exchange requires listed companies to maintain audit, compensation, and nominating/governance committees composed entirely of independent directors. The audit committee must have at least three members, each financially literate, and at least one with accounting or financial management expertise. The audit committee charter must be posted on or through the company’s website.2New York Stock Exchange. NYSE Listed Company Manual Section 303A FAQ
NASDAQ similarly requires formal written charters for audit, compensation, and nominating committees under its Listing Rule 5605 series. Companies must certify at listing that they have charters meeting NASDAQ’s requirements. The compensation committee charter must be reviewed and reassessed for adequacy annually, a requirement that does not apply to the other two.3Nasdaq. Reference Library Search – Listing Center Failure to comply with these listing standards can lead to compliance notifications, suspension of trading, and delisting.
Audit Committee Charter Rules
The audit committee charter carries the most prescriptive federal requirements because of the Sarbanes-Oxley Act and the SEC rules implementing it. Under Exchange Act Rule 10A-3, the audit committee must be directly responsible for appointing, compensating, and overseeing the company’s external auditor. Every audit committee member must be independent, meaning they cannot accept consulting or advisory fees from the company outside their board compensation, and they cannot be an affiliated person of the company or any of its subsidiaries.4eCFR. 17 CFR 240.10A-3 – Listing Standards Relating to Audit Committees
The charter must also establish procedures for receiving and handling complaints about accounting, internal controls, or auditing, including a mechanism for employees to submit concerns confidentially and anonymously. The company must provide whatever funding the audit committee determines it needs to pay the external auditor and any independent advisors the committee retains. These are legal mandates, and an audit committee charter that omits them is noncompliant from day one.
Compensation Committee Charter Rules
The Dodd-Frank Act added federal requirements for compensation committees through Exchange Act Rule 10C-1. Each member must be independent, and the exchanges must adopt listing standards that consider at least two factors when evaluating independence: the source of a director’s compensation (including any consulting or advisory fees from the company) and whether the director is affiliated with the company or its subsidiaries.5eCFR. 17 CFR 240.10C-1 – Listing Standards Relating to Compensation Committees
The compensation committee has sole discretion to retain compensation consultants, independent legal counsel, and other advisors, and is directly responsible for their appointment, pay, and oversight. Before selecting any advisor, the committee must evaluate the advisor’s independence by considering factors such as other services the advisor’s firm provides to the company, what percentage of the firm’s revenue comes from the company, and any personal or business relationships between the advisor and committee members.5eCFR. 17 CFR 240.10C-1 – Listing Standards Relating to Compensation Committees A well-drafted compensation committee charter incorporates all of these requirements and spells out the evaluation process the committee follows when engaging outside advisors.
Risk Committees at Large Banks
Bank holding companies with total consolidated assets of $50 billion or more face an additional layer of requirements. Federal banking regulations under 12 CFR 252.22 require these institutions to maintain a risk committee with a formal, written charter approved by the board of directors. The committee must be independent, and its sole function must be overseeing the company’s global risk-management policies and framework.6eCFR. 12 CFR 252.22 – Risk Committee Requirement for Bank Holding Companies With Total Consolidated Assets of $50 Billion or More
The charter must provide for quarterly meetings at minimum, quarterly reports from the chief risk officer, direct reporting to the full board, and full documentation of all proceedings and decisions. The framework the committee oversees must address governance policies, risk identification and reporting processes, managerial accountability, independence of the risk-management function, and integration of risk controls with the company’s compensation structure. This is one of the most prescriptive charter mandates in any regulated industry.
Nonprofit Charters and Form 990
Federal tax law generally does not require nonprofits to adopt specific governance structures or committee charters. The IRS does, however, ask about governance practices on Form 990, and the answers are publicly available. Part VI asks whether the organization contemporaneously documented every meeting held and every written action taken by its governing body and any committees with authority to act on the board’s behalf. It also asks whether the organization delegated broad authority to an executive committee, and if so, requires a description of the committee’s composition and scope of authority on Schedule O.7Internal Revenue Service. Instructions for Form 990 Return of Organization Exempt From Income Tax
The IRS has said that while the governance policies requested in Part VI are generally not required by the tax code, it considers them to improve tax compliance, and their absence can create opportunities for prohibited transactions and activities inconsistent with exempt status.7Internal Revenue Service. Instructions for Form 990 Return of Organization Exempt From Income Tax For nonprofits, adopting written charters is less about legal obligation than about demonstrating to donors, grantmakers, and the IRS that governance is being taken seriously.
Why a Charter Protects Directors
One of the most practical reasons to maintain a charter is the legal protection it gives individual directors. When shareholders sue over a board decision, the business judgment rule creates a presumption in favor of the directors. Courts apply the presumption when directors can show they acted in good faith, with the care a reasonably prudent person would use, and with a reasonable belief that they were acting in the corporation’s best interests. If the presumption holds, the burden shifts to the plaintiff to prove it shouldn’t apply.
A written charter and documented adherence to it are strong evidence that the committee followed a deliberate process. Directors who can point to a charter requiring them to meet quarterly, review specific reports, and consult independent advisors before making a decision are in a far better position than directors who operated informally. If a plaintiff can show the committee ignored its own charter or never updated it, that undermines the presumption and can push the burden back to the board.
Drafting a Charter
Start with the regulatory baseline. If the company is publicly traded, pull the applicable exchange listing rules and federal regulations for the committee type and build the charter around those requirements first. An audit committee charter that doesn’t address the complaint-handling procedures required by Rule 10A-3 is deficient before it reaches the board for approval.
Once the regulatory floor is covered, the charter should address the organization’s specific operational needs:
- Membership and qualifications: number of members, independence standards, any expertise requirements (such as financial literacy for audit committee members), term lengths, and the process for filling vacancies.
- Scope of authority: what the committee can decide independently versus what it recommends to the full board, and an acknowledgment of the limits imposed by state corporate law.
- Meeting procedures: minimum meeting frequency, quorum requirements, whether non-members can attend, and how meetings can be called outside the regular schedule.
- Access to resources: the committee’s authority to engage outside advisors, access company records and personnel, and require management to provide information.
- Reporting obligations: how and how often the committee reports to the full board, and whether reports go into the consent agenda or require separate board discussion.
- Record-keeping: requirements for meeting minutes, document retention, and how records are maintained for future audits or litigation.
- Charter review: a schedule for reviewing and updating the charter itself, typically annually.
Cross-reference the draft against the organization’s bylaws. The charter cannot grant the committee authority the bylaws don’t permit, and the two documents shouldn’t contradict each other on matters like quorum or appointment procedures.
Board Approval and Ongoing Review
The finished charter goes to the full board for a formal vote. The board should discuss and approve the document during a properly noticed meeting, and the resolution adopting the charter should be recorded in the corporate minutes. Those minutes serve as legal evidence that the board authorized the committee to operate under the specified terms.
For public companies, the charter must then be made accessible. Under SEC rules, the company can either post the current version on its website or include it as an appendix to the proxy statement at least once every three fiscal years.1eCFR. 17 CFR 229.407 – Corporate Governance In practice, virtually every public company posts all committee charters on its investor relations page and updates them promptly when amendments are made. Private companies and nonprofits have no disclosure mandate, but making charters available to stakeholders signals transparency to investors, donors, and regulators.
Charters are not permanent documents. Regulations change, organizational priorities shift, and committees learn through experience what works. Schedule a formal review at least annually, and update the charter whenever there is a material change in applicable law or the committee’s responsibilities. A charter that hasn’t been touched in five years is almost certainly out of compliance with something.