board-committee-charter

# Board Committee Charter — Audit & Compensation

Drafts Audit and Compensation Committee charters tailored to the company's regulatory posture, exchange listing, and governance needs.

## Prerequisites

Gather before drafting:

- **Company profile**: public/private, exchange (NYSE/NASDAQ), state of incorporation, industry
- **Governance docs**: articles, bylaws, existing charters, board resolutions
- **Context**: ownership structure, international operations, pending transactions (IPO, M&A)
- **Special circumstances**: restatements, control deficiencies, regulatory investigations

## Charter Sections

Draft a single document with these sections:

### I. Preamble & Authority

- Board adoption statement per bylaws and applicable law
- Committees exercise delegated authority; fiduciary duty remains with full board

### II. Purpose

| Committee | Core Purpose |
|---|---|
| **Audit** | Oversight of financial integrity, internal controls, audit functions, compliance, and financial/operational risk |
| **Compensation** | Align executive compensation with shareholder interests, strategic objectives, retention, and risk balance |

### III. Composition

**Audit Committee:**

| Requirement | Standard |
|---|---|
| Size | Min 3 (4–5 for complex orgs) |
| Independence | All independent per listing standards + SEC Rule 10A-3 |
| Financial expert | At least 1 per SEC definition |
| Prohibited | No compensatory fees beyond director pay; no affiliate relationships |

**Compensation Committee:**

| Requirement | Standard |
|---|---|
| Independence | All independent per listing rules |
| SEC Rule 16b-3 | All qualify as non-employee directors |
| IRC §162(m) | Outside director status if preserving deductibility |

Appointment: nominated annually by Governance Committee or full board. Define term lengths. Chair sets agenda, liaises with board.

### IV. Authority & Resources

**Audit Committee:**

- Appoint, compensate, oversee, terminate independent auditor (reports to committee, not management)
- Pre-approve all audit and permitted non-audit services
- Retain independent counsel/accountants/investigators without board approval
- Unrestricted access to personnel, records, and systems
- Authority to investigate and compel management cooperation

**Compensation Committee:**

- Set CEO goals, evaluate performance, determine CEO compensation
- Approve executive officer compensation (may delegate sub-CEO to CEO with ratification)
- Approve employment agreements, severance, change-in-control provisions
- Retain compensation consultants with sole selection/termination authority
- Assess consultant independence per listing standard factors
- Administer equity plans, approve grants, interpret provisions

### V. Meeting Procedures

| Element | Audit | Compensation |
|---|---|---|
| Frequency | 4×/year (quarterly) | 2×/year minimum |
| Quorum | Majority | Majority |
| Action | Majority vote or unanimous written consent | Same |

**Executive sessions:**

- Audit: exclude management; private sessions with independent auditor, internal auditor, CFO annually
- Compensation: no officers present during deliberations on their own pay; annual session with consultant without management

### VI. Audit Responsibilities

- **Financial reporting**: review annual/quarterly statements before release; evaluate accounting principles, estimates, disclosure completeness; review auditor communications and management representation letters
- **Auditor oversight**: annual evaluation of qualifications, performance, independence; evaluate lead partner; consider rotation
- **Internal audit**: approve charter, plan, budget, staffing; approve/replace internal audit head; review reports and corrective actions
- **Compliance & risk**: oversee compliance programs; establish whistleblower procedures per SOX §806; review related party transactions; oversee financial risk management

### VII. Compensation Responsibilities

- **Philosophy**: annually review objectives, element weighting, fixed/variable balance, equity/cash mix, pay-performance relationship
- **CEO pay**: set goals → evaluate → determine compensation in executive session without CEO → report to board
- **Executive pay**: approve material changes (salary, bonus, LTI, severance); ensure §409A compliance; include restrictive covenants
- **Equity**: oversee plan design; approve grants with timing policies preventing MNPI abuse; monitor burn rate and dilution
- **Risk**: annual assessment of whether pay policies create adverse risk; ensure mitigants (clawbacks, ownership requirements, caps)
- **Succession**: oversee CEO and key executive succession planning annually
- **Proxy disclosure** (public): review CD&A, compensation tables, Committee Report

### VIII. Reporting & Escalation

Committees report to board after each meeting. Escalate immediately:

- **Audit**: material weaknesses, fraud, regulatory violations, whistleblower matters
- **Compensation**: significant financial obligations, conflicts, reputational risks

### IX. Self-Assessment

Annual self-evaluation and charter review. Report results and recommendations to full board.

## Pitfalls & Checks

- **Public vs. private**: SOX and listing rules don't apply to private companies directly — use as best-practice benchmarks and scale accordingly
- **Verify regulations**: SOX §§201, 206, 301, 806; SEC Rule 10A-3; Rule 16b-3; IRC §162(m) [verify post-TCJA applicability]; IRC §409A
- **Exchange differences**: NYSE and NASDAQ independence definitions differ — confirm applicable standard; use more stringent if dual-listed
- **Industry overlays**: expand responsibilities for regulated industries (banking, healthcare, energy)
- **State law**: confirm delegation authority under state of incorporation (e.g., DGCL §141(c) for Delaware)
- **Cross-reference**: verify alignment with bylaws, articles, and other governance policies before finalizing
- **Drafting tone**: clear legal language accessible to non-specialist directors; active voice; consistent defined terms