are groups made up of company directors who are assigned particular corporate responsibilities to oversee. In many companies, significant responsibilities, such as review and approval of executive compensation, are delegated to committees.
Usually, the authority to establish committees is contained in the company's bylaws and the laws of the state in which the company is incorporated. Committees improve efficiency by giving management smaller groups of directors to work with on particular types of questions and by reducing the number of full-member board meetings that must be called.
The most common committees are audit committees, compensation committees, and stock committees. Audit committees set up and oversee auditing and accounting standards for a company and, thereby, establish the mechanisms by which management and the board monitor the operations of the company.
The compensation and stock committees are often combined into one committee that establishes salaries for company employees and recommends the issuance of stock options to selected employees.
Often the power of this committee includes the actual issuance of options within guidelines established by the board of directors. The establishment of a stock committee without ensuring that the committee is thoughtfully constituted can create problems for a growing company. If the committee consists of one person, as is often the case, the company can find itself in trouble when it prepares to go public or merge with another company. This is because granting one person the power to issue options makes it too easy to inadvertently grant them to employees and others. And often, these unintended stock grants do not come to light until deals have been made to go public or merge.
In start-up situations, companies often find themselves short of cash and in desperate need to hire or keep qualified people. Without adequate cash, it can be difficult for a company to retain the people it needs. To bridge this gap, many companies issue shares or options to new and senior employees. The stock and options attract key people by giving them the opportunity to participate in the company's growth.
The problem with one-person stock committees, however, is that without the reservation of stock-granting power to a larger group, even casual conversations with employees about the desire to issue more stock or options can turn into legally binding obligations of the company. Given the intense pressures new companies and their employees face, the discussing of "more stock and more options" can become commonplace. If the company president participates in these discussions and is the only person on the stock committee, they can easily lead to binding agreements to issue company stock.
To reduce this risk of inadvertent stock issuance, companies should avoid single-member stock committees so that stock and option grants require the approval of two or more persons before they become binding on the company. It is also helpful for the company's bylaws or board minutes to require options to be in writing and signed by all committee members. If company employees know this is the case, casual conversations are less likely to lead to misunderstandings. See: Board of Directors, Going Public, ISOs (Incentive Stock Options), Stock Committee, Vesting Schedules.