 Scandals involving nonprofit organizations make the headlines. Who's to blame?
Attending Meetings
Independent Judgment
Information
Reliance
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the Guidebook for Directors of Nonprofits
Scandals involving nonprofit organizations make the headlines. Who's to blame?
Many fingers point to boards of directors. "If the board had been paying more
attention, the
executive director wouldn't have been able to embezzle every last dollar from the
treasury, pressure his secretary into satisfying his carnal desires, and pay his sister as
a consultant even though she never did anything."
Increased board vigilance might indeed have prevented all of that misconduct. But how much
attention are board members required to give? And if their only shortcoming was failure to
prevent wrongdoing, are board members legally responsible for the consequences?
In the past few years, legislatures, courts, and governance experts have sent
contradictory messages. On the one hand is a strong trend toward greater accountability.
Boards are advised to be actively engaged in the governance of the organization, while
leaving day-to-day management to staff. Several court opinions and investigations by
attorneys general have faulted inactive boards and encouraged greater involvement in their
organizations' affairs.
On the other hand, nearly every state has enacted a volunteer protection law to shield
board members from personal liability if they do not live up to their responsibility.
While some of these laws offer significant protection from unwarranted lawsuits, they can
also convey the wrong message that the new accountability standards are merely advisory.
That impression is a mistake because the volunteer protection laws have a very limited
scope. While they may indeed protect board members from personal liability in some
circumstances, they do not change the standard of care itself.
To clarify the legal standards, and provide suggestions for satisfying them, the American
Bar Association published the Guidebook for Directors of Nonprofit Corporations. The
Guidebook explains that directors owe two fundamental duties to the organization: care and
loyalty. Failure to oversee the organization's operations generally constitutes a breach
of the Duty of Care. The material presented in the remainder of this article is based on
the Guidebook's explanation of the Duty of Care for nonprofits.
A common statement of the Duty of Care requires board members (1) to be reasonably
informed; (2) to participate in decisions; and (3) to do so in good faith and with the
care of an ordinarily prudent person in similar circumstances. Each of the tasks outlined
below requires the efficient allocation of time by the director; the suggestions offered
here as to each element of the director's function must be evaluated in light of this
need. Although none of these tasks is necessarily essential, substantial compliance with
these elements of care is commonly expected of the nonprofit director and may be required
by law.
To discharge the Duty of Care the director must monitor the organization's activities.
Such participation finds expression in such things as the following.
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Attending Meetings
Regular attendance at meetings of the board of directors is a basic element of prudent
performance as a director. All directors must remember that they act as a group, and
therefore attendance at board and committee meetings is urged. Continuous or repeated
absence may expose the director to the risk of not satisfying the Duty of Care. Sporadic
board attendance by some directors reduces the morale of those who do attend. It should be
recognized, however, that directors also render a great deal of service outside board
meetings by taking on various assignments for the organization or the board, by opening
doors, by soliciting contributions, etc.
It should be understood that, in most states, directors cannot vote or participate by
appointing another person, even another director, as a proxy. All directors should
understand the reasons
for this rule. First of all, whatever reasons a director's constituency may have had for
choosing
her or him, that choice was the selection of one person to perform a duty, not the grant
of a transferable privilege. Secondly, all the other directors are entitled to demand the
duly elected or appointed director's wisdom and judgment, not that of such surrogate as
the director may choose. Thirdly, such deference and accommodation as the directors
themselves may give to each other in the course of their work cannot, as a practical
matter, be transferred to purely
personal appointees.
If a board of directors encounters significant problems concerning the frequency of a
director's attendance, it should consider adopting or recommending bylaws or policies
permitting or requiring the removal of directors who regularly miss meetings or attend
only portions of meetings, or create honorary directorships or advisory councils for such
persons.
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Independent Judgment
Each director, no matter how selected, shares in all the responsibilities and powers of
the directors. Each director should exercise her or his independent judgment on all
corporate decisions.
The law conceives of a board of directors as an entity, each member of which shares the
same right and the same duties, and each member of which is accountable to the same
constituency. Even if other parties may regard the director as representing a particular
group or interest, these considerations do not affect his or her duties as a director
which are to the entire organization and the responsibilities will be the same as those of
any other director. If the board decides to delegate a task to a particular director, that
is a decision of the board, not the constituency or body which selected or suggested the
director.
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Information
To function effectively a director needs to be informed. To function effectively, a
director needs to have an adequate source of information flow. This information is
generally supplied by the staff. To the extent that it is not adequate, a board or an
individual director will have to determine what additional information is needed. Needless
to say, the director should read the information with which he or she is supplied.
In some small nonprofit entities, such as neighborhood improvement bodies or condominium
associations, the board itself may be its own primary source of information. With larger
organizations, however, the board will inevitably use and rely on information prepared by
the corporation's officers and agents. This means that the corporation's staff will
unavoidably have a significant effect on the board's decisions since, inevitably, the
staff must select much of the information the directors receive. Even when a director has
total and justified confidence in the suppliers of information, he or she should be at
least aware of this. In general, the Board may rely on information supplied by the staff,
but if for any reason any member of the Board thinks that it is inadequate in any respect,
he or she should not hesitate to request further information. Such requests should be
reasonable and should not overwhelm the staff.
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Reliance
In the ordinary course of business, a director may act in reliance on information and
reports received from regular sources whom the director reasonably regards as
trustworthy. A director may rely upon the reports, communications and information received
from another director, a committee or from any officer, employee or agent if the director
reasonably believes the source to be reliable and competent. The Model Act expressly
recognizes the concept of reliance on others and thus attempts to codify a somewhat
diffuse common law standard:
"In discharging his or her duties, a director is entitled to rely on information,
opinions, reports or statements, including financial statements and other financial data,
if prepared or presented by:
-
one or more officers or employees of the corporation whom the
director reasonably believes to be reliable and competent in the matters presented;
-
legal counsel, public accountants or other persons as to matters
the director reasonably believes are within the person's professional or expert
competence;
-
a committee of the board of which the director is not a member, as
to matters within its jurisdiction, if the director reasonably believes the committee
merits confidence; or
-
in the case of religious corporations, religious authorities and
ministers, priests, rabbis, or other persons whose position or duties in the religious
organization the director believes justify reliance and confidence and whom the director
believes to be reliable and competent in the matters presented." (Model
Nonprofit Corporation Act, Section 8.30(b)).
However, the director will not be acting in good faith if she or he has such knowledge
about the matter in question as would make such reliance unreasonable. (Section
8.30(c)).Although individual state laws differ from the Model Act, the Act's rules are
sound general guidance. Some states allow even less reliance on materials prepared by
others, however.
As the Guidebook notes, in all but the smallest and simplest corporations, the
corporation's needs for the board's attention will often exceed the time the board has to
furnish this resource. Hence, this limited asset must be used efficiently.
To fulfill each aspect of the Duty of Care--without overburdening board members--the
Guidebook provides a set of specific recommendations for running meetings and taking
actions.
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Guidebook for Directors
The Guidebook for Directors of Nonprofit Corporations may be purchased from the Nonprofit
Risk Management Center for $22.95 (included shipping and handling).
--This article was reprinted with permission from the Nonprofit Risk Management Center's
newsletter, "Community Risk Management & Insurance." To subscribe to this
free publication, contact the Nonprofit Risk Management Center.
For more information about the Center's publications and services, send a stamped,
self-addressed envelope to Nonprofit Risk Management Center, 1001 Connecticut Avenue,
NW, Suite 900, Washington DC 20036; phone 202-785-3891; fax 202-833-5747.
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