Thomas R. Spencer*
America is blessed with an abundance of well-meaning citizens who volunteer their expertise, time, energy and enthusiasm to participate as members of countless boards of non-profit organizations. As the nation has escalated its litigious framework of dispute resolution, laws have been enacted and judicial decisions promulgated to provide basic rules of conduct for directors. Adherence to these basic, logical concepts will almost always protect the director. Violation may, under the wrong circumstances, result in worrisome, expensive litigation. As is always true in our society, consultation with knowledgeable lawyers—who frequently advise non-profits pro bono--- is a wise investment for sound sleep. This article merely explains broad, important principles. **
2. The Duty of Care and Sound Practices
Directors must direct. They are not potted plants, merely receiving reports from officers and employees. The role of directors is to set the policy by which the officers and employees will be governed. The By-Laws and state laws are their road map and common sense their Polestar. Meetings and reports are the mechanism by which facts are to be presented, issues vented and policies set. Individuals who assume office are required to be diligent in their office and their responsibilities. Each member of the board of directors, when discharging the duties of a director must:
- act in good faith, and,
- in a manner the director reasonably believes to be in the best interests of the non-profit corporation.
The directors must discharge their duties with the care that a person of like position would reasonably believe appropriate under similar circumstances. This “reasonable person” analysis is the closest American Law can get to a reliable standard of behavior. It is a standard that necessarily “looks back”, after the fact, through the lens of “reasonableness.” Most human activity can be judged in that light, since almost all people who would function as a director would or should know what contemporary standards require of them. But in a litigation contest, a judge or jury will make judgments of reasonableness looking at a totality of perspective and facts while assessing fault against a director. Most judges or juries will expect that directors make decisions with the same degree of care that they would use in their own businesses or personal lives. They will expect careful stewardship, conservative action, inquisitive judgments and challenging analysis of factual issues. Directors can neither be blind to known facts nor passive to obvious suspicions. Directors are the guardians of the business interests of the organization and are required to be vigilant.
Directors are expected to disclose-- and must expect that other directors will also disclose--- all relevant information in their possession or control with respect to any decision or question brought before the Board.
Directors are entitled to rely on information, reports, statements, financial statements and other data presented to the Board. They may rely on employees of the organization, legal counsel, accountants, or others retained by the organization as long as the Director reasonably believes, in good faith, that the information presented is accurate and has no bias either in the facts or the source. While a director is not required to be “Inspector Colombo”, the director must not have an interest or bias in the issue and must be reasonably diligent in objectively assessing the facts.
Therefore, a director must understand the by-laws and state law, attend meetings, be informed of the facts, and disclose any personal bias or interest or information unknown to the other directors. Directors are thus required to adopt the “Sound Business Judgment Rule” and apply it to issues which must be resolved by the Board. To exercise “Sound Business Judgment”, the director must:
- Be informed of the facts and make reasonable inquiries into the facts, and
- Make judgments in good faith and without conflicts of interest, bias, outside influence and
- Make reasonable judgments, based on a sound, rational and defensible basis.
3. Duty of Fidelity and Loyalty
Directors must have an uncompromised allegiance to the interests of the organization. The interests of the organization must prevail over the interests of the individual director or anyone else. No director can use his or her position to advance a personal agenda or business interest—or to serve the interests of another person or organization.
Directors have a duty to disclose any conflict of interest and to act ethically and honestly in fact and in perception.
A Director may not appear on both sides of a contemplated transaction or issue. Moreover, a director must exercise confidentiality of information and opportunity. So, a director may not compete with the organization, breach confidentiality, appropriate an opportunity presented to the organization, fail to disclose a conflict of interest, or receive any personal benefit from the organization.
4. Liability of Directors
Directors are generally protected from honest mistakes, made in good faith but mistaken belief if they: (1) exercised good faith judgment without wanton carelessness or gross negligence, and (2) acted diligently within the powers granted to the organization by state law and the organization’s articles of incorporation and bylaws, and (3) executed such judgment after due consideration of what the director reasonably believed to be the relevant facts, and (4) acted without self interest or a conflict of interest. Under the above circumstances, many States offer immunity from suit to non-profit directors.
*Thomas R. Spencer is a member of the Florida and District of Columbia Bar Associations. He has been a director of and counsel to a substantial number of non-profit organizations.
**This article is based, in part on the Model Non-Profit Corporation Act, Third Edition (2008), American Bar Association, Section on Business Law, Committee on Non-Profit Corporations. See also, Fla.Stat. §§617.0830 through 617.0834 (2010)