DUTIES OF DIRECTORS FOR NONPROFIT

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DUTIES OF DIRECTORSFOR NONPROFIT

• Directors are subject to two primary duties
• Duty of Care
• Duty of Loyalty

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DUTY OF CARE

• Director must act in a reasonable and informed
  manner.
• ? Director must be informed
• ? Director must discharge duties
• in good faith
• Reasonable person test.

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DUTY OF CARE

• ? Director should regularly attend
• meetings Board and Committees.
• ? Exercise independent judgment do
• what is best for the corporation. Do
• not act solely on basis of what
• another director thinks.
• ? Have adequate information.

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• ? Director may rely on information from
• officers or employees of corporation
• legal counsel
• public accountants
• info from board committee
• ? Directors oversee, but do not directly
• engage in day-to-day operations.

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• ? Delegation The scope of the boards
• delegation of Board authority to an
• executive committee should be clearly
• set forth in the bylaws and/or in board
• resolutions.
• ? Directors still retain a duty of oversight
• over the executive committee.

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DISCHARGE OF DUTY OF CARE

• ? Board should meet on regular basis.
• ? Use standard agenda.
• ? May transact business without a
• meeting by unanimous written consent.
• (Should not be used as a substitute for
• regular meetings.)
• ? Provide information on a regular
• schedule before board meetings.

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• ? Adopt rules of procedure appropriate
• to size of board, diversity of membership.
• ? Minutes of all meetings include
• members present, votes taken,
• and how each member voted.

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BUSINESS JUDGMENT RULE

• Director generally protected from liability if
  he/she acted in good faith and in a manner
  reasonably believed to be in the corporations
  best interest and with independent and informed
  judgment.

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• The rule is less well established in the non
  profit context. Courts may be less willing to
  extend this protection to directors when
  individuals are harmed, or other bad facts are
  present.

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EXCEPTION TO AVAILABILITYOF THE RULE

• Business Judgment Rule defense will not be
  applied in situations where there are basic
  breaches of duty by the director.
• Criminal Activity
• Fraud
• Bad Faith
• Willful Wanton Misconduct

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DUTY OF LOYALTY

• Directors must exercise powers in good faith and
  in best interests of corporation, rather than in
  their own interests or the interests of another
  entity or person.
• The director SHALL NOT use a corporate position
  for individual or person advantage.
• Relates primarily to
• conflicts of interest
• corporate opportunity
• confidentiality

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CONFLICTS OF INTEREST

• Duty of Loyalty requires that a director be
  aware of the potential for conflicts of interest
  and act with candor and care in dealing with such
  situations.
• It is the manner in which the director and the
  board deal with a conflict of interest that
  determines the propriety of the transaction.

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CONFLICT OF INTEREST

• A conflict is present whenever a director has a
  material personal interest in a proposed contract
  or transaction to which the corporation may be a
  party.
• Can be direct or indirect.

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CONFLICT OF INTEREST (cont.)

• In a nonprofit there are possible conflicts of
  interest arising from the directors simultaneous
  service on the boards of other (for profit or
  nonprofit) corporations.
• A director should disclose such affiliations in
  general as well as any specific circumstances
  that could create a conflict of interest.

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ANTITRUST CONCERNS

• Dont use meetings and opportunities to network
  made possible by Board participation to commit
  antitrust violations.
• Do not enter into any agreements with
  competitors.
• Do not demean competitors products.
• Do not discuss pricing with your competitors
• Do not discuss allocation of markets.
• Do not agree with competitors to give cash
  discounts or promotional allowances.

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DIRECTOR LIABILITY RISKS

• Directors possible liability arises not
  because the corporation might be liable for a
  matter, but because the director is charged with
  some breach of duty or other harm done by the
  director to the corporation.

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SUITS AGAINST DIRECTORS

• These are brought in three different ways.
• 1. Outside party claiming injury by the
  corporation, and claiming that the director is a
  principal or implied
• co-conspirator.
• 2. Aggrieved party asserts a right of the
  corporation against the director for some claimed
  harm to the corporation. Usually arise because
  of an alleged breach of duty.

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• 3. Personal liability under various
  federal and state laws dealing with issues
  such as environmental claims, tax
  delinquencies, and antitrust claims.
• Generally based on allegations of negligence or
  failure to oversee.

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INDEMNIFICATION

• Most states provide for indemnification rights of
  non profit directors by statute.
• Usually corporation may use its discretion to
  indemnify director who has acted in good faith
  and with the reasonable belief that his/her
  actions were in the best interests
• of the corporation.
• May be full or partial.

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• May make discretionary indemnification mandatory
  by appropriate provisions in the Articles of
  Incorporation or bylaws.
• Indemnification is mandatory when the director is
  wholly successful in his/her defense of the
  matter as to which indemnification is sought.

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INSURANCE

• Nonprofit should obtain insurance to protect
  its directors and officers.
• DO insurance.
• May be broader in coverage into areas where
  indemnification is prohibited by state law.
• Be sure you know what is covered.
• Claims made policies.

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LIMITATION OF LIABILITY

• In more than 25 states a directors liability
  is limited except in special cases of gross
  negligence or willful malfeasance.

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GROSS NEGLIGENCE

• Acting without the slightest care or diligence
  that a reasonable person would exercise.
• Actions taken without even the slightest care of
  a reasonable person.

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PROTOTYPE VOLUNTEER

• A demonstrated interest in the agencys service
  goals.
• Specific experience and/or knowledge in at least
  one element administration, finance, personnel,
  program development, evaluation, public
  relations, or communications.

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• Representative of some aspect of segment of the
  population in the community.
• Available time.
• Participate on board committees.