LAWREVIEW
Duties of New Directors
This Law Review was written by
Susan Feingold Carlson and edited
by Jed Mandel. Both practice
in the Association Law Group at
Neal, Gerber & Eisenberg LLP and
serve as the Association Forum’s
legal counsel.
Q: At our upcoming annual meeting, we
will install new directors. What should I
tell them about their responsibilities?
A: Not-for-profit organizations and their
boards, like all corporations, are under
increasing scrutiny by state and federal
agencies. The obligations today, however,
are the same as they’ve always been. To
assist newcomers and remind veterans,
here are the basics regarding the fiduciary
duties of directors:
The duty of care. The duty of care
requires a director to exercise the care that
a reasonably prudent person would exercise in a like position under similar circumstances. A director who makes decisions
with reasonable care and in good faith
receives the protection of the “business
judgment rule,” that is, their decisions will
not be second-guessed by a court.
But what constitutes “reasonable care”
and “good faith” in this context? Essentially, they require directors to participate
in association meetings, read meeting
materials ahead of time, and ask questions
when necessary. That said, directors don’t
need to do all the work of the association
themselves. In fact, they are expected to
delegate tasks to staff or committees, and
they may rely on the advice of experts, like
attorneys and accountants. In the end,
however, each director must exercise his or
her own independent judgment in voting
on matters coming before the board.
The duty of loyalty. The duty of loyalty
requires each director to place the interests of the organization he or she serves
ahead of his or her own personal interests
and the interests of any other person or
organization. In addition, it requires each
director to refrain from using his or her
position, or information gained from participation on the board, to further the
director’s personal financial interests.
In a nutshell, the association’s interests
come first … before the director’s personal or business interests, and before
the interests of a family member or business associate. It would be a breach of
one’s duty of loyalty, for example, for a
director to listen to a board discussion
regarding a new initiative or educational
program and then use that information to
develop a competing or substitute program or initiative. Similarly, but less obviously, a breach also would occur where a
director has an idea for an initiative that
may be pursued either by the association
or by the director personally, and the
director pursues the initiative personally
without bringing the idea to the association’s attention and giving the association
the opportunity to pursue it first.
To assist directors in faithfully discharging their duty of loyalty, associations
should adopt conflict of interest policies
requiring disclosure of any actual, potential
or perceived conflicts between the interests
of the directors and those of the association. Through such disclosure, the disinterested members of the board can determine
whether disclosure by itself is sufficient to
protect the association’s interests, whether
the interested director should be excused
from participation in specific activities, or
whether the interests of the association and
the board member are so different that the
interested director should be asked to step
down from the board. It should be noted
that it is not inherently illegal for a director
to perform services for his or her association under the appropriate circumstances.
Specifically, directors may do business with
their association where the disinterested
directors determine, after full disclosure,
that the terms of the agreement are fair.
The duty of obedience. The duty of obedience requires directors to support their
association’s rules and policies, as well as
board decisions once made. This duty
often is a difficult one with which to comply. While the duty of care requires directors to participate in the debate and
deliberation of the issues, the duty of obedience requires directors to support board
decisions, even those with which they disagreed. If a director feels compelled to
speak publicly against the board’s decision,
he or she should resign from the board.
In addition to meeting their fiduciary
duties, directors also must comply with
certain statutory requirements. Specifically, for example, associations and their
directors are subject to federal and state
antitrust laws, civil rights laws and federal
employment tax requirements. That said,
unless a director was directly and personally involved in committing the violation,
it is unlikely that he or she would have
personal liability.
Thus, as a practical matter, volunteer
directors generally have little personal liability for the actions they take on their
organization’s behalf unless they act in
bad faith or with deliberate disregard for
their fiduciary duties. The business judgment rule protects directors against liability for decisions made in good faith, with
reasonable care, and in the organization’s
best interests, even if such decisions turn
out to have been “wrong.”
Because no one can prevent someone
from bringing a lawsuit — even if it’s frivolous — many associations indemnify their
directors against liability for actions taken
in good faith, and they buy insurance to
cover any costs and/or losses related to
those actions. The best protection from
liability, however, is prevention, which
may be achieved by educating directors
about their legal responsibilities and then
assisting them through the adoption and
implementation of policies that promote
sound corporate governance practices.
The answers provided here should not be construed
as legal advice or a legal opinion. You are urged to
consult a lawyer concerning any specific situations
or legal questions you may have.
