The board of directors of a nonprofit is ultimately responsible for the activities and affairs of the nonprofit and the exercise of all corporate powers. A board may delegate management of the day-to-day operations to officers, committees, employees, or a management company, but it may not delegate its oversight responsibility or its function to govern. And when it delegates authority and power, the board must do so with reasonable care.
For nonprofits with employees, the roles of the board are to direct, oversee, and protect. Direction is provided through mission, vision, and values statements; plans; policies; budgets; specific directives; and responsible leadership. Oversight involves reviews of executive performance, financials, audits, programmatic impact, and compliance. And protection of charitable assets is accomplished by appropriate risk management, including internal controls and insurance, and strategic decision-making.
Directors are subject to two fiduciary duties in carrying out their governance responsibilities: the duty of care and the duty of loyalty.
Duty of Care
Meeting a director’s duty of care generally requires acting in a reasonable and informed manner under the given circumstances. The standard of care is typically expressed as that which “an ordinarily prudent person in a like position would use under similar circumstances.”
Keeping informed (and making reasonable inquiries when appropriate) is a key to meeting a director’s duty of care. It may be prudent to consider the following activities as essential in that endeavor:
- Regularly attend board meetings;
- Assure that the directors receive adequate information before taking appropriate board action (e.g., by requesting materials and asking questions);
- Review the materials provided in connection with board meetings, particularly those used in reference to any contemplated board action;
- Be familiar with the organization, its legal structure, governing documents (e.g., articles of incorporation, bylaws), exempt purposes (as represented in its governing documents, exemption applications and marketing materials), activities, and key stakeholders (including, but not limited to, staff); and
- Be familiar with general laws applicable to the organization.
Duty of Loyalty
Meeting a director’s duty of loyalty generally requires acting in good faith and in the best interests of the corporation. The key to meeting this duty is to place the interests of the corporation before the director’s own interests or the interests of another person or entity.
A conflict of interest exists when a director has a personal material interest in a proposed transaction to which the corporation may be a party. Conflicts of interest are neither unusual nor generally prohibited under state law. Indeed, transactions involving a conflict of interest may sometimes be in the best interest of the corporation. For example, it may be perfectly appropriate for a board to approve a transaction with a director in which the director is providing the corporation with some good, service or facility at below market rates. Note, however, boards should also consider compliance with federal laws, including those regarding private inurement, private benefit, and either self-dealing (private foundations) or excess benefit transactions (public charities), in approving such transactions.
From a legal perspective, it is often the manner in which conflicts of interest (even ones that are favorable to the corporation) are handled by the interested director and the board that may determine whether the director’s duty of loyalty has been breached and whether the transaction may be rendered void. It should be noted, however, that transactions involving even a perceived conflict of interest might subject the interested director and the corporation to a serious loss in reputation. Accordingly, corporations should enter into such transactions cautiously where the directors believe that it may be viewed negatively if brought to light by the media. For all these reasons, a conflict of interest policy is highly recommended.
Generally, the corporate opportunity doctrine prohibits a director from seizing an opportunity intended for the corporation if: (1) the corporation is financially able to undertake it; (2) it is within the corporation’s line of business and is of practical advantage to the corporation; and (3) the corporation is interested, or has a reasonably expectancy, in the opportunity. Accordingly, a director who, in his or her capacity as a director, learns of a prospective transaction that might be considered a corporate opportunity may find it prudent to first present the opportunity to the board and allow the corporation sufficient time and first right to exploit the opportunity before taking advantage of the transaction in his or her individual capacity.
A director should keep the corporation’s private information confidential. In addition, a director should exercise reasonable diligence to help assure that the corporation and all of its agents keep such information confidential. Note that the strategic plans of a corporation may contain confidential information not meant to be disclosed to the general public lest some other person or entity be able to exploit the information to the disadvantage of the corporation.