Legal Duties of Nonprofit Board Members

Nonprofit officers, directors, committee members, and others involved in the nonprofit's governance structure are often unclear as to their roles and responsibilities. And for good reason – some rights and obligations are determined by law, others by the nonprofit's articles of incorporation and bylaws, and still others by written policies and procedures or more informal arrangements. This article is designed to clarify the delegation of duties, explain the fiduciary duties imposed by law on nonprofit officers and directors, and suggest ways to protect volunteer leaders from personal liability.

Roles and Responsibilities.

The board of directors is the governing body of the nonprofit, responsible for the ultimate direction of the management of the affairs of the organization. The board is responsible for policymaking, while employees (and to a certain extent, officers) are responsible for executing day-to-day management to implement board-made policy. However, the ultimate legal responsibility for the actions (and inactions) of the nonprofit rests with the board. (Note that the term “directors” is synonymous with “board members.”)

The board can act legally only by consensus (majority vote of a quorum in most cases) and only at a duly constituted and conducted meeting, or by unanimous written consent (in most states, boards cannot act by mail or electronic ballot). The board may delegate authority to act on its behalf to others such as committees, but, in such cases, the board is still legally responsible for any actions taken by the committees or persons to whom it delegates authority. An individual board member has no individual management authority simply by virtue of being a member of the board. However, the board may delegate additional authority to a board member such as when it appoints board members to committees. In a similar fashion, an officer has only the management authority specifically delegated in the bylaws or by the board (although the delegated authority can be general and broad).

Committees have no management authority except for that delegated to them by the bylaws or by the board. Note that most state nonprofit corporation law delineate between committees of the board (which usually need to be comprised solely of board members and which can exercise the board’s fiduciary authority) and other committees (which do not need to be comprised solely of board members but which cannot exercise the board’s fiduciary authority). Furthermore, even for committees of the board, under most state nonprofit corporation statutes, certain functions may not be delegated by the board to committees. For example, in many states, the board may not delegate to committees the power to elect officers, fill vacancies on the board or any of its committees, amend the bylaws, or approve a plan of merger, consolidation or dissolution, or a substantial transfer of assets.

Employees have no management authority except that specifically delegated to them in the bylaws or by the board. For example, most nonprofits' bylaws delegate to the chief staff executive the responsibility for the day-to-day operations of the nonprofit's office(s), including the responsibility to hire, train, supervise, and terminate the professional staff of the nonprofit, as well as the responsibility for all staffing and salary administration within guidelines established by the board.

Members (where the nonprofit corporation has members) have no management authority, as such authority is held by the board of directors. However, state nonprofit corporation laws generally reserve to members the right to approve certain major corporate transactions, such as mergers, consolidations, dissolutions, and substantial transfers of assets, as well as the authority to amend the nonprofit's articles of incorporation. If members elect board members, many state statutes reserve the right to remove such directors to the members that elected them. Under some nonprofits' bylaws, certain matters, such as the amendment of the bylaws or the election of officers and directors, must be submitted to the membership for a vote. However, most other matters generally are not submitted to the full membership, but rather are handled by the board, one or more of its committees, or the officers or employees of the nonprofit. Any rights not allocated to the members or others by statute or the nonprofit’s governing documents default to the board.

Fiduciary Duty.

Those in positions of responsibility and authority in the governance structure of a nonprofit – both volunteers who serve without compensation and employed staff – owe fiduciary duties to the organization, including duties of care, loyalty and obedience. In short, this means they are required to act reasonably, prudently and in the best interests of the organization, to avoid negligence and fraud, and to avoid conflicts of interest. In the event that the fiduciary duties of care, loyalty or obedience are breached, the individual breaching the duty is potentially liable to the nonprofit for any damages caused to the nonprofit as a result of the breach. This fiduciary duty is a duty to the nonprofit as a whole; even those who only serve on a particular committee or task force owe the fiduciary obligation to the entire nonprofit. Breaches of fiduciary duties also can be enforced by the state Attorney General of the nonprofit’s state of incorporation.

1. Duty of Care. This duty is very broad, requiring officers and directors to exercise ordinary and reasonable care in the performance of their duties, exhibiting honesty and good faith. Officers and directors must act in a manner which they believe to be in the best interests of the nonprofit, and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. The "business judgement rule" protects officers and directors from personal liability for actions made in poor judgment as long as there is a reasonable basis to indicate that the action was undertaken with due care and in good faith.

2. Duty of Loyalty. This is a duty of faithfulness to the nonprofit. This means that officers and directors must give undivided allegiance to the nonprofit when making decisions affecting the nonprofit. In other words, officers and directors cannot put personal interests above the interests of the nonprofit. Personal interests may include outside business, professional or financial interests, interests arising from involvement in other organizations, and the interests of family members, among others. Officers and directors should be careful to disclose even potential conflicts of interest to the board of directors, and should recuse themselves from deliberation and voting on matters in which they have personal interests. For pervasive and continuing conflicts – such as a director of the nonprofit concurrently serving on the board of a competing nonprofit – resignation from the individual's nonprofit leadership post or from the outside conflicting responsibility may be required. Officers and directors can have business dealings with the nonprofit, but such transactions must be subject to considerable scrutiny. In such event, officers and directors must fully disclose any personal interests to the board of directors, and the terms of any transaction must be fair to the nonprofit. In addition, state nonprofit corporation statutes frequently provide specific procedures for dealing with transactions in which officers or directors have conflicts of interest. Finally, the duty of loyalty imposes an obligation to protect any confidential information obtained while serving the nonprofit.

Corporate Opportunities Doctrine. The duty of loyalty specifically prohibits competition by a nonprofit officer or director with the nonprofit itself. While officers and directors generally may engage in the same "line of business" or areas of endeavor as the nonprofit, it must be done in good faith and without injury to the nonprofit. One form of competition that is not permitted, however, is appropriating "corporate opportunities." A corporate opportunity is a prospect, idea or investment that is related to the activities or programs of the nonprofit and that the individual knows, or should know, may be in the best interests of the nonprofit to accept or pursue. A nonprofit officer or director may take advantage of a corporate opportunity independently of the nonprofit only after it has been offered to, and rejected by, the nonprofit.

3. Duty of Obedience. This duty requires officers and directors to act in accordance with the organization's articles of incorporation, bylaws, policies, and other governing documents – including the mission and purposes of the organization expressed in those documents – as well as all applicable laws and regulations.

Reliance on experts. Unless an officer or director has knowledge that makes reliance unwarranted, an officer or director, in performing his or her duties to the organization, may rely on written or oral information, opinions, reports, or statements prepared or presented by: (i) officers or employees of the nonprofit whom the officer or director believes in good faith to be reliable and competent in the matters presented; (ii) legal counsel, public accountants, or other persons as to matters which the officer or director believes in good faith to be within the person's professional or expert competence; or (iii) in the case of reliance by directors, a committee of the board on which the director does not serve if the director believes in good faith that the committee merits confidence.

Willful ignorance and intentional wrongdoing. Directors cannot remain willfully ignorant of the affairs of the nonprofit. A director appointed as treasurer, for example, with limited knowledge of finance cannot simply rely on the representations and reports of staff or auditors that "all is well" with the nonprofit's finances. Moreover, officers and directors acting outside of or abusing their authority as officers and directors may be subject to personal liability arising from such actions. Furthermore, officers or directors who, in the course of the nonprofit's work, intentionally cause injury or damage to persons or property may be personally liable, even though the activity was carried out on behalf of the nonprofit.

Reducing Personal Liability Risk.

Nonprofit officers and directors can help minimize their risk of personal liability by doing the following:

• Being thoroughly and completely prepared before making decisions.
• Becoming actively involved in deliberations during board meetings, commenting as appropriate, and making inquiries and asking questions where prudent and when such a need is indicated by the circumstances.
• Making decisions deliberately and without undue haste or pressure.
• Where there are dissenting votes or abstentions, insisting that meeting minutes accurately reflect such votes on actions taken at meetings.
• Requesting that legal consultation be sought on any matter that has unclear legal ramifications.
• Requesting that the nonprofit's accountants assess and evaluate any matter that has significant financial ramifications.
• Obtaining and carefully reviewing both audited and unaudited periodic financial reports of the nonprofit.
• Attending the nonprofit's meetings and reading the nonprofit's publications carefully to keep fully apprised of the organization's policies and activities.
• Reviewing from time to time the nonprofit's articles of incorporation, bylaws, policies, and other governing documents.
• Avoiding completely any conflicts of interest that may be harmful to the organization and fully disclosing any potential conflicts at the outset.

Liability Protection.

If preventive risk management fails, the liability of nonprofit officers and directors often can be limited – but not fully eliminated – through indemnification by the nonprofit, directors and officers liability insurance purchased by the nonprofit, and federal and state volunteer protection laws.

Apparent Authority.

In the landmark 1982 case, American Society of Mechanical Engineers v. Hydrolevel, the U.S. Supreme Court determined that a nonprofit can be held liable for the actions of its officers, directors and other volunteers (including actions which bind the nonprofit financially), even when the nonprofit does not know about, approve of, or benefit from those actions, as long as the volunteer reasonably appears to outsiders to be acting with the nonprofit's approval (i.e., with its "apparent authority"). The U.S. Supreme Court made clear that nonprofits are to be held strictly liable for the activities of volunteers that have even the apparent authority of the nonprofit. Even if a nonprofit volunteer does not, in fact, have authority to act in a particular manner on behalf of the nonprofit, the law will nevertheless hold the nonprofit liable if third parties reasonably believe that the volunteer had such authority. The law thus requires a nonprofit to take reasonable steps to ensure that the scope of its agents' (e.g., officers, directors and committee members') authority is clear to third parties, and that agents are not able to hold themselves out to third parties as having authority beyond that which has been vested in them by the nonprofit – for example, by being permitted to use an email address being able to utilize an email address containing the nonprofit’s domain, having business cards from the nonprofit, or having access to nonprofit’s letterhead

For more information, contact Mr. Tenenbaum at jtenenbaum@TenenbaumLegal.com.