Directors and officers owe fiduciary duties to the nonprofit they serve. While most directors and officers know about fiduciary duties, there is often a lot of confusion about what the duties require. Below is a quick breakdown of each duty and what each entails.
Duty of Care
What is it?
Directors and officers must exercise their responsibilities in good faith and with a certain degree of diligence, attention, care, and skill. This duty focuses on the decision-making process, not the outcome of the decision. So long as a director acts in good faith, with the requisite degree of care, and within his/her authority, a court will not review a decision, even if it ended up being bad for the organization (only applies in absence of fraud, illegality, or a disabling conflict of interest). Courts recognize that not every decision is going to be a good one. Therefore, if directors and officers are making informed decisions in good faith, this duty is upheld.
How does a director or officer uphold this duty?
Directors and officers must actively participate by attending meetings, reviewing materials prior to meetings, accessing and reviewing financial records and statements, and seeking expert advice when necessary.
Directors and officers must make informed decisions by reviewing written materials and hearing presentations from management, hearing advice and recommendations of outside experts when necessary, debating and deliberating upon a proposal, requesting additional information deemed relevant, gathering information from comparable institutions, and taking the to properly weigh the decision.
Directors and officers may rely on expert opinion so long as they read and evaluate it, reasonably believe the contents to be accurate, and honestly assume that the agents presenting such reports or opinions are within their professional and expert competence.
Directors and officers may delegate the day-to-day work but should set policies and exercise general supervision.
Duty of Loyalty
What is it?
Directors and officers must: (i) act in a manner that does not harm the corporation; (ii) avoid using their position to obtain an improper personal benefit; and (iii) place the interests of the corporation ahead of their personal gain. This duty focuses on the fairness of a transaction and if the decision to enter into an interested transaction was made by an impartial board.
Common violations include: (i) use of an organization’s property or assets on a more favorable basis than available to outsiders; (ii) usurpation of a business opportunity; (iii) use of material nonpublic organizational information or position for personal benefit; (iv) insider advantages and corporate waste; and (v) competing with the organization.
How does a director or officer uphold this duty?
The procedural aspect of this duty looks to the process by which the board approved the transaction. Your nonprofit should: (i) have a conflict of interest policy and follow it; (ii) require full disclosure of conflicts prior to a decision being made; and (iii) recuse the director or officer who has the conflict from the discussion and votes.
The substantive aspect of this duty asks whether the transaction is fair to the organization and will consider the overall financial health to determine if the decision makes sense.
Duty of Obedience
What is it?
Directors and officers must carry out the purposes of the organization as expressed in the articles of incorporation or organizing documents. They may not deviate in any substantial way from the duty to fulfill the particular purposes for which the organization was created and must obey applicable laws.
How does a director uphold this duty?
Directors and officers should refrain from transactions and activities that are beyond the corporation’s powers and purposes as expressed in its certificate of incorporation and should abide by all applicable laws.
Questions?
Did you know the Colorado Nonprofit Legal Center offers educational seminars? We are happy to attend a board meeting to train your directors and officers on fiduciary duties or any other legal or governance matter you need assistance with.