(This blog was updated in March 2021.)

A seat on the board of a nonprofit corporation can bring many benefits, ranging from an opportunity to support a valuable community service to goodwill for your private business. Such positions also come with obligations. The basic obligations of directors of nonprofit corporations fall into two categories — the duty of loyalty and the duty of care.

Duty of Loyalty

A nonprofit director must act in good faith, in a manner he or she reasonably believes to be in the best interests of the corporation.

The basic principle to be observed is that the director cannot use his corporate position for personal gain.

Some examples of the breach of the duty of loyalty would include breaching confidentiality, competing with the corporation, appropriating a corporate opportunity, acting with a conflict of interest, having a corporation loan money to a director or a director’s affiliate or improper payments or gratuities.

A variety of situations could create a conflict of interest. A transaction between a fiduciary and a corporation is not void because one or more interested directors participate — if certain factors are met.

First, the material facts to the relationship or interest must be disclosed.  Also, the directors must in good faith authorize the relationship by the affirmative vote of the majority of disinterested directors, or the transaction must be fair to the corporation as of the time it is authorized or approved.

Duty of Care

The director must also exercise the care that an ordinarily prudent person in a like position would use under similar circumstances.

The duty of care includes the duty of attention, which normally requires the directors to attend meetings, review adequate information concerning action taken by the board, generally oversee the corporation’s business and adopt and prescribe major policies.

Directors cannot fulfill their duties without knowing the organization’s goals and mission. Directors must expect a time commitment in order to be effective board members and to fulfill board positions appropriately.

Directors are not expected to be experts on all issues. Seeking expert and professional advice is evidence of diligence on the part of directors.

The Business Judgment Rule protects decisions that are (1) informed and made on the basis of reasonable inquiry; (2) made in good faith and without a disabling conflict of interest; and (3) made on a rational basis.

Directors are expected to rely upon legal counsel, public accountants and other experts as to matters reasonably believed to be within their knowledge.

Committees can also be relied upon as to matters within their designated authority that the director reasonably believes merits confidence.

Duties to Members or Third Parties

Directors of some nonprofit corporations may have issues regarding active members of the corporation or issues as a result of possible statutory duties to third parties under employment discrimination claims, RICO, ERISA, Antitrust laws or tax laws.

Emerging Trends

Various trends emerging in the corporate world can also affect the duties of directors in the nonprofit world. Two of the more important trends are those of transparency and accountability.

Transparency has clearly become a major factor with for-profit corporations but is also important to nonprofit corporations. If a nonprofit corporation is receiving public funds, applicable public records laws are very important.

Nonprofit organizations receiving public funds must open at least some of their board meetings to the public. They must promote accountability and transparency by allowing the public to see how decisions are made and how money is allocated.

Sarbanes-Oxley, a wide-reaching law that imposed unprecedented accounting and filing requirements on publicly traded companies to increase transparency, has become relevant to nonprofit corporations, too. Audit committees, which oversee outside auditors’ activities, are now standing committees for nonprofits.

Nonprofit companies and their boards must be proactive in putting together policies to deal with the many changes that accompany these trends.

Directors’ and Officers’ Liability Insurance

Most incorporating documents state that the corporation will indemnify directors found personally liable.  This language is only effective if there are assets of the corporation to cover the amount owed.

Many corporations purchase directors’ liability insurance to protect their directors in the event they are found liability in any matter.

If you are a director of a nonprofit board, check to make sure you are covered by such insurance.

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Shawna L. L’Italien, a lawyer in the Salem office of Harrington, Hoppe & Mitchell, focuses on on business transactions, estate planning, probate, elder law and real estate law. She can be reached at (330) 337-6586 or at slitalien@hhmlaw.com.