Fiduciary Duties of Board Members NAEYC Affiliate Leadership Day November 18, 2009 Therese M. Myers

Fiduciary Duties of Board Members What is a Fiduciary? Board members of nonprofit corporations are Fiduciaries A Fiduciary is “a person who stands in a special relation of trust, confidence or responsibility in his or her obligation to another” (Webster) “The law requires the highest level of good faith, loyalty, and diligence of a Fiduciary, higher than the common duty of care that we all owe one another.” (www.moranlaw.net)

Fiduciary Duties of Board Members Source of the Requirement Not-for-profit corporate law states that board members have the fiduciary obligation to manage the corporation. Breach of fiduciary duties can result in personal liability of board members The corporation itself can enforce these duties, or members or nonmembers if they are harmed by any breach.

Fiduciary Duties of Board Members Duty of Care Duty of Loyalty Duty of Obedience

Duty of Care Exercise reasonable care in acting on behalf of the corporation Duty to act honestly and in good faith Duty to act diligently attend meetings and participate

Duty of Care Act on an informed basis You may rely on competent staff and outside consultants like attorneys and accountants unless you have reason to know such reliance is unwarranted

Duty of Care Maintain confidentiality of non-public corporate information Personnel, financial Executive sessions Attorney-client privilege Bottom line: pay attention, ask questions and be careful in handling the corporation’s matters

Duty of Loyalty Duty to have undivided loyalty to the corporation Act in the best interest of the corporation, not your own or anyone else’s interest

Duty of Loyalty Do not directly compete with the corporation Do not participate in self-dealing transactions (board member on both sides) Do not usurp corporate opportunities (taking for yourself a business idea or that fits within corporation’s current or future plans) (ok to pursue for yourself but only after you offer it to corporation and disinterested members reject it)

Duty of Loyalty Conflicts of Interest Duty of loyalty requires avoidance of conflicts of interest, unless fully disclosed and determined to be in the best interest of the corporation Conflicts may be actual, potential, or perceived Board members should avoid the appearance of a conflict of interest, to protect the integrity of Board decisions.

Duty of Loyalty Conflicts of Interest A conflict of interest is when a board member participates in the corporation work and at the same time has other personal, financial or professional interests that could bias the board member one way or the other.

Duty of Loyalty Examples of Conflicts Board Member’s spouse applies to become the executive director of the corporation. Board Member holds a significant investment in Company A, which may sell goods to the corporation. Board Member is an early childhood educational consultant who works in a consulting firm, which offers to provide consulting services to the corporation.

Duty of Loyalty Conflicts of Interest How to address and resolve a conflict of interest Minimum requirement is Disclosure Disclosure of a minor conflict will often resolve it Recusal from discussion and voting on an issue where a more serious conflict exists Resignation if there is a serious, ongoing conflict that precludes meaningful involvement on the Board The Board, upon motion, may exclude a Board member from participation in deliberations and vote

Duty of Obedience Obey the law and faithfully pursue the corporation’s purpose Comply with the governing documents Articles of Incorporation Bylaws Board Policies and Procedures

Duty of Obedience Comply with Governing Documents Articles of Incorporation: give the entity its separate legal existence; purpose Agreement between the state and the corporation Comply with corporate filing requirements and deadlines

Duty of Obedience Comply with Governing Documents Bylaws: Rules of management and governance Agreement between the corporation and its members An important legal document that merits careful review -- likely the best statement regarding board members’ responsibilities and authority Board Policies and Procedures: more detailed rules; cannot conflict with Articles of Incorporation or Bylaws

Duty of Obedience Document Destruction and Whistleblowers The Sarbanes-Oxley Act was enacted in 2002 in response to major corporate scandals Applies mostly to publicly-traded corporations but two CRIMINAL sections also apply to nonprofits: Nonprofits must not destroy documents to thwart a federal government investigation Nonprofits must not retaliate against “whistleblowers” who report possible illegal activity to federal authorities Be Careful! These two provisions carry criminal penalties: fines and jail time. whistleblowers i.e. individuasl (generally staff) who reprt Taking huge risk; be real careful re firing is unrelated to someone’s

Duty of Obedience Great Federal Tax Benefits NAEYC and its Affiliates are recognized by the IRS as Tax-Exempt under § 501(c)(3) of the IRC as educational, charitable organizations Federal tax law provides great tax benefits to 501(c)(3) corporations No income tax on certain revenues, including dues, conference fees, exhibit fees, publication sales, corporate sponsorships “Big Deal” - contributions are tax deductible to donors as charitable contributions

Duty of Obedience Maintain Tax-Exempt Status The Internal Revenue Code requires that tax-exempt corporations comply with federal tax law to maintain 501(c)(3) tax-exempt status and avoid penalties. Three Serious Risks: excessive private benefit to insiders political campaign activity excessive lobbying Excellent Resource: Compliance Guide for 501(c)(3) Public Charities (go to www.irs.gov/eo and then click “ABCs for Exempt Organizations”)

Duty of Obedience Excessive Private Benefit to Insiders 501(c)(3) corporations may not allow excessive private benefit to insiders Why not? 501(c)(3) corporations must serve a public interest, not private interest Do not pay above market rates or unreasonable compensation to insiders; use comparability data when setting executive director’s and key employees’ salary

Duty of Obedience Political Campaign Activity 501(c)(3) corporations are absolutely prohibited from participating in activities in favor of, or in opposition to, any candidate for public office (federal, state or local) cannot contribute to political campaign funds cannot make public statements of position It is fine for you as an individual to engage in political activity—just be sure it is clear that it is not in your official capacity or that it could appear that way.

Duty of Obedience No excessive lobbying 501(c)(3)s must not engage in excessive lobbying a couple different tests (substantial part test, expenditures test) detailed in the Life Cycle of a Public Charity (www.irs.gov/eo) Honest Leadership and Open Government Act of 2007 (amends Lobbying Disclosure Act) places certain restrictions on lobbying quarterly reporting requirements details in statute and regulations

Fiduciary Duties in a Nutshell Attend meetings Pay attention and ask questions Review materials Report irregularities Refrain from acting in your own interest Avoid conflicts of interest Become familiar with governing documents Mind the corporate and tax status Always act in the best interests of the corporation

Protections from Personal Liability Compliance with the fiduciary duties of care, loyalty and obedience protects from personal liability.

Protection from Personal Liability Volunteer Protection Statutes Volunteers generally are not personally liable for actions made in good faith while acting within the scope of her volunteer responsibilities Volunteers are still liable for willful, reckless or criminal activity, fraud and gross negligence As a practical matter, the common law sets a high bar for those who would impose personal and individual liability upon volunteers to nonprofit corporations.

Protection from Personal Liability Indemnification Most states permit nonprofit corporations to indemnify board members against claims for all but gross negligence or fraud. Check your governing documents to see if they contain an indemnification provision. Will contain standard of conduct

Protection from Personal Liability Insurance Purchase and Maintain D&O Insurance Coverage Some insurance policies are tailored for nonprofits and are preferred over standard business policies Protect the entity, board members, other volunteers and staff for wrongful acts and omissions sometimes called Association Professional Liability Insurance Ask about exclusions and coverage limits

Final Thoughts Make your best effort and use your best judgment – perfection is not required Board members generally are not personally liable for actions unless they act in bad faith, with gross negligence, intentional misconduct or fraud