Directors and Officers
Issues of Personal Liability
Directors, officers, and trustees of not-for-profit organizations face personal liability for their actions as board member. In performing their duties, individuals face greater personal risk than insurance coverage along can mitigate.
The following points are intended to help those in positions of responsibility protect themselves against litigation arising out of their conduct as trustees or board member.
The three basic duties of Directors and Officers include:
Duty of Diligence
- Act with the care that a reasonably prudent person in a similar position would use under similar circumstances;
- Perform their duties in good faith and in a manner they reasonably believe to be in the best interest of the organization;
- Prior to making any business decision, consider all material information available;
- Reasonable behavior with respect to matters submitted for approval, but also inquiry and monitoring of the organization’s affairs. Directors and Officers are required to implement reasonable programs to promote appropriate organizational conduct, and to identify improper conduct;
- Prudently represent the interests of the organization’s members and other constituencies in directing business and affairs of the organization with the law
- Refrain from engaging in personal activities that would injure or take advantage of the organization;
- Do not use your position of trust and confidence to further your private interest;
- Requires undivided and unselfish loyalty to the organization and demands that there be no conflict between one’s duty to the organization and self-interest.
- Perform duties in accordance with applicable statutes and the term or the organization’s charter;
- May be liable if they authorize an act that is beyond the powers conferred upon an organization by its charter or by the laws of the state of incorporation;
- Not for profit organizations are often regulated by a multitude of statutes, rules, and regulations with which outside directors are typically unfamiliar. It is important to ensure control and monitoring processes are place to guarantee compliance.
Business Judgment Rule
Directors are presumed to have acted properly and to have satisfied these three basic duties if the Business Judgment Rule (BJR) applies. Recognizing that not all decisions of directors will result in benefit to the organization, the BJR provides directors with a legal defense such that they will be personally liable for loss to the organization only if the elements of the defense are not satisfied.
To obtain the element of this important defense, directors must:
- Act in good faith;
- Believe that their conduct is in lawful and legitimate advancement of the organization’s purposes;
- Exercise their honest business judgment after a reasonable investigation.
Five Elements of the BJR are generally recognized:
- Business decision. The BJR protects directors from liability in connection with actual business decisions by the directors. Inaction by directors is protected only if it is a result of a conscious decision to refrain from acting.
- Disinterestedness. The BJR protects directors who are disinterested and free of any conflicts of interest with respect to the challenged action. For this purpose, disinterested directors are those who neither appear on both sides of the transaction nor expect to derive any personal financial gain from it in the sense of self-dealing as opposed to a general benefit to the organization or its constituents.
- Due care. The BJR protects directors if they reached an informed decision after making a reasonable effort to ascertain and consider all relevant information reasonably available to them and after reasonably deliberating the decision.
- Good faith. The BJR protects directors if they acted with a good faith belief that their business decision was in the best interests of the organization. The protection will not apply if the directors acted solely or primarily to preserve their positions or otherwise to benefit themselves.
- No abuse of discretion. The BJR protects directors against honest errors of judgment but does not provide protection for decisions that cannot be supported by some rational basis and are extremely and conspicuously bad on their face.