Justice Douglas, writing for the United States
Supreme Court, described the fairness test as follows:
He who is in such a fiduciary position cannot serve
himself first and . . . [the nonprofit corporation] second.
He cannot manipulate the affairs of his corporation to
their detriment and in disregard of the standard of
common decency and honesty . . . He cannot use his
power for his own personal advantage and to the
detriment of . . . [the nonprofit corporation] no matter
how absolute in terms that power may be and no matter
how meticulous he is to satisfy technical requirements.
For that power is at all times subject to the equitable
limitations that it may not be exercised for the
aggrandizement, preference, or advantage of the
fiduciary to the exclusion or detriment . . . [of the
The Duties of Nonprofit Corporate Directors and Officers
by Patt Wilson McDaniel, © 2000
Directors and officers are subject to the duties of due diligence, obedience and loyalty.
These fall under the broad duty of governance as defined by common law and state corporate statutes. The Business Roundtable has said that corporate boards of directors have five primary functions, four of which apply to nonprofits. (The Business Roundtable, Corporate Governance and American Competitiveness 1990)
· Select, regularly evaluate, and, if necessary replace the chief executive officer. Determine management compensation. Review succession planning.
· Review and, where appropriate, approve the financial objectives, major strategies and plans of the corporation.
· Provide advice and council to top management.
· Review the adequacy of systems to comply with applicable laws/regulations.
Many other functions, of course, fall under the duty of governance.
Duty of diligence: The standard of care with which Directors are legally obliged to perform their duties is typically expressed as ‘with the care that an ordinarily prudent person in a like position would exercise under similar circumstances’. This does not mean that a person with additional capabilities can leave that expertise at the door. They must bring all their abilities to play in the fulfillment of their duties. In addition:
‘These standards consider the knowledge, skills and experience of the individual director, but do not excuse a director who lacks business experience or particular expertise from exercising the diligence and common sense, informed judgment and practical wisdom of an “ordinarily prudent person”’ (The Revised Model Business Corporation Act as quoted in International Risk Management institute’s Professional Liability Insurance Vol.I)
Directors must devote adequate time, effort and care making informed and prudent decisions in good faith. Legal precedent states that this precludes “rubber-stamping” proposals made by corporate management. California law goes further in requiring reasonable inquiry.
California General Corporation Law section 309(a) provides: “A director shall perform the
duties of a director, including duties as a member of any committee of the board upon which the
director may serve, in good faith, in a manner such director believes to be in the best interests of
the corporation and its shareholders and with such care, including reasonable inquiry, as an
ordinarily prudent person in a like position would use under similar circumstances.”
The Principle of Independence also applies: The decision must be made on its merits independently of outside influence or consideration.
Duty of obedience : Directors must act within the scope of their authority and hold the corporation to the powers conferred upon it by the state corporate statutes, the corporate charter/articles of incorporation, and bylaws. The duties of obedience lie primarily in the area of financial matters and record keeping and reporting.
Duty of loyalty: Directors must act ‘in good faith’ and ‘in the best interests of the corporation’.
‘The duty of loyalty imposes an obligation on directors and officers to act in good faith and with
fair dealing. It arises even where a director or officer does not stand to gain or has not made any
personal profit.’ (Director’s and Officers Liability, Specialty Technical Publishers, 1995)
In other words, personal interests, monetary or non-monetary, must not influence the decisions which must be made solely in the best interest of the corporation and its mission.
There are specific guidelines for situations that may involve actual or perceived conflict of financial interest; these will not be discussed in this paper.
Although it may be difficult at times to distinguish between the duty of loyalty and other duties, a breach of the duty of loyalty is treated with greater severity.
Delegation of Duties
The California Department of Corporations has determined that there is only one governing board for a corporation and that is the board of directors. Boards of Directors may delegate some of their powers to committees by board resolution or bylaws, but this does not relieve the board or any director of their fiduciary duties to the corporation. It is the board’s responsibility to supervise and oversee the actions taken by delegated authority. Responsibilities may not be delegated to individuals who are not directors. Major corporate decisions cannot be delegated and, according to California General Corporation Law (Section 311), certain duties are specifically prohibited from being delegated. Those applicable to nonprofits include:
Filling any vacancy on the board or committee
Fixing compensation of the directors
Adopting amending, or repealing by-laws
Amending or repealing any resolution of the board which by its express terms is not to be amended or repealed
Appointing other board committees and members of those committees
In addition, Directors may rely upon information and reports as provided by employees and officers or expert or professional testimony but they still retain the primary duty to oversee the business of the corporation.
This is not intended as legal advice or in any way a definitive treatment of the subject. It is merely presented in the hopes that a broader understanding of their potential responsibilities will enable directors to be more effective in their positions.
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