Fiduciary Duties of Nonprofit Directors and Officers (Portfolio 488)

Tax Management Portfolio, Fiduciary Duties of Nonprofit Directors and Officers, No. 488-2d, examines in depth the legal obligations that directors and officers of nonprofit organizations must adhere to in order to avoid liability and to ensure the stability and success of the organization that they serve. To view this Portfolio, visit Bloomberg Tax for a free trial.

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Description

Tax Management Portfolio, Fiduciary Duties of Nonprofit Directors and Officers, No. 488-2nd, examines in depth the legal obligations that directors and officers of nonprofit organizations must adhere to in order to avoid liability and to ensure the stability and success of the organization that they serve.

The Portfolio first analyzes basic issues such as the qualification of nonprofit directors and the general authority of a board of directors in the nonprofit context. It then reviews the origin and evolution of fiduciary obligations of nonprofit officers and directors, which have changed significantly over the years.

The core of the Portfolio is a detailed discussion of the basic fiduciary duties, i.e., the duty of care and the duty of loyalty. The Portfolio examines in depth the various facets of each of these duties, offering practical interpretations and insights. Complementing this is an analysis of circumstances under which the standard of care for nonprofit leaders can change depending upon specific circumstances.

An important part of the analysis is a discussion of investment responsibility, which is one of the principal sources of liability for nonprofit directors and officers.

Also included is a unique but vital discussion of the importance of the actual operations of a board.

The Portfolio next reviews which constituencies have standing to bring a legal action against an officer or director alleging breach of a fiduciary duty. These include state attorneys general, members, and beneficiaries. Finally, the Portfolio examines various statutory protections that are available to nonprofit officers and directors to minimize fiduciary liability exposure, including volunteer protection statutes and indemnification.

The Worksheets include sample conflict of interest policies and sample investment policies.

This Portfolio may be cited as Webster, 488-2nd T.M., Fiduciary Duties of Nonprofit Directors and Officers.

Authors

Hugh K. Webster, Esq.

Hugh K. Webster, partner, Webster, Chamberlain & Bean, Washington, D.C., A.B., Middlebury College (1983); J.D., Duke Law School (1986); Author, 614 T.M., Trade Associations; 613 T.M., Lobbying and Political Expenditures; 452 T.M., Tax-Exempt Organizations: Reporting, Disclosure and Other Procedural Aspects; 450 T.M., Tax-Exempt Organizations: Organizational Requirements; 451 T.M., Tax-Exempt Organizations: Operational Requirements; The Law of Associations (Matthew Bender & Company); Editor, Nonprofit Legal and Tax Letter.

Table of Contents

Detailed Analysis
I. Introduction
II. Authority and Nature of the Board
A. Nature of a Board
B. The Role of Personal Liability
C. The Authority of the Board
D. Applicable Law
III. Origin and Evolution of Fiduciary Obligations
Introductory Material
A. The Trustee Standard of Care
B. The Shift to the Corporate Standard
C. The Corporate Standard of Care
D. Gross Negligence
E. The Overriding Concept of Good Faith
F. To Whom Is the Duty Owed?
G. The Two Fiduciary Duties
H. A Third Duty?
IV. The Duty of Care
Introductory Material
A. Being Informed
B. Attendance
C. Information Flow
D. Informed Decisions
E. Reliance on Others
F. The Business Judgment Rule
G. Specific Types of Wrongdoing
1. General Neglect
2. Poor Decision Making
3. Waste of Corporate Assets
4. Mismanagement of Investments
a. A Reasonable Plan
b. Outside Advice
c. Oversight
d. Poor or Reckless Investing
e. Delegating Authority
f. Abdicating Authority
g. Uniform Prudent Management of Institutional Funds Act
5. Violating Articles and Bylaws
6. Fair Dealing with Members
H. Corporate Formalities
1. Attendance
2. Quorum
3. Participation
4. Rules of Operation
5. Voting
6. Minutes
V. The Duty of Loyalty
Introductory Material
A. Interested Director Transactions
1. Statutory Safe Harbor
2. Core Concepts
a. Disclosure
b. Fairness
c. Approval
3. Non-Financial Conflicts
B. Corporate Opportunity
1. In General
2. Applicability to Nonprofits
VI. Federal and State Good Governance Efforts
A. IRS Activities
B. State Statutes
VII. Duty of Obedience
Introductory Material
A. Obedience to Mission
B. Obedience to Governing Documents and Policies
C. Obedience to State and Federal Laws
VIII. Other Considerations
A. Heightened Standard of Care for Committee Members
B. Effect of Nonparticipation
C. Special Litigation Committees
D. Possibility of Lenient Treatment
E. Subsidiary Organizations
IX. Standing to Sue
Introductory Material
A. State Attorneys General
B. Fellow Directors
C. Members
D. Beneficiaries
E. Other Interested Parties
X. Statutory Protections
A. Ability to Eliminate Certain Liability
B. Volunteer Protection Statutes
1. Federal Statute
2. State Statutes
C. Indemnification
1. Permissive Indemnification
2. Mandatory Indemnification
3. Court-Ordered Indemnification
4. Prohibited Indemnification
5. Special Rules for Fiduciary Claims
6. Advancement of Expenses
D. Conclusion

Working Papers

Table of Worksheets
Worksheet 1 Sample Investment Policy
Worksheet 2 Nonprofit Organization Board of Directors Code of Ethics
Worksheet 3 Director Statement of Commitment and Responsibilities
Worksheet 4 Fiduciary Obligations of Nonprofit Directors
Worksheet 5 Sample Conflict of Interest Policy
Worksheet 6 Guidelines for Board Approvals and Notifications
Worksheet 7 Governance Committee Charter
Worksheet 8 Audit Committee Charter
Worksheet 9 Nonprofit Board of Directors Self-Evaluation