01/05/2015 No Comments
Serving on a Board or as an officer in any non-profit organization can be a challenging and sometimes unsettling. Well intentioned and interested members of our community are invited or volunteer to become a member of a non-profit Board. Too often, new Board members take on their responsibilities without some kind of introduction or orientation about what their role is.
Becoming a Board Member or officer, has serious legal ramifications and all Board members, incoming and continuing, need some kind of orientation or a reminder about the role they play in keeping and maintaining the direction and health of important and well established organizations. It is challenging to try to fulfill the organization’s mission without some kind of guide book.
Part of my orientation goes through general roles and boundaries. Allow me to briefly highlight some of the legal expectations and responsibilities that Board members and officers should follow in carrying out their duties.
Board members and officers are part of a whole. Board members, including its officers, should avoid taking matters into their own hands or use their position on the Board to act without the Board’s prior notice and approval. Directors who act without the Board’s prior notice and approval could be placing themselves and the Board in a position of being held legally responsible for any, individual action that is not authorized by the Board.
III. Scope of Duties of Board Members
Generally, board members have a fiduciary duty to the organization and may only take official actions to the degree of car and loyalty required of an officer or director of a non-profit corporation. Recently, the Hawaii State Supreme Court has noted that:
“It is a well established rule both in Hawaii and in a majority of the States that the relation of directors to the corporations they represent is fiduciary one.” Hawaiian Int’l Fins. V. Pablo, 53 Haw, 149, 153, 488 P.2d 1172, 1175 (1971) (citations omitted). Further, “[a] corporate officer is an agent for his corporate principal.” Williams v. Queen Fisheries, 2 Wash.App. 691, 469 P.2d 583, 585 (1970). (Emphasis added)
Taniguchi v. Association of Apartment Owners of King Manor, Inc., 114 Hawaii 37, at 50, 155 P.3d 1138, at 1151 (Hawaii 2007).
In carrying out their duties, the law assumes and requires all Board members and officers to act in “good faith” and “use ordinary care and prudence in performing their functions.”
Generally, the Board is the policy making body for the organization. The Board sets the goals and objectives for the organization. Board members and officers should avoid being involved in the day to day operations of the organization. Some organizations have paid staff that are responsible for daily operations. The Board’s role is to evaluate the performance of the paid staff in relation to the Board’s goals and objectives.
If a Board Member or officer feels that there is an issue that affects the organization, he or she should bring the matter to the attention of the full Board in an official Board meeting. It can be placed on the agenda under “New Business.” The Board member can notify the Board of a question or issue and then that individual Board member or other Board member can make a motion how to resolve the issue in an appropriate manner. A “second” to the motion would be required and the Board can discuss the merits of the motion (or the “how” to solve the problem) and then vote on the matter.
Following this process gives individual Board members and officers the maximum protection from liability. Throughout the country, courts generally do not question a Board’s decision, if voted upon, based on what is called the “business judgment rule.” See generally, Lingo b. town ‘N Harbor Owners Corp., 580 N.Y.S.2d 427 (1992). In other words, the courts will not second guess the Board’s business decisions. The exception to the rule is where the Board’s decision violates either its by-laws or other laws (i.e. discrimination, sexual harassment, etc.).
I should note and caution that where a Board member or officer decides to pursue a course of action without first notifying the Board and without Board approval, that Board member or officer maybe acting outside the scope of his or her duties an may not be acting in the best interests of the organization, regardless of that person’s intent.
This is an issue that has affected other clients and as a Board changes membership, all new and existing Board members need to be reminded that they are not individual agents that can freely act on the Board’s behalf or direct paid staff. Board members and officers can and should only act as a group. If an issue comes up, it should come up to the Board as a whole for its consideration and direction how to proceed.
For example, a Board member has a concern about an expense, such as parking. He or she suspects that the cost of repainting stalls was too high. He or she wants to investigate the contract and work performed.
The proper way to proceed is to bring the issue to the Board’s attention and ask the Board to approve an investigation by looking at the project. The concerned Board member would inform the Board that he or she has a concern and then he or she can make a motion to investigate the situation. The motion requires a “second” and then the Board would discuss the need for and the particulars how such an investigation would be conducted, including when a report back to the Board would be due. The Board takes a vote on the motion and it either passes or it fails.
If approved, the investigation becomes an official Board action and the Board’s decision and resulting investigation would be within its business judgment rule. Board members would not incur any individual liability for their action.
The task of being a member of a Board is difficult and sometimes thankless. But there is a process which individual Board members and officers need to follow to make sure that whatever action is taken, on behalf of the organization, is an official, legitimate action that would be protected by the business judgment rule. Actions taken without notifying the Board and/or receiving Board approval, could be viewed as a breach of the duty to act in good faith.
The purpose of this letter is to give you some genera guidance and also let you know that I am available to answer any questions by new and continuing Board members.
Thank you for the opportunity of bringing this important matter to your attention. Please feel free to contact me if you have any questions or concerns about this letter.
BOARD ACTION – SUMMARY
TASK: This boulder has to be moved. Here’s an example of how a Board discussion would go, using basic Robert’s Rules of Order.
MOTION: I move that the Board hires a contractor to move this boulder 100 feet North.
SECOND: I second the motion.
PRESIDENT: Any discussion on the motion?
BOARD MEMBER: I think we only need to move it 50 feet.
BOARD MEMBER: I move to amend the original motion and move the boulder 50 feet North.
[Discussion only on the amendment to move it 50 feet]
PRESIDENT: Are you ready for the question (if no objections), then all those in favor of the amendment to move the boulder 50 feet? Those opposed?
The amendment fails. We are back to the original motion. Is there further discussion?
BOARD MEMBER: We don’t even know how much it will cost. We can’t vote on something without knowing the cost.
BOARD MEMBER: I move to amend the motion that we allow bids to go out to move the boulder 100 feet and that the Facilities Committee be in charge of putting out the bids, evaluating the bids and recommending a contractor to the full Board for approval.
PRESIDENT: Any discussion on the amendment to allow the Facilities Committee to put out bids, evaluate them and make a recommendation to the full Board?
Any further discussion? Hearing none, those in favor of the amendment to allow the Facilities Committee to put out bids, evaluate them and make a recommendation to the full Board? Those opposed?
The amendment passes.
Is there any further discussion on the main motion, which is to move the boulder 100 feet to the North, as amended, which would be to have the Facilities committee to put out bids, evaluate them and make a recommendation to the Board?
Hearing none, all those in favor of the motion say “yes.” All those opposed? The motion is adopted by the Board.
The President directs the Facilities Committee to report back to the full Board at its next meeting.
NOTE: This is an example of someone on the Board wanting to do something and how the Board can take that idea and make it happen. If a Board Member decided to act on his or her own and either got bids or talked to “Fly by Night Contracting” who said they could do the job, the Board could be legally bound to whatever commitment that Board member made or was perceived to have made and there could be legal action taken if that contractor didn’t get the job. An attorney representing the Board would recommend that the Board take an adversarial role against the Board Member who made the unauthorized deal and that Board member would have to pay for his or her own attorney, despite his or her good intentions.