Board of Directors- Legal Duties and Liabilities

Board of Directors – Legal Duties and Liabilities

Under California law, all nonprofit corporations must have a board of directors. The board exercises all the powers of the corporation, and conducts all of the corporation’s activities and affairs. However, it may also delegate its management powers to committees or other persons so long as it maintains ultimate oversight authority. Some key operations that require board action or ratification are:

– Planning the year’s activities
– Adopting a budget
– Electing officers
– Adopting, amending or repealing bylaws
– Amending the articles of incorporation

Although a California nonprofit can technically have a board of one, both the California Attorney General and the Internal Revenue Service recommend a minimum of three board members to promote adequate and competent oversight of the nonprofit’s activities.

In exercising the functions of the board, directors should keep in mind their two primary fiduciary duties to the corporation: the duty of care and the duty of loyalty. Under the duty of care, a director must generally act in a rational and informed manner. Whether a director has met his or her duty of care is an objective inquiry as to whether he or she has acted with “such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.”

The duty of loyalty requires that a director act in a manner that the director believes to be in the best interests of the corporation and all its members, rather than his or her own interestes, and to administer his or her corporate powers for the common benefit. When a board member has a material financial interest in a corporate transaction, it is considered a “self-dealing” transaction and is generally prohibited unless approved or validated by the board.

Directors are generally protected by the limited liability nature of the nonprofit corporation, and are not responsible for the debts and liability of the corporation. However, directors can be personally liable for breach of their fiduciary duties of care and loyalty to the corporation. They can further be liable for certain tortious conduct, including negligent acts that result in personal injury, certain employment-related claims, and in other areas.

In addition to fulfilling one’s duties as a director diligently through making informed, independent and careful decisions in the best interest of the corporations, other means are available to minimize directors’ personal liability. The corporation may indemnify directors for amounts incurred in connection with legal proceedings, including attorneys’ fees, judgments and settlements. In addition, insurance packages, including general commercial liability insurance and directors and officers (“D&O”) liability insurance, provide additional protections to both the director and the corporation.

Written by Cameron Holland.