As a Director, May I Be Held Personally Liable for the Organization’s Missteps?

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Organization leaders should take note that the answer is sometimes yes.

Individuals serving on nonprofit boards are expected to act consistently with their fiduciary duties.  Such duties include the duty of care and duty of loyalty.  When a directors act consistently with such fiduciary duties, they are generally statutorily protected from personal liability for actions taken in their capacity as directors.  However, when directors fail to be aware of, or act according to, their fiduciary duties, they run the risk of not only harming the organization, but also being held personally liable for such harm.

Protection for Directors is not Absolute

Recently, Pennsylvania Attorney General Kathleen Kane petitioned the Crawford County Court of Common Pleas, seeking the ouster of the current trustees of Conneaut Lake Park, an amusement park in Western Pennsylvania.  At issue in the petition is a 40 million dollar construction project approved by the Board of Directors.  The Attorney General alleges that the directors entered into the project without having a clear plan for how to pay for it.  As reported in Nonprofit Quarterly, “Should Kane’s petition be approved, the soon-to-be-ousted trustees collectively would be on the hook for a “surcharge” of $1 million to offset some of the expenses associated with a breach of trust—in this case for failing to protect the park’s assets and manage its finances properly.” 

Illinois and other states have statutory provisions that protect directors from personal liability for acts performed in their capacity as directors.  However, as the Pennsylvania petition illustrates, there are limits to such protections.  When directors have been grossly negligent in fulfilling their fiduciary duties, statutes may no longer provide that protective shield.  Therefore directors should have at least a basic understanding of their fiduciary duties and expectations arising under them.

Fiduciary Duties in Brief.

Black’s Law Dictionary describes a fiduciary as “a person who is required to act for the benefit of another person on all matters within the scope of their relationship; one who owes to another the duties of good faith, trust, confidence, and candor.”  Understanding that directors and trustees act as fiduciaries of the organizations they serve helps explain the duties arising from such relationships, namely that their actions must always be performed in the best interests of the organization. 

Duty of Loyalty

The duty of loyalty prohibits directors and officers from using their position to engage in self-dealing, or otherwise pursue their interests instead of those of the organization.  Organizations should adopt strong conflict-of-interest policies to guard against such practices.  Good policies will identify potential problem areas and establish frameworks to govern how potential conflicts are to be handled.  Through the approval and compliance with such governing documents, directors avoid those activities that might later expose them to a charge of negligence. 

Duty of Care  

The duty of care requires directors and officers to exercise a standard of reasonable care when acting on behalf of the organization.  In the example above, this is probably the area in which the Pennsylvania Attorney General alleges that a breach of fiduciary duties has occurred.  If the trustees indeed entered into a 40 million dollar construction project without a plan on how to pay for it, such failure may be construed as breach of the trustees’ duty of care.  A court would evaluate whether the Board exercised the degree of care that a prudent and competent person engaged in the same line of business would exercise under similar circumstances. 

For this reason, due diligence is a crucial element in directors’ and officers’ decision making.  Leaders must be continually mindful to not rush major corporate decisions, but rather carefully research and analyze the situation, documenting any research or information relied upon to approve an action.  Armed with such information, the Board is able to demonstrate that their actions were reasonable and what they believed in good faith to be the best interest of the organization.

Conclusion

Cases like the one in Pennsylvania need not frighten prospective directors and officers away from being involved in the worthy causes engaged by nonprofits.  But they do remind us that such responsibilities are to be taken seriously.  Directors and officers should understand their fiduciary duties and attendant expectations.  They should take reasonable steps to ensure the interests of the organization are well protected, and thereby enjoy the statutory protections afforded them.