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Some Legal Considerations for Board
Members
© Copyright Carter McNamara, MBA, PhD, Authenticity Consulting, LLC.
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When Considering Legal Protection for Directors
and the Organization, Consider the Following
– Directors cannot abdicate their responsibility to be in charge
and to direct
– Directors must make certain the organization is operating within
a legal framework
– Directors have a legal responsibility for the protection of
all assets
– Directors must validate all major contracts by giving and recording
formal approval
– Directors must attend most board meetings, not just on occasion.
Absence from a board meeting does not release the director from
responsibility for decisions made. A pattern of absence may indeed
be presumed to increase an individual’s liability because
she/he cannot demonstrate a serious dedication to the obligations
of the position.
– There is no absolute protection against someone bringing suit
against you. Conscientious performance is the standard. The best
defense is a good offense: strive hard to do everything right
and be able to show that you tried hard, then you are much more
like to be OK.
– Remember: The assumption in the law is not necessarily that
you must make the correct decision, but that you must make the
decision correctly. (It helps greatly to be able to show that
the board made serious consideration of an action before the action
was taken. Board minutes should reflect this care taken.) It is
not a crime to be wrong, but did you ask the right questions and
respond as another reasonable individual would in that situation?
– Board members are more at risk for taking no action than for
taking the wrong action for the right reasons.
– While you have the right to rely on information supplied to
you in due form, and on the accuracy and integrity of others (particularly
in areas of special competence) you must use reasonable judgment
in this area, too.
– If it smells fishy, find out where it has been swimming — and
how long it has been dead.
Key Suggestions
– Attend meetings
– Read minutes and make sure they are correct
– Record objections and ensure a debate on controversial or difficult
issues. It is your duty to review plans and policies and how they
are carried out, not to be accommodating to people because they
have been around for a long time in the organization and are doing
their best.
– Always have comprehensive and up-to-date personnel policies
that are reviewed by a professional, authorized by the board and
well understood by management. If a manager’s actions are not
in accordance with a policy, courts will usually assume the manager’s
acts to be the official stance of the organization and to have
superseded the policies.
– Ensure that all employment and income taxes are paid. Understand
the distinction per the IRS between an “employee” and
an “independent contractor.”
– Schedule a presentation from an insurance agent who is well
versed in board liability matters. Have him or her explain: general
liability, professional liability, workers compensation, asset
protection, and directors and officers insurance. If you get directors
and officers insurance, be sure the policy covers employee suits
against the organization.
– Review financial statements and insist on understanding them.
Most boards probably should have two levels of reporting: in detail
for a sophisticated finance committee, and in a simplified form
for monthly reports to the rest of the board, supplying data which
has been reviewed by the finance committee.
Trust – But Verify!
Additional Information Focused on Nonprofit Boards
Should Nonprofit Board of Director Worry About Personal Liability?
How to Protect Your Nonprofit s Board Members
Return to Toolkit for
Boards of Directors
For the Category of Legal:
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