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

Advice from the Nonprofit FAQ
Are board member's personally liable?
What do until the lawyer comes ...

Return to Toolkit for Boards of Directors


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