Directors and Trustees Fiduciary Duties
By Alvin Mason
Congratulations, you have been chosen to be, or asked to be on a Corporate Board of Directors or a Trustee with a non-profit organization. Normally, a person is asked to be a Director or Trustee based on their standing in society.
Many times, that standing is a result of accomplishments, past experience, and especially for Trustee's the individual's wealth. The addition of your name to the Director or Trustee list gives the organization credibility. Your name generates goodwill. It should be important to you to maintain your good name as you execute your Director or Trustee responsibilities. As a person who has worked hard all your life to achieve the status you have, it should be important to you that being involved in a Corporate Board or Trustees Board, does not negatively effect your reputation. This is the one act of looking out for one's self that is allowed in performing your duties as a director or trustee. The duties of a Director or Trustee are Fiduciary in nature. Thus you are in a position of trust. Fiduciary duties can be distinguished by two categories. One is the duty of loyalty, and the other is the duty of care. These duties of trust for loyalty, and the duty of care are boundaries, since as a fiduciary you have entrusted power.
The entrusted power you have as a director or trustee should be examined from the outside looking in. Your reputation in part, is a result of your having made prudent decisions, which is what interested parties outside the organization expect from you. If you owned stock in a corporation, or made a contribution to a non-profit, what would you want and/or expect from the directors or trustees.
In the case of a corporation, you would want the director's to insure that the corporation was being managed efficiently limiting waste, especially wasting money. You would want the directors to insure that all operations were carried out legally and you would also want the directors to make management consider the future of the corporation in decision-making.
In the case of a non-profit, you would want the trustee's to mandate the same efficiency of operations; assure the organization follows applicable laws; and assure that donations were being used for their intended purposes.
Many times when you are asked to become a director or trustee, it is because you have expertise in a specific area that can help the board as a whole monitor management's performance. But as a board member, you are not required to defer to the resident board expert in another field in all matters pertaining to that area. You will be much more effective as a board member, and insure that your reputation is protected by broadening your knowledge in other areas such as technology, finance, marketing, etc.
For example, if your area of expertise is technology, many important decisions are made based on the input of financial management. When the finances of a corporation go belly up, your reputation can suffer. So it is prudent for you to have at least a general understanding of finances.
Basically, your fiduciary duty is an obligation to act in the best interest of another party. In the case of a corporation, it is the shareholders. In the case of a non-profit, it is the contributors and the intended beneficiaries.
I advocate balancing the primary responsibility of shareholders in a corporation, and the corporation as an entity, with concern for employees and places where corporate operations take place. For instance, it might be in the best interest of shareholders for a factory to be moved overseas. But as a caring person, shouldn't you ask about the current employee's, and the effect moving would have on the area that will lose the operation?
I advocate that particular attention and scrutiny, be given to mergers and takeovers. I believe a director should ask for an independent economic analysis, rather than use projections offered by management. Too many times consolidations have become disasters.
Raising an issue can help keep your good name. You should just say, "I want the following to be reflected in the minutes of this meeting", and raise your concern.
The biggest thing for a fiduciary is to refrain from self dealing. You should not profit from your duties as a director/trustee. That is why you are in a position of trust.
Your duty of loyalty is to the corporation or organization you are serving as a board member for. Thus, you are breaching your fiduciary duties if you act in the best interest of another organization. How you vote on a particular matter is a major component of executing your duties.
The standard of care required, is that you act as a reasonably prudent person would act. That could mean asking questions, doing some research, or at least consulting an expert.
Since the Enron fiasco, it is prudent that a director take an active role in ensuring the finances of a corporation are accurately reported. A Corporate Director should have knowledge of the Sarbanes-Oxley Act (Public Law 104-204); which requires publicly traded firms to access the adequacy of their financial controls.
Let's not forget The United Way, where nonprofit managers misspent funds. There are numerous other examples, such as college president's paying personal expenses with institution funds and union leaders misspending funds. In all cases with Nonprofits, misspent funds originated from contributions or fees of hardworking people.
A key question is, could diligent directors and trustees have minimized or prevented these embarrassing tragedies from occurring?
Generally speaking, with some exceptions, a director or trustee of a nonprofit organization who is not compensated is immune from liability.
Compensated board members can be liable especially for self dealing. Outside of self dealing or mischievous conduct, it usually takes more than just negligence. It usually requires gross negligence to be found liable.
Since you are part of a group of directors, you should not serve unless Director/Trustee liability insurance is provided for you.
Take your Director/Trustee position seriously. Come to meetings prepared. Leave meetings with questions or concerns you want answers for, and if necessary, do some research. Remember that honest hardworking people depend on you. When I advise you, I guarantee you will ask the right questions!
I don't own stock and I won't own stock. The capitalism I advocate and practice is the small non-public company. However, I as an American have an interest in society as a whole, that is why I can advise you. I don't need to know your name, or the organization that you sit on the board of. That way you can assure the confidentiality of the organization you represent.