For Board Members

November 22, 1998

Excerpts taken from The Legal Guide For Association Board Members, James G. Seely Attorney at Law 1995.

"It is not common for board members to be held personally liable for the action of the association. However, a board member should be aware of the legal obligations assumed by virtue of service on an association’s board.

STANDARD OF CARE. The statutory standard of care expected of a board member is relatively uniform throughout the United States. It is important to note that a board member is expected satisfy the standard of care regardless of whether the board member is compensated. Statutes that seem to promise immunity for uncompensated board members often require the board member to meet other requirements that are the equivalent of the statutory standard of care. Therefore, the board member should become familiar with and conform to the standard of care regardless of whether or not the statute includes an immunity clause for uncompensated board members.

Following is the exact language of the standard of care as expressed in a typical state statute:

A director shall perform the duties of a director, including duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner such director believes to be in the best interests of the corporation and with such care, including reasonable inquiry, as an ordinary prudent person in a like position would use under similar circumstances.
In performing the duties of a director, a director shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by: (1) One or more officers or employees of the corporation whom the director believes to be reliable and competent in the matters presented; (2) Counsel, independent accountants or other personas as to matter which the director believes to be within such person’s professional or expert competence; or (3) A committee of the board upon which the director does not serve, as to matters within its designated authority, which committee the director believes to merit confidence, so long as, in any such case, the director acts in good faith, after reasonable inquiry when the need therefore is indicated by the circumstances and without knowledge that would cause such reliance to be unwarranted.
A person who performs the duties of a director in a accordance with subdivisions (A) and (B) shall have no liability based on any alleged failure to discharge the person's obligation as a director.

The standard of care includes the requirement of good faith (a board member should not be liable for an honest mistake of business judgment). The reference to an "ordinarily prudent person" is designed to focus on the basic attributes of common sense, practical wisdom and informed judgment rather than some particular expertise.

The require of "reasonable inquiry" is intended to prevent the board member from ignoring what is going on in the conduct of corporate business and to enable the board member to exercise the duty to oversee the activities of the association. It also permits consultation with other appropriate person when it is prudent to do so. Note carefully that when the board member consults one of those persons (such as the executive director or legal counsel), the board member is entitled to rely on information, opinions, reports or statements prepared or presented by those persons. The standard of care makes it clear: If a board member has doubts about some issue, questions should be asked. If a board member does not make a reasonable inquiry when it is prudent to do so, the board member has violated the standard of care.

With some important exceptions, as long as the board member conforms to the standard of care, the board member will not be personally liable to the association for actions taken as a director.

CONFLICTS OF INTEREST. If a board member desire to enter into a transaction in which the board member has a material interest, the board member should first disclose the interest. Thereafter, the board of directors should meet in accordance with applicable state law and determine whether the transaction is just and reasonable to the association.

A board member should disclose any material interest to the board and obtain its approval. Otherwise, the board member risks losing the benefits of the transaction at some future date.

DISTRIBUTIONS, LOANS AND GUARANTEES. A board member is liable to the association for improper distribution of funds to members or others. The essence of a nonprofit corporation is that profits are not distributed to members.

In most states, a nonprofit corporation may not lend money or property to a board member or guarantee the repayment of a board member’s loan. In all cases, the board of directors must determine that the loan or guarantee is in the best interest of the association. Board members should determine the law in the state in which the association is chartered or incorporated.

ACTIONS OUTSIDE THE BOARD MEMBER’S AUTHORITY. The board member may be confronted with situations where the board member is alleged to have abused or to have acted outside of the authority conferred on all board members. Board members should be careful to avoid such situations because there will always be a substantial question as to whether the board member will be entitled to reimbursement for legal defense. By definition, corporate indemnification and the association’s professional liability insurance policy deal only with wrongful acts or omissions within the areas of the board member’s authority as a director.

Moreover, a board member is personally responsible for purely personal actions that are not conceivably within the board member’s authority as a director, even when the association may also be liable to third parties for those actions. Thus, a board member cannot avoid liability for sexual harassment of an association staff member, even though the association will also be held liable.

In essence, when a board member acts outside of or abuses the authority granted to directors, any mantle of protection afforded under corporate law is lost. It is critical that board members remember that they have no authority until it is delegated to them by the board. The board member must always be clear as to these limits on authority and take care not to act outside these limits.