By: Clark, Campbell, Lancaster & Munson, P.A.
Q: As a new member of a nonprofit’s board of directors, what liabilities am I undertaking?
A: Volunteer directors govern and manage the nonprofit organization and make decisions about its activities, policies, and affairs. Even if management is delegated to, say, a paid executive director, directors must still supervise the organization’s affairs to satisfy their fiduciary duties to the organization and the public.
The duty of loyalty requires directors to avoid transactions in which they would have a material financial interest and not to put their own interests ahead of the organization. The duty of care requires directors to act reasonably and prudently to avoid foreseeable risks. Directors also have a duty to comply with investment standards and invest in good faith. To avoid director liability under Florida law, directors must act in good faith, with reasonable and prudent care to avoid foreseeable risks, and in what the directors reasonably believe to be the best interests of the organization.
While a director is unlikely to be on the hook for an accidental slip-and-fall at the nonprofit’s campus entrance, directors are susceptible to claims for financial wrongdoing (including misuse of grant money, failure to identify improper spending, and commingling of assets), tax violations (including failure to deposit payroll or property taxes or failure to file necessary tax returns), and failure to inquire about questionable conduct of a few directors and officers. Although a director should actively and diligently get involved in reviewing budgets and other financial data, directors may reasonably rely on information, reports, and financial statements provided by any reliable and competent officer or employee or board committee, legal counsel or accountant.
Of course, self-dealing or criminal acts are not protected. Nor is a director protected if he personally and directly injures someone, guaranties a loan or other debt on which the nonprofit defaults, or commingles nonprofit and personal funds.
The lines are not always clear. Nonprofits should therefore invest in insurance for their volunteer directors and officers. To protect themselves and the nonprofit, directors should work to prevent and decrease liability for the organization, including establishing employment-related policies and developing a system for determining consistent and uniform application of those policies.
The June 18th edition of “The Law” will cover a new disclosure rule designed to protect home and land buyers.
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