Many people who volunteer for boards of non-profit organizations seem to place their legal liability exposure on a different plane than do members of for-profit boards. In general terms, however, volunteer directors have the same legal liabilities; the only difference is that they are often less likely to occur. If an association has employees, for example, the directors are still responsible for remitting withholding taxes. If a church board happens to allow an environmental spill, an unlikely but possible occurrence, the directors could still face criminal proceedings.
It is a major challenge, however, to make all volunteer directors aware of the more common areas of liability exposure: in volunteer boards, almost by definition, there is usually a much lower standard of governance. After all, becoming a volunteer director needs only dedication and commitment, not business experience, and gaining the chair is often a matter of seniority and rotation, not the ability to manage meetings or to apply checks and balances to staff. While the board member's education can build on a board manual, which should set out clearly the procedures and modus operandi, this may not focus enough on the function of the board and duties of individual directors.
George and Hugh Webster, in an article published in Leadership, highlighted four areas in which volunteer directors may come adrift. The first is self-dealing, which takes place when an officer or director uses their position in the organization for personal gain. In one example where an entire board engaged in self-dealing, the board of directors of a museum, with regular deficits of approximately $200,000, voted itself salaries of $100,000 per year, and even sold items from the museum to pay this excessive compensation. In another case, a US court found that an organization was not tax-exempt when it made excessive rental payments and erected expensive improvements on property owned by officers of the organization.
Conceivably, in fact, self-dealing could result even if a non-profit simply provided a director with a preferential lease for office space or other special advantages not generally available.
Another type of problem conduct is usurpation of corporate opportunity, which simply means that a director or officer may not acquire, in opposition to the organization, property which is essential to its existence , or in which the organization has an interest or even a reasonable expectancy of an interest. Very simply, if an officer or director is confronted with an opportunity that could be advantageous to the organization, they should offer it to the organization before personally acting on it.
The third problem area for board member conduct is mismanagement and non-management, often the result of negligence and incompetence. A typical example was Lynch v. John M. Redfield Foundation, in which the attorney general of California brought an action against directors of a non-profit organization for permitting funds to remain in a non-interest-bearing chequing account for five years. The directors were held personally liable for the interest that would have been earned.
In another instance, a US federal court found that non-profit directors had failed to exercise even the most cursory supervision over the handling of funds. According to the court, a director must "use diligence in supervising and periodically inquiring into the actions of those … to whom … financial decisions … have been assigned or delegated." This last example is very similar to the proactive due diligence actions now being heavily emphasized for business boards of directors.
The Websters point out that wrongful conduct, a complex area of law, is interestingly one often covered by directors' and officers' insurance policies. Usually, for individual directors to be sued, the conduct must be "extreme, outrageous and willful." Volunteers should, nevertheless, be aware that many of the actionable failures to ensure due diligence could fall under this heading, as well as such situations as civil or human rights abuses, and discrimination. Many associations, however, do indemnify their directors and officers, provided that they have carried out their duties "diligently and in good faith", almost identical wording to that used in the for-profit community.
As the Websters see it, "People who are not prepared to live up to [their] responsibilities should not seek the office [of volunteer director]. But if a person is honest and makes reasoned decisions based on what he or she believes to be in the best interests of the organization, then the remote possibility of personal liability should not be a deterrent to volunteer service."
Brian Lechem is the president of Boardroom Advisory Services and the Editor of Boardroom, a monthly newsletter of review, analysis and guidance for corporate directors. For more information, call (416) 494-1440.