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NONPROFIT TRUSTEE/DIRECTOR

FIDUCIARY DUTY

Fiduciary Responsibility/Duty DefinedAs a trustee/director fiduciary duty entails

Duty of Care Duty of Loyalty Duty of Obedience

Legal Liability and IndemnificationThe Age of AccountabilityThe President as Fiduciary, a special position of trust

OVERVIEW

As a director/trustee of a nonprofit organization today, one needs to be vigilant of fiduciary duty and potential personal liability.

As an officer or president, one has even higher obligation to adhere to the law and organization bylaws and mission.

While there are safeguards and D&O insurance (directors and officers), as a fiduciary, one can be held personally legally liable for malfeasance. Such policies are cancellable and are unlikely to protect directors/trustees as a whole or individually from any intentional concealment or misrepresentation of material fact . (examine your policy)

In today’s world, two edicts are omniscient: need for complete transparency and zero tolerance.

INTRODUCTION

This presentation is a response to a request for a summary of key issues related to “fiduciary responsibility” in today’s world for directors/trustees of nonprofit organizations. One should consult their lawyers, insurance professionals, and accountants for authoritative advice. For fiduciary duty related to investments of nonprofits, Fi360 is an organization that has special expertise.

The primary sources used for this discourse are internet based:

1. “Legal Responsibi l i t ies of Board Members in the Age of Accountabi l i ty” by Bruce R Hopkins,(nonprof i t lawcenter.com)

2. “Fiduciary Responsibi l i ty of a President ial Off icer for a Nonprof i t ” by Melanie Jo Triebel ( legalzoom.com )

3. “Fiduciary Duties of Directors and Off icers of Distressed Nonprof i t Organizat ions by Gregory Pesce and Neal Donnel ly (thelawproject.org )

4. “Legal Duties and Avoiding Liabi l i ty: A Nonprof i t Board Member Primer” by Paul Davidson and Tera Rica Murdock (trusteemag.com).

NOTE OF CAUTION

“A person who has a relationship of trust or confidence with another is a fiduciary. A fiduciary’s relationship with an organization is one-sided, meaning the relationship is designed to meet only the needs of the organization and the fiduciary must act without regard to his or her own needs.” (Davidson and Murdock)

Simply put – Fiduciary responsibility is to do what’s right!

“Directors and officers of nonprofit and community-based organizations are considered fiduciaries, or persons of trust, with the power and obligation to act with total trust, good faith, and honesty on behalf of their organization” (Pesce and Donnelly)

FIDUCIARY RESPONSIBILITY DEFINED

DUTY OF CARE – “to keep informed, remain attentive, and act in a manner that the off icer or director reasonable believes is in the best interest of the organization…inform itself of al l material information reasonably available to it. Implement a decision making process … seek advice… and maintain complete records”

DUTY OF LOYALTY – “to act in good faith … and in the best interest of the organization”

DUTY OF OBEDIENCE - “to carry out the purpose and mission of the organization, as expressed in the governing legal documents” (Pesce and Donnelly)

Directors/Trustees “are deemed to have the same obligation toward assets (of the nonprofit)…as they do to personal assets. Equally, all board members’ responsibil ity is to act prudently in their handling of nonprofit organization’s resources…(They) are fiduciaries; the law imposes on them standards of conduct and management that, together, comprise fiduciary responsibil ity …One of the main responsibil it ies…is to maintain financial accountabil ity and effective oversight of the organization they serve.” (Hopkins)

DUTY OF CARE, LOYALTY, & OBEDIENCE

Strategies to Minimize Liability “Analyze solvency regularly (cash flow and balance sheet)… Comply with fiduciary duties… Obtain professional advice… Do not wait until the “last minute” … Document the bases or reasoning for decision-making… Detailed evaluation of “business plan”… Ensure the quality and quantity of disclosure … Gain familiarity with organizational documents…article of incorporation, bylaws,

and policies … Confirm scope and purchase of “D&O” insurance … Create indemnification policy for the organization” (Pesce and Donnelly)

LEGAL LIABILITY AND INDEMNIFICATION

We live in a world where transparency is critical and the measure is how would the “Washington Post” report any event.

We also live in a world of “zero tolerance” whereby norms of the past are not appropriate and any indiscretion may taint one’s reputation and/or be a cause for dismissal.

“Former directors may be held responsible if he or she oversaw the matter being alleged. Although a director relinquishes his or her fiduciary duties upon resignation, a director ’s fiduciary duties continue for events set in motion or known about prior to resignation” (Pesce & Donnelly)

Also, see “New Concepts of Board Duties and Responsibilities” (Hopkins) for a checklist of suggested safeguards.

THE AGE OF ACCOUNTABILITY

“The president of a nonprofit, like the president of a for-profit business, is legally required to act with special care towards the nonprofit … is a ‘fiduciary’ of the nonprofit: an individual in a special position of trust who must not abuse the position …must act with a heightened standard of care” (Triebel)

State law determines actual standards of fiduciary duty.

THE NONPROFIT ORGANIZATION PRESIDENT

PROVIDE MANDATORY ORIENTATION OF ALL DIRECTORS/TRUSTEES ON FIDUCIARY RESPONSIBILITY NOT JUST CONFLICTS OF INTEREST WITH A QUIZ TO ASSURE UNDERSTANDING AND WITH EACH INDIVIDUAL SIGNING AN AGREEMENT OF UNDERSTANDING ANNUALY

PROVIDES AN ANNUAL REPORT ADDRESSING HOW THE NONPROFIT ORGANIZATION IS FULFILLING FIDUCIARY RESPONSIBILITY ISSUES

PROVIDE EACH FIDUCIARY WITH A COPY OF THE D&O POLICY AND RELATED STATE LAW

CREATE A NEW PAID POSITION OF RISK MANAGER/CHIEF COMPLIANCE OFFICER WHO ORGANIZATIONALLY REPORTS TO THE EXECUTIVE COMMITTEE. HE/SHE REPORTS TO THE BOARD OF DIRECTORS QUARTERLY REPORTS AND HAS COMPLETE ACCESS TO ALL ORGANIZATION PERSONNEL AND RECORDS AND MAY ATTEND ANY ORGANIZATION ACTIVITY AS AN OBSERVER.

SUGGESTED ACTION