Serving on the board of a non-profit corporation can be a very rewarding and fulfilling experience. It is, however, important to understand the obligations which come with that service. These obligations can be summed up by the three primary duties of a director of a non-profit corporation; the duty of care, the duty of loyalty, and the duty of obedience. This article will examine the elements of each of these duties.
Duty of Care. The duty of care requires a director to discharge his or her duties in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances and in a manner the director reasonably believes to be in the best of interest of the corporation. This duty is codified in Indiana’s Non-Profit Corporation Act. At a minimum, this duty requires a director to become informed in preparation for participating in the decision-making process at board meetings. In discharging directors’ duties, the director may rely on information, opinions, reports or statements including financial information prepared or presented by:
(1) an officer or employee of the corporation who the director reasonably believes to be reliable and competent in the matters presented;
(2) by a qualified professional such as legal counsel or a CPA who the director reasonably believes to be reliable and competent in the matters presented; and
(3) a committee of the board of which the director is not a member if the director reasonably believes the committee merits confidence.
A director does not act in good faith if the director has knowledge concerning an issue which makes reliance on the information described above unwarranted.
Duty of Loyalty. The duty of loyalty requires that a director place the interests of the corporation above his or her own personal interest, particularly when the potential for conflict arises. Avoiding conflicts of interest and disclosing them when they arise are both important aspects of the duty of loyalty. In order to ensure enforcement of the duty of loyalty, non-profit corporations should adopt conflict of interest policies for their officers and directors. The goal of conflict of interest policies should be full disclosure of any duality of interest or possible conflict of interest that a director may have with the corporation. Any director who has a business relationship which impacts upon a matter before the corporation’s board should not vote or exert personal influence on the outcome of the matter. Finally, as part of the duty of loyalty, a director should not appropriate to his or her own use a business opportunity that belongs to the corporation.
Duty of Obedience. The duty of obedience requires directors to make decisions and take actions which are consistent with the stated objectives of the corporation and the rules and regulations applicable to the corporation. This duty requires a director to be familiar with the objectives of the corporation as well as the rules and regulations governing the corporation and to abide by them.
Before agreeing to serve as a director of a non-profit corporation, consider the duties described above and make sure you are willing and able to fulfill them.
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