Understanding Your Rights on the Board of Directors of a Nonprofit Organization - dummies

Understanding Your Rights on the Board of Directors of a Nonprofit Organization

By Jill Gilbert Welytok, Daniel S. Welytok, U.S. Senator Chuck Grassley

It’s a sad fact of life that volunteer directors of nonprofits run the risk of being sued in the course of carrying out duties for which they aren’t paid. Fortunately, many states realize the importance of philanthropy and volunteerism and have adopted laws to protect directors from lawsuits when they’re acting on behalf of the organization and within the scope of their authority.

This article covers several principles gleaned from court cases and other legal precedents. It’s a summary of legal doctrines that support directors of nonprofit organizations in doing good work.

Protection under the business judgment rule

The business judgment rule is a legal doctrine that protects directors of for-profit corporations from having to second-guess their actions — as long as they’re acting in a reasonable, informed manner that they believe to be in the best interests of their corporation. Many courts have applied this rule to nonprofit contexts as well.

If a corporate director undertakes an action in good faith, exercises independent judgment, and has taken steps to be reasonably informed, courts have ruled that litigants shouldn’t be permitted to second-guess their decisions. Hindsight is 20/20, the courts figure.

By the same token, directors don’t have to pass an IQ test. A bad business decision won’t be the basis for a winning lawsuit unless the decision was made for bad motives (such as the director’s financial self-interest).

Access to corporate books and records

Directors of both for-profit and nonprofit corporations have an absolute right to view the corporate books and records. If they can’t look at them, who can? If you serve on a board, you can also usually permit your attorney or accountant to see the data so that he or she can advise you personally.

Access to the minutes

Directors have a right to receive a copy of the minutes from every meeting. Even though you may be tempted to toss them aside after hashing out an issue for hours, don’t. Those minutes can come back to haunt you years later when the board needs to review them to see why an action was or wasn’t taken.

Minutes are the only record memorializing what took place at a meeting, and they can have unanticipated legal significance. So, even though you can’t change time, do make sure the minutes are complete, and that the reasons for any controversial actions and votes taken are fully (and accurately) reflected.

Communication with management

If you’re a director of a nonprofit, you have the right to communicate (reasonably) with management. If something doesn’t make sense on the financial front, you can call up the chief executive officer or chief financial officer and ask questions.

You don’t have the right to restrict or interfere with these individuals in carrying out their own duties. You also can’t make demands on staff or organizational resources without approval from the board as a whole.

The right to dissention from board actions

There isn’t always rationality in numbers. It’s amazing how opinions fall like dominos in some settings, with each person adopting another’s viewpoint.

Not only do you have a right to vote as a board member, in many states you can also go on record as having dissented (disagreed) with the majority.