Directors & Officers Liability
Guidelines for Loss Prevention
Most non-profit organizations have as directors and officer’s individuals with substantial experience and expertise in business matters. These individuals should not abandon their business approach to decision making when sitting on the board of a non-profit organization. Ironically, a non-profit is often more demanding than its for-profit counterpart because some of the work will be unfamiliar and the business of the organization may be conducted under less efficient conditions than in business corporations.
Directors and officers should require that the organization be operated much like a for-profit business. Formal and well-defined operating procedures should be established, strong financial controls and systems should be implemented, and risk management and loss controls programs should be adopted.
D&O’s have a fundamental responsibility to represent prudently the interests of the organization’s members in directing activities of the organization. They are subject to basic principles in performing their duties. One is that they must act with the care that a reasonably prudent person in a similar position would use under similar circumstances. They must perform their duties in good faith and in a manner they reasonably believe to be in the best interest of the organization. They are required to implement reasonable programs to promote appropriate organizational conduct and to identify improper conduct.
Where possible the size and composition of the board should be evaluated and determined based upon the organization’s unique requirements.
D&O’s should be selected and maintained with a view towards creating the most effective and efficient board possible. Too often directors are selected based upon personal relationships, contacts, the perceived ability to raise or donate money, or visibility in the community.
The following suggestions can be used as a guideline in helping prevent an organization from having a D & O claim.
D & O’s CONDUCT
D&O’s should refrain from engaging in personal activities, which would injure or take advantage of the organization. They should be prohibited from using their position of trust and confidence to further private interests.
1. D&O’s should not realize secret profits or unfair advantage through personal transactions with or on behalf of the organization.
2. D&O’s should not compete with the organization to its detriment.
3. D&O’s should not usurp an opportunity of the organization.
4. D&O’s should not realize personal gain from the use of organizational material and non-public information.
5. D&O’s background and business affiliations should be examined to avoid a potential conflict of interest.
6. D&O’s should be required to perform their duties in accordance with applicable statutes and the terms of the organization's charter.
7. D&O’s should have sufficient time and interest to devote the necessary energies to the required job. Those who serve on more than three or four boards should be scrutinized as to the time and effort they can give.
8. D&O’s should be made up of individuals who possess expertise and/or experience in different areas affecting the organization so they may provide greater depth to the board.
9. Directors should be independent and not merely accept recommendations of executive officers or management.
10. Directors should demand and scrutinize carefully material furnished to them.
11. An organization should develop a thorough orientation program for new D&O’s and an on-going commitment to education in the particular operations of the organization.
12. New D&O’s should become familiar with basic corporate records and minutes of recent board and committee meetings. They should also review annual reports, board and committee organization, management personnel, planning documents and studies, letters from independent auditors, and information concerning facilities.
The board should periodically review and agree upon procedural issues relating to board meetings, including the frequency, timing, content and the persons other than directors who should attend.
Attendance at board meetings should be emphasized so as board members can be informed and have the opportunity for meaningful input in the decision making process.
Regular and special board meetings should be scheduled for maximum attendance.
Non-directors, who have been involved, who are knowledge about or consulted in connection with a particular action under consideration by the board, should also either attend the meeting or remain available as needed.
Adequate information concerning matters requiring board attention should be distributed to the board in time to permit a review of the information before any vote is taken.
Adequate time should be made available at meetings to completely analyze and discuss a matter under consideration. A director should not be deprived of an opportunity to question any aspect of a decision.
A dissenting director must affirmatively vote against a proposal if a legal defense based upon dissent is to be established. Mere abstention is deemed by the courts to be tantamount to approval.
Maintenance of accurate and complete minutes of all board and committee deliberations and other documents relating to D&O’s conduct is one of the most important areas of loss prevention.
Board minutes should document the matters discussed, record any instructions given to management, and set forth any resolutions passed, actions taken or other decisions made.
Minutes should clearly and concisely set forth exactly what action occurred at the meeting, including any limitations placed on the action taken or authority granted and any conscious decision not to act.
Minutes should describe what matters were considered and discussed and what authorities were relied upon in reaching the decision of the board.
If documents are incorporated by reference or attached to the minutes, they should be clearly identified in the minutes.
Minutes should be reviewed prior to their finalization not only by the directors, but also by legal council.
Minutes should reflect the results of any vote taken and identify by name all directors who voted against an approved action.
If an absent director dissents or disagrees with actions taken at a meeting, the objections should be placed in writing and submitted to the board for their information and for filing in the organizations minute book.
Imprecise wording, inflammatory or vulgar phrases, and ambiguous language should be avoided.
To guarantee that valuable documents are not destroyed and that potentially harmful documents are not retained, a document retention program should be established. This program should define the procedures for retaining documents relating to the organization and the actions of the board, including financial and legal documents, and personnel records.
Such a program should be in compliance with state laws.
USE OF LEGAL COUNSEL
From a loss prevention standpoint, legal council renders the most important advice to D&O’s. Legal advice not only helps guide D&O’s into legally acceptable conduct, but also improves the D&O's ability to defend their conduct if their actions are taken in reliance upon legal council advice.
Where possible only qualified legal counsel with experience and expertise in the subject area should be relied upon. The D&O’s should not feel compelled to use the same counsel for all legal issues, but seek the most competent counsel for the issue under consideration.