Introduction:
Delegation:
Members:
Legal Obligations:
Duty of oversight:
To be proactive in ensuring you have the full and necessary information, including adequate internal control systems of the organization
Fiduciary Duty:
Individuals holding positions of responsibility and authority within the governing framework of an association, including both unpaid volunteers and paid staff, bear a fiduciary obligation to the organization. Succinctly put, this implies they are obligated to act reasonably, cautiously, and in the utmost interests of the organization, to refrain from negligence and fraudulent activities, and to avoid conflicts of interest.
Duty of care:
This duty is broad, requiring officers and directors to exercise ordinary and reasonable care in the performance of their duties, exhibiting honesty and good faith. Officers and directors must act in a manner that they believe to be in the best interests of the association, and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.
The "business judgment rule" protects officers and directors from personal liability for actions made in poor judgment as long as there is a reasonable basis to indicate that the action was undertaken with due care and in good faith.
Duty of loyalty:
This is a duty of faithfulness to the association. This means that officers and directors must give undivided allegiance to the association when making decisions affecting the association. In other words, officers and directors cannot put personal interests above the interests of the association. Personal interests may include outside business, professional, or financial interests; interests arising from involvement in other organizations; and interests of family members, among others.
Officers and directors should be careful to disclose even potential conflicts of interest to the board of directors and should recuse themselves from deliberation and voting on matters in which they have personal interests.
Duty of obedience:
This duty requires officers and directors to act in accordance with the organization's articles of incorporation, bylaws, and other governing documents, as well as all applicable laws and regulations.
Reliance on experts:
Unless an officer or director has knowledge that makes reliance unwarranted, an officer or director, in performing his or her duties to the organization, may rely on written or oral information, opinions, reports, or statements prepared or presented by:
Officers or employees of the association whom the officer or director believes in good faith to be reliable and competent in the matters presented
Willful ignorance and intentional wrongdoing:
Directors cannot remain willfully ignorant of the affairs of the association. A director appointed as treasurer, for example, with limited knowledge of finance cannot simply rely on the representations and reports of staff or auditors that "all is well" with the association's finances
Reducing Personal Liability Risk
Apparent Authority:
In the landmark 1982 case American Society of Mechanical Engineers v. Hydrolevel, the U.S. Supreme Court determined that an association can be held liable for the actions of its officers, directors, and other volunteers (including actions that bind the association financially), even when the association does not know about, approve of, or benefit from those actions, as long as the volunteer reasonably appears to outsiders to be acting with the association's approval (i.e., with its "apparent authority").
Directors’ Business Judgments:
Decisions must be made in good faith upon reasonable investigation for a lawful purpose, and in an honest belief that it is in the company’s best interests.
Directors’ Duty of Confidentiality:
The director must maintain the confidentiality of board deliberations and decisions. Many matters that come before the board are confidential and must remain so
Conclusion:
What are examples of ways directors can meet their fiduciary standards for the duty of oversight? Directors should monitor General Manager or Chief Executive Officer through recruitment, evaluation, retention, and compensation decisions. Where applicable, directors should make use of third parties for employees to report possible dishonest or illegal activities that might be occurring and have a formal whistleblowing policy in place. Risk committees within the board are sometimes used to monitor the overall risk faced by the company because of transactions undertaken by management. Directors should ensure that the company has a certified audit and interview auditors to make a choice suitable for their company. Understanding the nature of the company’s internal control process is a necessary duty for the directors.
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