Standard of Conduct The standard of conduct required of board members is a broad one that requires individual interpretation and application to the facts of each specific case. It is sometimes codifiecl within a state's non-profit corporation law. The New York Not-for-Profit Corporation Law,' section 717(a), reads, for example: "Directors and officers shall discharge the duties of their respective positions in good faith and with the degree of diligence, care, and skill which ordinarily prudent men (sic) would exercise under similar circumstances in like positions." The New York statute resembles the common rule for jurisdictions lacking a specific statutory provision. Oleck summarized the requirement by saying, "So long as a director exercises reasonable diligence and care, he is free from personal liability-when his poor judgement causes loss or injury to the corporation. Good faith is the principal (but not the sole) test of adequacy of a director's care and diligence." The board member acting in good faith is allowed to make mistakes, acting within her or his "business judgement," but is not allowed gross negligence or self-dealing. A director will generally be held liable for acts of the board for which she or he votes or which she or he knows of but does not oppose. In general, the standard of conduct applied to the board member of a non-profit corporation is similar to, but not exactly like, that applied to the board member of a profit-making corporation. The standard for the director of a charitable organization is slightly higher than that applied to the director of most other types of nonprofit organizations. Variables Application of the general standard given above can be affected by a number of variables. These can include the size and scope of the organization; specific statutory requirements; whether the director is full-time or part-time; compensated or uncompensated; and whether the director has any special background. Reliance on Others In conducting supervisory activities, the director has the ability to place reasonable reliance on the information and reports of others. These can include financial statements provided by accountants, information provided by legal counsel, and reports of board committees and outside experts. Several states have specific statutory authorizations allowing reliance on various sources. Reliance on any of these sources will not relieve the director of the need to exercise ordinary prudence and good judgment. Actions to Show Good Faith To demonstrate good faith and reasonable care a director should undertake the following precautions and actions: 1. Attend all board and committee meetings. If unable to attend, be able to show a valid reason for absence. 2. Have a thorough knowledge of the duties and provisions within the by-laws and ·charter. 3. Heed corporate affairs and keep informed of the general activities and operation of programs. 4. Insure minimum statutory or technical requirements are met: filing annual reports, withholding employee taxes, etc. 5. Record personal conduct and register dissents in the minutes or by letter. 6. Avoid any semblance of self-dealing or enrichment. Discourage any business transactions between directors and the corporation, unless conducted entirely in the open and with stringent safeguards. 7. Make no pecuniary profit except that expressly provided in compensation or reimbursement within the by-laws. In essence, the best protection available to a director lies in doing a conscientious job on behalf of the organization. Fall 1986 RAIN Page 19
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