is the same as a for-profit Board’s standard of care.
The “business judgment rule” generally protects a Board of Directors from liability in suits against an organization. This means that if the Board used its best business judgment, then it has fulfilled its duties to the organization.
I have been recently voted in as “Legal Officer” for a small non-for-profit organization. This organization is trying to get established with the IRS as a nonprofit 501(c)(3) and has been for a couple years now. Delays due to the organization being of a completely volunteer nature have slowed its progress, no doubt, but what can you do… God willing, the application will be approved and everything will be hunky dory.
This being a volunteer organization, its Board members are perhaps not as savvy as their paid counterparts over at the United Way. So something they need to keep in mind is that a Board of Directors of any organization, be it for-profit or non-profit, needs to be diligent in how it handles the affairs of the organization. This includes making reasonably sure that money is being managed by the right person, that there are checks and balances (which are enforced) that protect the resources and interests of the organization.
Why does an organization become incorporated? In the case of a nonprofit, there’s the tax implications, of course… but there’s also a degree of protection involved in running the nonprofit that protects the Board and its officers from liability while they transact business for it.
So, let’s say an officer of the organization ordered three cases of books from a publisher but she only paid for two because the organization didn’t get the donation it was promised to pay for the last case. The books were never returned to the publisher. Can the publisher sue the officer? It depends on the circumstances, but usually no.
My organization’s bylaws provide that the Board may fill vacancies in the Board between elections. What does that mean for the Board? It means that the Board must be diligent in filling those vacancies.
The Board’s standard of care is simply nonexistent when there is an election of the entire membership. Board members have no say as to how the general membership votes (except for her own individual vote). So no duties there, outside of conducting a good election.
When the Board is making appointments, however, there is a big duty of care, especially when it comes to the positions of Director and Financial Officer in this organization, because they are the positions that control the money accounts.
Granted, not much money, but what is there is used for many good things. So if it disappeared, that would be terrible.
An angry member might want to take it out on the people who allowed it to happen by appointing the thief FO or Director.
That member might want to sue the innocent Board members for gross negligence and not using the correct standard of care with those funds.
IF the Board made its choice based on supporting facts that showed the trustworthiness of the FO, then the Board is protected.
If, on the other hand, the Board didn’t take time to scrutinize the FO, ask questions, get input from reputable sources, then the member might have a case.
The take-away: The Board has a duty to be diligent in handling the organization’s affairs, and doing so, God willing, will protect its members from liability.
Posted by debmcnichol 
