(Published in the Portsmouth Herald, July 2010)
Good Citizen, whose name has been changed for the sake of his privacy, just accepted a position as member of the Board of Trustees of a local public charity. Mr. Citizen was pleased with the appointment as Trustee and felt he was well-qualified to serve, particularly because he’d previously served as a director on the boards of a number of public and private corporations in the region. Mr. Citizen explained that he saw little difference between serving on a for-profit board of directors and on the board of a charity, and asked what I thought. I agreed that there are similarities between the duties and obligations owed by a director of a for-profit corporation and those owed by a director or trustee of a charity board. But I pointed out that there are significant differences too and that serving as a director or trustee of a public charity can be more exacting than serving as a director of a for-profit company.
For-profit directors and directors and trustees of public charities are fiduciaries or special caretakers of the organizations they serve. The general duties of directors are defined similarly in the for-profit and not-for-profit contexts. But the judicial interpretation of the similarly-defined director obligations has resulted in a higher degree of responsibility being placed on the shoulders of nonprofit directors and trustees.
For-profit directors manage the narrow field of the interests of a single corporation, and answer to a constituency of shareholders that is highly watchful over the directors’ activities and, therefore, likely to enforce their rights against for-profit directors. In contrast, directors and trustees of public charities undertake to manage charities in which all of us have a general stake, but probably not a sufficiently high stake to maintain a keen eye on director and trustee activities. In response, our legal system creates heightened levels of obligation for nonprofit directors and trustees to assure that the public trust is well served.
The model laws governing for-profit and nonprofit corporations offer nearly identical definitions of the fiduciary duty of care owed by directors. To fulfill her duty of care, a for-profit director or a nonprofit director or trustee must act with a care an ordinarily prudent person in a like position would exercise under similar circumstances. The judicial interpretation of what this duty of care means may result in a nonprofit director being held to a higher standard of care than a for-profit director. This is because in interpreting whether a for-profit corporation director has fulfilled his duty of care, most courts will apply something called the ‘business judgment rule’ and presume that, in making a business decision, the director acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company. This judicial presumption or safe harbor is not available to nonprofit directors.
The duty of loyalty requires a director or trustee to pursue the organization’s best interest rather than her own interests. The duty of loyalty prohibits the director from engaging in self-dealing unless there is full disclosure to the governing board and the transaction is clearly in the organization’s best interest. Among other things, such a transaction must be objectively fair to the organization and must be approved by the members of the governing board, other than the director that is directly involved. The duty of loyalty is defined similarly for both for-profit and nonprofit directors, but the fulfillment of a director duty of loyalty requires more of a nonprofit director in many instances. This is because the federal government (through the Internal Revenue Service) and many states, including New Hampshire, require public disclosure of most transactions between a nonprofit entity and its fiduciaries. Such public disclosure requirements generally do not apply to for-profit corporations, other than public companies or companies subject to special regulation.
Underlying the concepts of fiduciary duties is the question of who benefits from the fulfillment of those duties. In the for-profit context, the shareholders are the clearly-established beneficiaries of the directors’ fiduciary duties. A director’s service to the shareholders requires the director to preserve and grow the value of the shareholders’ investment in the company, which is a clear, consistent and easily-grasped standard. In a nonprofit context the beneficiaries of the directors’ or trustees’ fiduciary duties are less easy to define because nonprofits, particularly public charities, typically serve multiple constituencies, including the public at large.
For this reason, the courts of some states specifically impose an additional duty of obedience on nonprofit fiduciaries. The duty of obedience is imposed to require a nonprofit fiduciary to act as director or trustee in accordance with the specific charitable purposes of the charitable trust served. In addition the states, including New Hampshire, give their attorneys general special enforcement power to assure that the directors and trustees of public charities that operate within these states comply with their fiduciary duties.
M.L. Geffert is a member of the Corporate Department at the law firm of McLane, Graf, Raulerson & Middleton, Professional Association. She can be reached at [email protected] or 603-334-6929. The McLane Law Firm is the largest full-service law firm in the state of New Hampshire, with offices in Concord, Manchester and Portsmouth as well as Woburn, Massachusetts.