Board of Directors Liability?

While giving a presentation to a nonprofit board last fall (regarding the legal structure of their separately incorporated foundation), one of the board members asked me a pointed question:

Does that mean we (the parent charity board) have fiduciary responsibility (i.e. liability) over our separately incorporated subsidiary?

The question was specifically raising the question of board responsibility regarding actions of a subsidiary 509 (a)(3) supporting organization (with its own board but never the less board membership being controlled by the parent charity).

A really good question, one that probably has never been litigated.  Meaning, yes, in theory a board member could be held liable even for the misbehavior of a subsidiary board (assuming that the parent board was negligent in its oversight).  In theory, but not in practice.

But, he raised a really difficult general issue regarding board membership itself:  When could board members be personally liable for the general actions of the nonprofit board which they sit on?

I almost couldn’t get out of that question because if you dig deep enough, you have to conclude that board members could possibly be personally liable for improper actions of the charity on whose board they sit.  Or not.

Check out this summary of a recent case by attorney Don Kramer in his online newsletter Nonprofit Issues:

http://www.nonprofitissues.com/public/features/leadfree/2010dec1-IS.html

In sum, the case showed how hard it is pin any personal liability on board members as long as they are acting in general good faith (not even best good faith).  I highly recommend perusing his summary of the case if you ever anticipate fielding a question like I did from a board member.  It shows how unlikely it is for a board member to ever be liable for anything regarding their board role.

For those who are more into the legal issues regarding nonprofits, check out that web site anyway and considered subscribing.

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