Board Portals and a Director’s Personal Liability
By Dustin McKissen, February 16, 2016
Most boards of directors believe that their personal liability is limited, so long as they do not willfully engage in any misconduct, and the organization has directors and officers (D&O) insurance.
According to the American Bar Association (ABA) that assumption is incorrect.
It is important to remember that board members have three fundamental duties:
- The Duty of Care – A director must act in a way that is prudent, reasonable, and demonstrates the correct level of competence needed to serve as a director.
- The Duty of Loyalty – A director must demonstrate allegiance to the organization first, and never use his or her position on the board for personal gain.
- The Duty of Obedience – A director must be faithful to the organization’s mission, and directors are not permitted to act in a way that is inconsistent with the central goals of the organization.
The three basic duties are broadly written, but show that a director must know what he or she is doing, put their own interests aside, and make decisions in a manner that furthers the organization’s mission.
However, a key word is missing from the three basic duties: intentionally. Nowhere does any duty include the word “intentionally”. In the definition of the duty of loyalty it doesn’t say, “…never intentionally use his or her position on the board for personal gain”. This is an important distinction. What it means is that directors may violate one of the three basic duties without knowing he or she is doing so.
Unfortunately many organizations never conduct board orientation, and often directors are unaware of the three basic duties. However, ignorance is not a defense – at least to the IRS. If a director or board takes action that is inconsistent with or in direct conflict with the basic duties there may be severe consequences. It is even possible that directors may be held personally responsible for the impact of their decisions.
While many directors (and organizations) assume that any personal liability will be mitigated by D&O insurance, these policies typically exclude specific wrongful acts. For example, suits related to a board member personally profiting are typically excluded from D&O coverage. A board member pleading ignorance of their responsibilities likely would not be an adequate explanation for the insurer.
So, what can a director do to avoid any potential personal liability?
First of all, know your responsibilities as a director, and always act in a manner that is consistent with the three basic duties. At times that may be easier said than done. As an association and nonprofit executive I’ve sat in meetings where a combination of peer pressure, persuasive directors, and groupthink caused boards to make decisions that were in conflict with their duty to put the organization first.
Like ignorance, a defense of “everyone else voted the same way” will not work for an insurer – or the IRS.
Secondly, make sure that your actions as a director are well-documented. BoardPaq, the most cost effective board portal for your board of directors, simplifies the recording of attendance, board votes, and discussion topics. Board portals like BoardPaq can help your board of directors show how and when they made a decision, which is important if your organization is ever in the unfortunate position of having to demonstrate that your board acted in a manner consistent with the three basic duties.
Serving as a director on any board is a great leadership opportunity. You can make a difference in a big way. However, service on any board, whether it is a community bank, credit union, or trade association, requires directors to act with the organization’s best interests in mind. Doing so – along with using a board portal to help document board activity – will help ensure you never experience a scenario where you are held personally liable for a board’s decisions.