A Short Note on Managing the 501: Fiduciary Responsibility
http://www.law.cornell.edu/uscode/text/26/501
© 2014 EEASI Corporation

 

In this Part we will discuss how a new manager must conduct themselves in order not to jeopardize the 501 status of the organization. This conduct comes under the heading of Fiduciary Responsibility.

Fiduciary Responsibility
Fiduciary responsibility refers to conduct that is in the best interest of the organization rather than to any single member, small group or director. All board members have an implicit responsibility to act in the best interest of the organization. For example, creating adversarial relationships with volunteers or critical suppliers could be seen as a breach of fiduciary duty in that such acts could result in the organization incurring a financial burden that did not previously exist. Such a financial burden could spell death to the organization because 501 organizations are highly dependent on volunteer help. An exact definition of fiduciary duty is very difficult to set down, but is very easy to breach by improper conduct or conduct propelled forward by self interest. Overly zealous inexperience directors who have poor people skills are those who are most at risk of a breach of fiduciary duty.

The most serious consequence of breach of fiduciary duty is that it puts the offending director at risk of being sued personally by any member. Title 48 of the United States code cannot protect a director from gross negligence and promotion of adversarial relationships with volunteers that results in income loss or loss of other good and valuable services by the organization to include the good will of the organization. Specifically, to be protected by 48 USC an individual is required and obligated to exercise "ordinary and reasonable care in the performance of their duties", exhibiting honesty, respect and good faith toward all volunteers and suppliers.

The prudent/ reasonable man rule applies to the conduct of directors. "This hypothetical person exercises average care, skill, and judgment in conduct that society requires of its members for the protection of their own and of others' interests."--definitions.uslegal.com. However, a director with professional skills can be held to a higher standard of conduct when assessing fiduciary responsibility.

Conflict of interest is another area of fiduciary duty that is easily breached. For example, directors who have a personal involvement or interest in a traditional activity of the organization, and are put in charge of that activity, are at risk of breach. This is because there is a fine line between taking reasonable, objective care of the activity on behalf of the organization versus acting to benefit from their position as one in charge of that activity. Benefit need not be monetary. It may come in the form of any good and valuable consideration. In general, one wants a director to have some knowledge of the traditional activity for which they are assigned responsibility without having any direct involvement or stake in the activity itself.

Additionally there is a duty to operate within and in accordance with an organization’s governing documents that include the Certificate of Formation, all bylaws, policies and procedures whether written or of an oral tradition. This may also relate to conducting business as it has always been conducted if doing otherwise would jeopardize the welfare of the organization and its 501 status. Compliance with all federal, state county and city laws and ordinances are also required. This requires that proper minutes, board meetings etc be conducted within a framework that avoids even the appearance of an officer or director attempting to promote a specific agenda through bypassing formal rules of meetings, typically Roberts Rules of Order.

Reliance on experts is a particularly difficult area within which to work effectively. A director is entitled to "rely on information, opinions, reports or statements prepared by committees, consultant and/or staff, that the leader believes is reliable and competent in the matters being presented". The difficulty inherent in this area maybe referred to as the problem of due diligence. If a director simply takes someone's lay opinion, or even a self proclaimed expert's opinion without having looked into the matter carefully, on their own, or cross examined the "expert" for relevance, may be found guilty of a failure to conduct due diligence with regard to their decisions.

Any director claiming to have skills that are more common to professionals in an area, and claiming to be able to provide those skills, is at risk of violating the due diligence requirement as well as possibly the conflict of interest requirement.

Fiduciary duty is generally difficult to fulfill and anyone seeking a position on a board of directors of a 501 must weigh carefully their commitment to the organization versus having a personal interest in benefiting from that position. Any benefit from their position on the board can be viewed as the board member using their position for personal inurement and is a violation that can jeopardize the 501 status of the organization as well as the personal assets of the director apart from the organization.

If a director brings attention to themselves as giving the appearance of a violation of fiduciary duty, that can be considered as serious as a factual breach because it damages the good will of the organization.