Duty of Care for New York Not-for-Profit Corporations
Board of Directors:
Duty of Care
Directors of non-profits generally become members of a not-for-profit board because they believe in the charitable mission of the organization. Directors often have valuable skills to offer the organization such as legal or financial expertise, fundraising knowledge and contacts, or business management experience. Non-profit directors are asked to attend meetings and invest time and resources into the governance and activities of the organization, but prohibited by law from receiving compensation for their roles as directors. This volunteerism, and dedication to a worthy cause however do not absolve the directors of charities and not-for-profits from adhering to a strict duty of care over the ongoing activities of the organization.
Each member of a board of directors of a corporation is charged with three duties: the Duty of Care, the Duty of Loyalty and the Duty of Obedience. These duties dictate the Directors activities as they govern the corporation. The duty of care is the standard of conduct required of each board member as it oversees the ongoing activities of the corporation. Though originally a standard for for-profit business corporations, the duty of care applies in full force and effect to the Boards of Not-for-Profit Organizations.
In New York State, the duty of care for directors is codified in the Not-for-Profit Corporation Law (NPCL) § 717. Duty of directors and officers:
“(a) Directors and officers shall discharge the duties of their respective positions in good faith and with the care an ordinarily prudent person in a like position would exercise under similar circumstances."
There are generally two situations which give rise to duty of care issues: nonfeasance and misfeasance. Nonfeasance occurs when the director, or Board, fails to act in a situation when an ordinary prudent person in a similar position would have acted on behalf of the corporation. In order to be held liable for nonfeasance, there must be an actual situation in which the director failed to act and that failure to act had to have caused the corporation or shareholders and actual injury.
Misfeasance occurs when the director or Board action or actions hurt the corporation. However, if a director violates his duty of care in a way that hurts the corporation the director will not be held liable if the Business Judgment Rule applies. The Business Judgment Rule is a policy by which a court will not interfere or second guess a business decision if (i) the decision was made in good faith, (ii) the director was reasonably informed, and (iii) the director had a rational basis for the decision. The underlying policy to the business judgment rule is that the directors are guarantors of the corporation’s success.
The NPCL §717(b) describes the ways in which directors can and should gather information to make decisions in good faith according to the duty of care. Directors, in discharging their duties in good faith may rely on financial statements and other data prepared by:
- officers or employees of the corporation who are believed to be competent and reliable;
- counsel, public accountants or other persons as to matters which the director believes to be within such person’s professional or expert competence, or
- a committee of the board upon which they do not serve, duly designated in accordance with a provision in the certificate of incorporation or the by-laws, as to matters within its designated authority, which committee the directors or officers believe to merit confidence.
Section 717(b)(3) also describes when a director is not acting in good faith:
“…a person shall not be acting in good faith if they have knowledge concerning the matter in question that would cause such reliance to be unwarranted. Persons who so perform their duties shall have no liability by reason of being or having been directors or officers of the corporation."
Directors are required to act on behalf of the corporation with good faith, care, skill and diligence. Good faith, though subjective, has been defined to include fairness, morality and honesty in purpose. Facts as to this standard can also be applied to determine if the director has met its duty under the law. Courts will look at meeting attendance, the source of information and corporate records.