April 27, 2011
Published in Business in Savannah
In the present litigious society, it has become a cautionary habit for individuals in positions of governing, directive or corporate power – where the probability and risks of a legal liability are high – to seek protection from liability in the event a lawsuit occurs.
Individuals in these leadership positions are typically invited to sit on a corporate or nonprofit board of directors to assist in the governing and management functions of the institution. However, most flattering propositions come with strings attached, and it is wise to consider two very important questions before accepting: What are the rights and responsibilities of the board as a collective and its members? Is there liability protection or insurance in place for its members?
If there is not some sort of protection against liability, whether written into the bylaws or in the form of liability insurance, think twice before accepting the position.
Directors and officers liability insurance provides financial protection for the members of the board in the event they are sued in conjunction with the performance of their duties as they relate to the institution.
In the event that specific instances occur, members of the board may be held liable. For example, in the instance that an individual or group cause financial harm to the organization; the individual or group act solely on their own behalf and to the detriment of the organization; and/or commit a crime or wrongful act against the organization.
Members of a board may also be held personally liable for financial harm caused to the organization if they breach their duty of care, misappropriate a corporate asset for personal use or use by another business, commingle personal and business assets and/or fail to disclose potential or actual conflicts of interest.
However, it is understood – and states have recognized – that without some method to limit the liability of officers and directors for claims brought against them, it would be most difficult for corporations to find individuals willing to serve as members of a board. Although they vary on the specifics, most state corporation statues now contain comprehensive provisions regarding indemnification – or compensation for damages or loss – and director liability insurance.
In the event that certain matters cannot be indemnified under state law or in the instance the organization does not have the financial resources to pay for the indemnification, a liability insurance policy can cover these issues. Also in effect is the Business Judgment Rule, which is a legal principle that grants immunity for officers, directors, managers and other agents of a corporation from liability in the event a loss occurs based on corporate transactions made within their authority and in “good faith.”
As a member of the board, there are other ways to protect yourself when faced with difficult decisions that may affect the profitability, management and overall well-being of the institution. Take advantage of your right to full access to all of the facts, which extends to personal legal counsel, in order to make the most accurate judgment calls.
Your rights also include access to copies of internal communications, such as internal policies and procedures as drafted by current and past boards. This will help when making a determination of whether or not a particular action, specific to a particular situation, is in accordance with the mission and vision statements in effect.
Especially important to be advised of are communications between directors and financial managers. Paper trails are very important when defending against prosecution for mismanagement of funds. A very important rule of thumb is to build a record of the every action you take to ensure that your conduct will be accurately represented and proven later.
As a board member, never forget your right to dissent. In the end, you are accountable – if only professionally – for your actions. It is always best to act in good faith and in line with the principles dictated by the organization.
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