Aug
10
2010

Board Duties Part II – The Duty of Loyalty

In the first installment of this series on board duties, we briefly discussed the fiduciary duty of care.  This second installment briefly discusses the fiduciary duty of loyalty.  To satisfy the duty of loyalty, a board member must act in the interest of the charity, and not act in their own interest or that of another person or entity.

The duty of loyalty primarily relates to conflicts of interest, corporate opportunity, and confidentiality. A conflict of interest is present whenever a director has a personal interest, whether direct or indirect, in connection with any proposed contract, arrangement or transaction. The mere presence of a conflict of interest, however, does not necessarily render a transaction void or voidable, or expose a director to liability.  When faced with a potential conflict of interest transaction, the board should consult the Internal Revenue Code (IRC Section 4941 or IRC Section 4958) and applicable state law.  Some helpful suggestions regarding the duty of loyalty include, but are not limited to, the following:

  • Use special care with compensation issues, especially compensation of officers and executives
  • Avoid conflicts of interest
  • Create an organizational structure where the best interests of the organization can be vigorously analyzed and pursued
  • The board should be independent and diverse, with terms
  • Adopt and enforce a conflict of interest policy – click here for a sample conflict of interest policy
Written by in: Governance

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