Trustees | Trusteeship

The Penn State lesson for the board of directors

MIAMI HERALD   |  July 22, 2012 by Anthony Alfieri, Frank Maderal Jr. and Roberto Martinez

Many of us devote significant time, energy and resources to not-for-profit organizations. At its best, non-for-profit board leadership reflects a deep culture of compliance and governance that embodies the values of accountability, independence and transparency. And yet, as the devastating report of child sexual abuse at Penn State demonstrates, even the best leadership sometimes disregards its responsibilities.

In commenting on the scandal, the president of the American Council of Trustees and Alumni stated: “For too long, the boards have been viewed more as boosters than as legal fiduciaries.”

That mindset contaminates many boards at schools, arts groups and other civic organizations. Otherwise upstanding members of the community, who volunteer unselfishly considerable time and resources, are compromised as board members by the expedient atmosphere of “groupthink” that can develop into an unwitting culture of willful ignorance and corruption. It should not be that way. The law requires otherwise.

There is a popular misconception that directors of not-for-profit corporations are not subject to the same legal requirements as for-profit corporate directors. This is totally incorrect. Florida, like almost every other state, imposes the same duties and liabilities on directors of not-for-profit corporations as on for-profit corporate directors. Those duties cannot be delegated, not even to committees of other directors, including a board’s executive committee.

This fact many times comes as a surprise to the director of the not-for-profit corporation who mistook service as primarily a duty to promote the organization and contribute through fund-raising, and it often comes too late when the damage is done and the liability has set in.

The law clearly imposes a fiduciary duty on each director. That duty requires each director to become informed of all reasonably available material information, and to inform the full board of any information that is material to the corporation. A director simply cannot keep material information from the board.

But, not only does a director have a duty to become informed; once informed, a director has a duty carefully to consider that information. Lack of attention in the face of material information is a breach of the director’s fiduciary duty, potentially exposing a director to personal liability.

This commonly arises in the context of information about the misconduct of officers and employees. By way of illustration, if an employee of a not-for-profit corporation harms some person in a way that created a liability, directors could be personally liable to that person if they breached their duty by ignoring information about that employee’s prior or ongoing misconduct or by failing to consider that information if they had reason to know that harm was highly probable from such inaction.

The tragedy at Penn State should serve as a wake-up call in many ways. The paramount message is the need ever to be vigilant to protect our children, who are innocent and vulnerable, from monstrous predators. But, this tragedy is also a wake up call to many fine individuals who serve unselfishly on such boards.

With the best of intentions, many directors strive to maintain group cohesiveness by seeking to minimize conflict and achieving consensus decisions. But, when that is accomplished without an honest evaluation of the facts and the exercise of critical thinking, the directors end up compromising their fiduciary duty. That Groupthink mentality can lead to a culture of corruption compromising the integrity of the directors and potentially harming innocent people.

Directors of not-for-profit entities undertake a serious legal responsibility. If they have information about the misconduct of officers or high-level employees that may cause harm to others or liability for their organization, by law they cannot ignore it. They must get involved and take appropriate action. If they do not, they risk serious personal liability for breaching their statutory duties. Just as important as their legal obligation, directors also have the moral and ethical obligation to act as responsible leaders.

Anthony Alfieri is the dean’s distinguished scholar director at the Center for Ethics & Public Service at the University of Miami law school. Frank Maderal Jr. and Roberto “Bob” Martinez, a former U.S. attorney, are lawyers at Colson Hicks Eidson in Coral Gables.


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