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While being recruited for and serving on the board of a college or university can be an honor, board members must recognize that they are accountable for the organization’s actions. In light of “The looming financial crisis for colleges and universities”, this responsibility cannot be taken lightly. Board members are legally required to be informed and active participants in corporate governance and, if the college is a non-profit, acting to fulfill the institution’s mission. Not surprisingly, the actual first duty owed by a board member is to understand his or her obligations.

A person serving on a board is a fiduciary, and is required to act without regard to his or her own needs, but instead is entrusted to make the goal of the fulfillment of the organization’s mission the only mission. This fiduciary relationship is legal in nature and comes with certain delineated duties.

Members of Boards of Directors/Trustees have the following fiduciary duties:

  • Duty of care
  • Duty of loyalty
  • Duty of obedience to the mission (non-profits only)

Duty of care

The duty of care requires the board to be informed about any proposals, including alternatives, the financial condition of the college and impact on the college – both short-term and long-term – of any particular decision. This may require questioning management or seeking advice from financial advisors or attorneys outside the organization. Board members cannot simply sit by and accept the decisions of management: they are required to investigate whether the recommended course of action is the best alternative.

Duty of loyalty

The duty of loyalty requires that board members advise other board members of relevant conflicts of interest and set aside conflicting loyalties when making a decision. Board members must evaluate options and make decisions as truly independent board members or may have to abstain from certain votes.

Duty of obedience to the mission

Normally, the board of a non-profit owes its primary obligation to the fulfillment of the mission. However, if the organization experiences financial difficulty, and is deemed insolvent, the board may need to subordinate fulfillment of mission to other interests, including those of the organization’s creditors.

When evaluating the options presented, colleges in financial distress face certain additional requirements and challenges. As discussed previously, if an entity is insolvent (cannot meet its expenses when they come due), the fiduciary duty of the board shifts to maximizing the recovery for creditors of the entity. Directors should not go into a meeting without a full understanding of the extent and depth of the financial problems, the legal issues and contractual requirements and a viable short and long-term plan of action.

Decisions must be independent, informed and documented

Board members must be proactive about being fully informed and being involved in determining the best course of action of their college, putting aside personal interests.

Complying with the required duties and obligations can protect the board of a college. As long as the decisions of the board members are made on an independent and informed basis, in good faith and in the best interests of the college, liability can be avoided through what is known as the “business judgment rule.” This presumption applies unless there is evidence showing a conflict of interest, disloyalty or an uninformed decision.

Boards should also make sure to document, through the board’s minutes, how decisions were reached. If members recused themselves because of an independence issue, note it for the record. If members relied on certain projections, include a copy in the minutes. If alternatives to the decision were considered, but ultimately rejected, include the discussion in the minutes. The business judgment rule does not require every decision made by a board to be correct (especially with the benefit of hindsight), only that the decision was independent and informed. Having a record to support the decision, or at least the contemplation behind the decision, lowers the risk to board members when the decision is questioned in the future.

Each board should establish appropriate policies, committees and measures of board performance. Boards should be focused on advancing the goals of the university but at the same time monitoring the organization’s financial well-being. While not all board members can be financial experts, a basic knowledge of the financial statements of the entity along with knowledge of the institution’s debt requirements are necessary to understand, and at times challenge the management team’s proposals.

Representing a university by serving on its board is an honor, and nothing written here should make a person avoid such service. Understanding the duties and obligations, however, will not only protect the board member, but will make him or her a more effective asset to the board.

For more information, please contact:

Paul W. Linehan
216.348.5413
plinehan@mcdonaldhopkins.com

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