Thinking about serving on a board?
Many nonprofits actively seek to include an attorney on their boards. A board member who is an attorney offers to the nonprofit specialized knowledge, skills, perspectives, and networks of contacts. But serving as a board member is very different from representing the organization as pro bono counsel, which makes it critical for the parties to understand the precise role in which the attorney will serve.
As a board member, or director, of a nonprofit corporation, an individual must meet the fiduciary duties of care and loyalty. Generally, these duties are to act in good faith, in a manner that director believes to be in the best interests of the corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.
As an attorney representing a nonprofit corporation, an individual must act with competence, prudence, and diligence within the scope of her engagement and consistent with rules of professional conduct. The standard of care under California law is expressed in Lucas v. Hamm, 56 Cal. 2d 583, 591 (1961): “to use such skill, prudence, and diligence as lawyers of ordinary skill and capacity commonly possess and exercise in the performance of the tasks which they undertake.”
While acting as both a director and attorney for a nonprofit is often discouraged and frequently prohibited by law firms, this has not prevented attorneys from providing legal advice to the organizations on which they claim they serve only as directors. Accordingly, in circumstances where the attorney desires to serve in both roles, it may be prudent for the attorney to expressly limit the scope of the legal engagement and to abstain from voting on matters in which she provided legal counsel.
Should you choose to serve as a director and an attorney to a nonprofit, whether formally or informally, consider the following:
Role Confusion. When you offer a particular opinion to the executive or to other directors, are you communicating as a director or as an attorney? Does the recipient of the communication know in which capacity you are providing the opinion? The concern is two fold: (1) your opinions offered as a director may be received with unwarranted and unspoken deference if the rest of the board considers it legal advice, and (2) your legal advice offered as an attorney may be received without appropriate consideration if the rest of the board considers it merely the opinion of a director.
Loss of Independence. Will the dual role compromise your independence of professional judgment? Consider if your legal opinion or advice will be clouded if you are reviewing an action already taken where you participated in the vote or had a preferential viewpoint from a business perspective.
Conflicts of Interest. What is your role if the organization enters into a dispute with your firm or one of your firm’s clients or prospective clients? In addition to potentially harming your firm, you can harm the organization if you either fail to provide zealous representation or withdraw from representing the organization due to the conflict.
Loss of Attorney-Client Privilege. Are your communications with the rest of the board protected by the attorney-client privilege? If it’s clear that the communications are to be attorney-client communications, they should be protected by the privilege. However, such protection may be lost if it’s not clear that you are communicating only as an attorney or if the communication is recorded in minutes to which other persons have access.
Competence. Do you have sufficient competence in the areas of law in which you have been asked to provide legal advice as an attorney to the organization? The competency issue is critical in avoiding malpractice, and attorney/directors must be careful when asked to provide advice in areas in which they possess some knowledge but do not have the requisite competence. The laws applicable to nonprofit and tax-exempt organizations are often unique and nuanced and largely unknown by attorneys who do not practice in this area.
Heightened Exposure to Liability
Standard of Care. While there are cases of inside directors (who are employees) of for-profit corporations having a higher standard of care than outside directors, there does not appear to be authority that extends to directors of nonprofit corporations with specific professional knowledge, skills, and experience that might be relevant in exercising their fiduciary duties. However, it seems quite plausible that you may be held to a higher standard of care if you are compensated by the organization for acting as an attorney while serving as a director.
Reliance Defense. In performing the duties of a director, a director may be entitled to rely on information, opinions, reports or statements prepared or presented by an attorney. This may serve as a defense to a claim if, for example, a director took an action that would otherwise have been considered negligent but not for the director’s reliance on the opinion of an attorney that it was proper. As an attorney and director, however, you would not be able to claim reliance on your own opinion as a defense.
Insurance. The role confusion issue may extend to whether insurance will cover acts or omissions of an attorney/director. Directors’ and officers’ (D&O) insurance generally covers certain acts or omissions of a director acting in such capacity but will not cover legal advice offered by an attorney/director. Professional liability or malpractice insurance generally covers certain acts or omissions of an attorney acting in such capacity but will not cover such individual if acting in the capacity of a director. In specific instances where it is unclear in which capacity you were serving, both your professional liability and D&O insurance carriers could deny coverage.
6 Tips for Attorney/Directors
- Inform management and the board about your role and the issues regarding attorney-client privilege up front.
- Identify in which capacity you are communicating and make sure this is accurately captured in the minutes when appropriate.
- Refrain from voting on material financial transactions between the organization and your law firm.
- Identify potential gaps in coverage between your professional liability insurance and the nonprofit’s D&O insurance.
- At all times when rendering legal advice, exercise the independent professional judgment required of an attorney (e.g., advising against illegal action even if favored by the board).
- Diligently perform your duties as counsel once an action has been approved by the board even if you disagreed with the action as a director.
Michelle Berger and Gene Takagi, Neo Law Group, specialize in corporate, tax, and charitable trust law counsel to nonprofit and tax-exempt organizations.