Q&A #133 – How does delegation to a committee impact the fiduciary duties of Board members?
Question: I am Board member of a nonprofit organization that is in the process of selling a building. The Board recently voted to move forward with the sale process and formed a committee of Board members to select the broker, negotiate the sale price, and ultimately execute the contract. Can the rest of the Board members rely on this committee to complete the transaction, or do we have fiduciary duties to review the contract and vote to approve the final sale?
Answer: While delegating a matter to a committee does not totally absolve the other Board members from their fiduciary duties, there is usually no explicit requirement that the Board retain final approval authority over day-to-day transactions. Further, state nonprofit corporation law typically provides favorable treatment to Board members who properly and reasonably delegate a matter to a committee of other qualified and experienced Board members.
State law governs the complex question of how the fiduciary duties of Board members are applied when a matter has been properly delegated to a committee of other Board members. The details vary depending on the state, but there are a few principles that are common to many jurisdictions.
First, state nonprofit corporation statutes usually provide that merely delegating a task to a Board committee does not by itself satisfy the fiduciary duties of the Board members. At a minimum, this means that care must be exercised in the process of delegating a matter to a committee. For example, it is important to avoid delegating a task to committee members who are manifestly unqualified or who have a conflict of interest with respect to the matter.
Second, state law generally describes certain powers that cannot be delegated to a committee, such as filling vacancies on the Board of Directors, amending the organization’s governing documents, or dissolving the organization. The Bylaws may set forth additional restrictions. Delegating powers that are not permitted to be delegated to a committee will risk a breach of fiduciary duties.
Third, many state nonprofit corporation statutes have provisions addressing the permitted reliance of Board members on information, statements, and/or actions of certain qualified individuals including officers, employees, experts such as lawyers and CPAs, and Board committees.
For example, these laws typically state that Board members are entitled to rely on information, opinions, reports, or statements prepared or presented by a committee of Board members so long as the Board members: (1) do not have knowledge of facts that makes their reliance on the committee unwarranted; and (2) reasonably believe the committee merits confidence. If these standards are satisfied, Board members are generally relieved of the duty to do additional investigation into matters presented by the committee beyond carefully reviewing and assessing the committee’s recommendations and asking questions when appropriate.
Some, but not all, jurisdictions provide that Board members are entitled to rely on the actions of a committee as well as their reports and recommendations. If the nonprofit corporation statute in your state is not clear about this, it may be advisable (although not strictly required) for the Board to retain some final approval power and/or set clear parameters within which the committee is authorized to operate.
Planning Tip – When forming a committee to oversee a specific task like the sale of property (as opposed to a standing committee with regular, ongoing responsibilities) consider setting a sunset date by which the committee will be disbanded if Board action is not taken to extend the committee’s authority. This approach helps to ensure that the committee moves forward with the matter efficiently while facilitating proper oversight from the Board.
In your case, while it is not necessarily required that the Board retain final approval authority over the sale, the Board may wish to specify that the committee is authorized to complete the sale within a specified range of sale prices and/or other terms that the Board has determined to be reasonable.
If you have a question you would like to submit to SE4N, send it to us using the contact form and we will consider answering it in a future post. Please do not send confidential information.
You might also be interested in:
Q&A #107 – Should a majority of a nonprofit’s Board members be independent?
