CA's Budget & Nonprofits: Part Four
05.25.2023 | Linda J. Rosenthal, JD
Sometimes, it boils down to a question of hats.
Two hats, to be exact.
And understanding that wearing both of those hats at once can lead to big trouble.
Should Attorneys Serve on Charity Boards?
“We already have legal counsel because we have an attorney sitting on our board,” we were told by several organization executives at a recent nonprofit governance symposium.
Attorneys on nonprofit boards? It happens all the time. It’s likely that every lawyer reading this post has been approached more than once to accept a directorship at a charitable organization. But is it a good idea?
To the charity, it may seem a no-brainer worthy of celebration like the little boy pictured, above. The organization gets a bright person trained in the law who may give free legal advice. The lawyer enjoys benefits as well: networking opportunities, increased professional stature, and a way to help out a favorite cause or fulfill a pro bono obligation.
What could possibly go wrong?
It can work out well, and often does. But there are significant lurking dangers. It is – as we lawyers cautiously describe many arrangements – “not without risk.”
The Hat Trick
The common thread popping up in these situations is the lawyer-as-board-member wearing the wrong hat at the wrong time, or trying to wear both hats at once – often at the innocent and misguided urging by the organization.
Simply put, this professional with the hat dilemma has multiple legal, professional, and ethical obligations. There are director duties and there are attorney duties; they may conflict unless great care is taken.
The ramifications for the attorney are potentially more serious than for the organization on whose board he or she serves, but the charity may sometimes suffer as well.
The board of directors is the governing body of the charitable organization. It’s responsible for planning and carrying out the mission and operations, and safeguarding the organization’s financial health and the assets held in charitable trust for the general public.
The authority to make decisions rests with the full board. No board member has authority to act alone, but each director has the separate and independent fiduciary duties of due care and loyalty – that is, 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.
The duty of care means that the director will act competently, and be an active and informed decision-maker. The duty of loyalty imposes an obligation on the director to act in good faith and in manner that the director reasonably believes to be in the best interests of the organization, including avoidance of conflicts of interest. (At a minimum, any potential conflict must be disclosed and the involved director should not participate in any action taken regarding that conflict.)
An attorney has additional – and sometimes colliding duties – because of the status of being a member of the state bar.
In particular, a lawyer may not represent a client if the representation involves a conflict of interest. That’s because the lawyer must be loyal to the client and be able to exercise independent judgment. There are specific rules that apply when a lawyer serves on the board of a corporation that is his or her client. The potential for conflict increases in that situation because the “client” is the corporation itself – not the founder, or executive director, or any one person.
An additional duty is the obligation to perform legal work competently. A lawyer asked to serve on a charity board may have little specific experience in the types of legal matters that arise; for example, the rules of tax exempt status, third-party liability, and employment law matters.
The View From The Organization’s Perspective
There are risks to the charitable organization if an attorney serves on its board. They may arise in a number of situations including, for example:
The View from the Attorney-Director’s Perspective
There are risks to the attorney arising from service on a charity board. For example:
It’s important for both the attorney and the organization to approach the decision about service on a charity board with eyes wide open.
Some of the risk may be mitigated by taking precautions: for example, making sure everyone is clear about when the lawyer-director is acting as an attorney and as a director only; disclosing actual and potential conflicts of interest; and candidly discussing the pros and cons of an attorney serving on the board.
In certain cases, the risks outweigh the benefits for either or both parties.