Breach of Fiduciary Duty by Ogling the Doughnuts

Admit it. You’ve done it.

The corporate secretary is asking for approval of the minutes from the last meeting. But you’re busy deciding between the maple-glazed doughnuts and the chocolate-topped ones. So is everyone else around the conference table.

Nonprofit Minutes: One More Worry

Sometime later, your organization gets an audit notice from the IRS. What do you think the agent will want to see? Financial records? Of course. The Articles and Bylaws? Those, too.

Would it surprise you to learn that the IRS wants to see your corporate minutes as well? In fact, it’s close to the top of the list. And the California Attorney General – who has oversight authority for charities – is interested, too.

More Than a Quaint Formality

What if there’s dissension brewing among board factions over an important issue or course of action taken? If a lawsuit erupts, what will be key evidence in the case? You guessed it: the Board meeting minutes.

In a leading case, members of the board of the Walt Disney Co. – (a for-profit, but the principles apply as well to nonprofits) – were sued for breach of duty for negligently approving a key executive’s employment contract and compensation package. In making his ruling, the judge focused heavily on the board minutes as proof of liability:

[They]were 15 pages long, but only a page and half covered [the executive’s possible employment]. A portion of that page and a half was spent discussing [a different topic]. According to the minutes, the Board did not ask any questions about the details of [the executive’s] salary, . . . or possible termination. The Board also did not consider the consequences of a termination, or of the various payout scenarios that existed. Nevertheless, at the same meeting, the Board decided to [hire the executive].

“This case, and others like it, demonstrate the importance of crafting minutes that can be used as evidence that a Board at all times acted appropriately and in particular gave important issues due consideration.”

In these cases, the official record of meeting proceedings “provided damaging evidence of (or created unfavorable inferences concerning) breach of fiduciary duty and/or created confusion or misunderstanding concerning the intentions of the board.”

If a nonprofit is sued or investigated, its meeting minutes are demanded and carefully reviewed, whether the other party is a private party, another nonprofit, or a government agency.

The Corporation’s Official Record

Corporate minutes are much more than meaningless formalities or mere note-taking; they are legal requirements of substance and have important consequences. They are the key records of the history of the organization.

Nonprofits that are incorporated can act only by and through the board of directors — as well as through officers and agents authorized by the board. It’s crucial to document board actions and decisions in writing. Minutes are “presumed to be correct and are considered legal evidence of the facts they report.”

There is no one-size-fits-all formula or format. They shouldn’t be too sketchy or minimal, nor should they be verbatim transcripts of the meeting. They should be prepared carefully and “with an awareness of third parties.” They may be read by outsiders who were not at the meetings, but are trying to understand – after-the-fact – what occurred.

Well-kept corporate minutes serve as a record of corporate decisions, reflect director dissent where appropriate, offer guidance for future board action, serve as a valuable source of contemporaneous evidence in regulatory or judicial proceedings and reduce misunderstanding as to the intent of the board. Corporate minutes can document compliance by board and committee members with their fiduciary obligations.

And when the time comes at the next meeting to ratify and approve them, stop ogling the pastries and pay close attention. The minutes should be clear, accurate, and sufficient to reflect what actually occurred at the meeting, how decisions were made, who participated, who dissented, and what actions were proposed but not adopted.

Future Posts

We’ll explore this topic in more depth in later blog posts. Here’s a preview of some of them:

  • Strategies and Tips for Preparing Minutes
  • What to Include in the Minutes
  • How to Avoid Mistakes and Problems
  • Motions and Board Resolutions
  • Timing of Preparing, Reviewing, and Distributing Minutes
  • What Regulators Look For in the Minutes
  • How Minutes are Used as Evidence For and Against the Organization
  • How to Handle Confidential, Sensitive, or Privileged Proceedings
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FPLG | Linda Rosenthal, J.D.

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  1. […] what we wrote in “Breach of Fiduciary Duty by Ogling the Doughnuts,” our introductory post on the exhilarating topic of nonprofit corporate […]

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