The business judgment rule and other protections for the conduct of not-for-profit directors

The authors review the Business Judgment Rule as applied to a not-for-profit director's duty of care, with particular emphasis on the different forms of state statutory liability shields that serve to enhance the protections of the Rule. They also examine current trends in enforcement of breach of fiduciary duty of care standards, and provide a series of specific recommendations for not-for-profit boards to consider implementing as a means of increasing the likelihood of affording such protections to individuals serving as directors.     

The fiduciary duties of healthcare directors in the "zone of insolvency"

Directors of healthcare organizations normally owe fiduciary duties to their shareholders or, in the case of nonprofits, to the charitable mission of the organization. As an organization descends to bankruptcy, however, the board's duties may shift. At some point, the board may be imposed with different and often conflicting obligations to the corporate enterprise as a whole, with a primary criterion being the interests of creditors. In this article, the authors analyze the murky areas of the Zone and give guidance as to when the board's duty may shift-and as to how directors should proceed both in determining their duties and in working to fulfill them.     

Revisiting the duty of care of the nonprofit director

The current corporate responsibility environment has prompted interested stakeholders, including legislators and state charity law officials, to more closely evaluate what constitutes the proper exercise of the "duty of care" by the director of a nonprofit corporation. The authors review recent developments affecting duty-of-care obligations and conclude that corporate responsibility and related concepts are likely to require directors to give greater consideration to the exercise of their "oversight" obligations as subsumed within the duty of care. The Article identifies a number of recent instances in which state charity law officials and other third parties have raised issues associated with the proper exercise of directors' oversight obligation, and concludes that directors of nonprofits will require greater counseling on their duty-of-care obligations in order to reduce their liability profile in an increasingly contentious environment.     

The layered prisoners' dilemma: Ingroup versus macro-efficiency

In the N-prisoners' dilemma (NPD), cooperation produces ingroup efficiency. But if ingroup gains from cooperation are less than outgroup losses, then macro-efficiency for the collectivity (defined as ingroup plus outgroup) is harmed. We call this situation a layered prisoners' dilemma (LPD). The LPD models diverse real world situations — from OPEC's effect on consumers to interest groups' effect on citizens. We developed an experimental analogue to test three hypotheses about LPD behavior. We found that subjects' behavior was not motivated by a concern for macro-efficiency but, instead, was a function of ingroup interaction. Specifically, ingroup discussion decreased macro-efficient behavior, but the amount of the decrease depended on decision-making structures and ingroup perceptions of outgroup worthiness. The results suggest that macro-inefficient behavior will be ubiquitous due to the ease with which subjects form ingroups. But the results also suggest tactics for constraining macro-inefficient behavior, though the success of the tactics depends on the existence of crosscutting group loyalities. We wish to acknowledge with graditude the help of Robyn Dawes, Carnegie Mellon University; John Francis, University of Utah; Mike Lyons, Utah State University; and John Orbell, University of Oregon.     

"Independence" and the nonprofit board: a general counsel's guide

In the wake of the Sarbanes-Oxley Act regulations that govern the public company sector, standards are emerging to assure that nonprofit corporate boards are maintaining appropriate levels of independence. This Article provides a summation of the current trends in the development of independence standards for nonprofit corporate governance, from both tax and corporate law perspectives. The authors consider independence standards for nonprofit boards of governance and discuss the evolution of independence standards as they relate to the duty of good faith, and the distinction between independence and conflicts of interest. The authors also seek to examine the evolution of current federal regulations and study state models that have been successfully implemented to insure the independence of nonprofit corporations. Finally, the authors propose a set of core guidelines to be considered when addressing board and committee independence issues.