The Pitfalls of Delegation (and how to avoid them)
Delegating activities to committees and other qualified individuals can be helpful for nonprofit boards that are short on the time or expertise needed to carry out certain functions. For example, nonprofit boards typically delegate the day to day management of the organization to officers such as the C.E.O./Executive Director. Boards also delegate specific tasks to committees who can devote more time to particular matters. For example, nonprofits often delegate oversight of finances, investments, audits, and compensation to a standing committee. In contrast, the board may convene other committees on an ad hoc basis for one time or temporary projects.
Properly functioning committees and delegations to officers, staff, and advisors permit directors to channel the appropriate expertise for highly specific functions or off-load highly technical or time-consuming responsibilities. However, in doing so, board members may inadvertently place too much authority and responsibility with persons who are not official directors, officers or employees. As a result, board members can unknowingly abdicate their fiduciary duties as imposed by statute and their bylaws, putting themselves and their nonprofit at risk. Under Arizona law, a proper delegation requires the following:
B. In discharging duties, a director is entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, if prepared or presented by any of the following:
1. One or more officers or employees of the corporation whom the director reasonably believes are reliable and competent in the matters presented.
2. Legal counsel, public accountants, or other person as to matters the director reasonably believes are within the person’s professional or expert competence.
3. A committee of or appointed by the board of directors of which the director is not a member if the director reasonably believes the committee merits confidence.
4. In the case of corporations organized for religious purposes, religious authorities and ministers, priests, rabbis or other persons whose position or duties in the religious organization the director believes justify reliance and confidence and whom the director believes to be reliable and competent in the matters presented.
C. A director is not acting in good faith if the director has knowledge concerning the matter in question that makes reliance otherwise permitted by subsection B unwarranted. A.R.S. 10-3830.
Fiduciary duties and delegation.
All states have precise statutory requirements for nonprofit directors, officers, and members. Arizona law contains a whopping 40 provisions regarding directors and officers, let alone the numerous other statutes that inform the more general operations of nonprofits incorporated in the state. In Arizona, a nonprofit directors’ fiduciary duties include the duties of good faith, due care, and loyalty in carrying out one’s responsibilities as a director.
Importantly, state law also provides that where directors exercise their fiduciary duties in making and executing board decisions, the law protects board members from personal liability in the event of a lawsuit. A.R.S. 10-3830(D) and many states’ laws follow a similar pattern. This legal defense is known as the “business judgment rule”. Simply put, a court will not second guess the board’s judgment so long as the board decided with due care, out of loyalty to the corporation, in good faith, and some states, out of obedience to the corporation.
While state law also permits boards to delegate tasks to others, it does not allow the delegation of ultimate oversight and fiduciary responsibility. As a result, when delegating activities to others, board members must take precautions to ensure they are effectively meeting their fiduciary duties and other obligations required by their articles of incorporation, bylaws, and their state’s laws.
Best practices for delegating board responsibilities to others.
If your board anticipates regularly delegating essential functions to others via committee or another arrangement, you should formalize the delegation in your articles of incorporation, bylaws, or via a committee charter. Boards delegating specific tasks for discrete periods can memorialize the delegated powers in a board resolution.
Arizona law provides that boards may expressly authorize delegations of authority in an organization’s articles of incorporation. In doing so, directors protect themselves from ensuing liability arising out of the specific duties and responsibilities that their nonprofit’s articles or bylaws delegate to others. See ARS 10-3801.
Here’s what your delegation should include:
- The specific powers, duties, and responsibilities that your board is delegating,
- The qualifications, skills, and knowledge required of delegees,
- The scope of the delegees’ authority,
- The procedures and standards for selecting and removing delegees,
- The limits of the delegated power; and
- Details regarding how delegees will report back to the nonprofit and its board of directors.
It is important to remember that the board cannot delegate oversight. To fulfill its fiduciary duties, the board must oversee the tasks it has delegated.