Fiduciary Duties Are Not Hats
One of the time-honored traditions in working with association boards is that at some time someone will say something like this: â€śNow remember, at this meeting today I expect everyone will wear their [Association Acronym] hats.â€ť More specifically, if a member of the board also serves on the board of another association, he or she will often be asked to â€śtake off their [ABC Competing Association] Hat, and put on their [Association Acronym] łó˛ąłŮ.â€ť
If only it were so easy. Fiduciary duties are not hats that can be removed or placed back on your head depending on where you are. When you agree to serve on a not-for-profit board of directors, these fiduciary duties stick with you, whether it is convenient, and regardless of what setting you are in. If one insists that fiduciary duties are analogous to hats, I would suggest that they are hats that are stapled to your head, to be removed only when your term on the board has concluded.
As an example, letâ€™s consider the case in which a person, weâ€™ll call her Jane, simultaneously sits on the boards of directors of a chapter of an association and the â€śparentâ€ť association. It would be incorrect to assume that when Jane attends the board of directors meeting of the â€śparent association,â€ť, the duty of loyalty of the parent association somehow supersedes or takes priority over the duty of loyalty of the chapter. Both are there and are fully in effect. This is often termed a duality of loyalty. Duality of loyalty is just one kind of conflict of interest but has the potential to put affected directors in a terrible position.
Let us imagine a case in which the parent board is considering an action that will be not in the best interests of Janeâ€™s chapterâ€”a withdrawal of their charter, for exampleâ€”that is clearly appropriate from the perspective of the parent association. If Jane votes with the parent, one could argue that she fulfills the fiduciary duty of the parent association but fails the fiduciary duty of the chapter. It is a no-win situation.
Another common example is a director (Jane again) who serves on the boards of potentially competing associations, letâ€™s call them Association A and Association B. If Jane learns of the strategy of Association A and her knowledge of this strategy would help Association B, she will feel compelled by the duty of loyalty to Association B to disclose this strategy to Association B. However, Jane is also bound by the duty of obedience to Association A, which will compel her to not report the strategy to Association B. Again, a no-win situation.
The resolution to this issue, of course, is to not place Jane in a no-win situation in the first place. A common way to do so is to ask her to leave the room when this issue is discussed. This is illustrative of a popular misconception around the practice of asking directors to leave the room. It is often assumed this is done because the director may be influenced by her position on the other board and thus cannot be trusted to have an unbiased, â€ścleanâ€ť opinion. Asking a director to leave the room because you donâ€™t trust her is a terrible reason to ask her to leave the room; she should not be on the board if you do not trust her. Asking a director to leave the room because of othersâ€™ perceptions regarding her participation in the debate around the issue is a better reason to ask her to leave the room. The best reason to ask a director to leave the room is because you donâ€™t want to put her in a terrible position, one in which she would be violating one set of fiduciary duties in order to conform with another set of fiduciary duties.
Perhaps the best way to avoid a duality of loyalty issue is to have a strong nominating committee and vetting process. Smart, capable, hard-working people will be in demand to serve on boards. Excluding people from the board on the basis of a potential conflict of interest, or duality of interest, is not a reflection of a lack of trust in these candidates. Rather, it should be done out of respect for these candidates to avoid putting them in a no-win position of violating one fiduciary for the sake of another.
Wearing hats for your association is fine and good, but remember that itâ€™s frankly not a good look to wear two hats at once.
Dave Bergeson serves as vice president of client relations on ±¬ÁĎą«Éçâ€™s Leadership Team and executive director of the Association of Pediatric Hematology/Oncology Nurses.
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