Attorneys may be of great value to nonprofits when serving on nonprofit boards. They bring to the board a special set of knowledge, skills, perspectives, networks, and experiences, including an ability to spot and address particular issues and problems. For such reason, many nonprofits actively seek out attorneys to serve as directors.
But this can also cause a misunderstanding of the capacity in which the attorney is going to serve. Nonprofits may want and expect the attorney to serve as pro bono counsel while the attorney often wants to serve purely as a director.
However the relationship starts out, it’s not uncommon to see the attorney/director eventually providing legal advice to the nonprofit, whether or not in the official capacity as the organization’s lawyer. Here are a list of issues for an attorney/director to consider in such scenario:
Role Confusion. When you offer a particular opinion to the executive or to other board members, are you communicating as a director or as a lawyer? Does the recipient of the communication know in which capacity you are providing the opinion? The concern is two fold: (1) your words offered as a director may be received with unwarranted and unspoken deference if the rest of the board considers it legal advice, and (2) your legal advice offered as a lawyer may be received without appropriate consideration if the rest of the board considers it the thoughts of a director.
Loss of Independence. Will the dual role compromise your independence of professional judgment? Consider if your legal opinion or advice will be clouded if you are reviewing an action already taken where you participated in the vote or had a preferential viewpoint from a business perspective.
Conflicts of Interest. What is your role if the organization enters into a dispute with your firm or one of your firm’s clients or prospective clients? Will you be aware of the conflict if representing the organization? In addition to potentially harming your firm, you can harm the organization if you either fail to provide zealous representation or withdraw from representing the organization due to the conflict.
Loss of Attorney-Client Privilege. Are you communications with the rest of the board protected by the attorney-client privilege? If it’s clear that the communications are to be attorney-client communications, they should be protected by the privilege. However, such protection may be lost if it’s not clear that you are communicating only as a lawyer or if the communication is recorded in minutes to which other persons have access.
Competence. Do you have sufficient competence in the areas of law in which you have been asked to provide legal advice as an attorney to the organization? The competency issue is of course critical in avoiding malpractice, and attorney/directors must be careful when asked to provide advice in areas in which they possess some knowledge but don’t have the requisite competence.
Heightened Exposure to Liability
Standard of Care. A director’s standard of care is generally expressed as that of an ordinarily prudent person in a like position under similar circumstances. While there are cases of inside directors (who are employees) of for-profit corporations having a higher standard of care than outside directors, there does not appear to be authority that extends to directors of nonprofit corporations with specific professional knowledge, skills, and experience that might be relevant in exercising their fiduciary duties. Accordingly, directors who happen to be lawyers should not be held to a higher standard of care than other directors. But there have proposals (including in a 2004 Discussion Draft Proposal from the Staff of the Senate Finance Committee) that would require directors with special skills or expertise to use such skills or expertise in meeting their duty of care. And it’s plausible that a director also acting as an attorney to the organization on a particular matter may be held to a higher standard of care based on being comparable to an inside director.
Reliance Defense. In performing the duties of a director, a director may be entitled to rely on information, opinions, reports or statements prepared or presented by an attorney. This may serve as a defense to a claim if, for example, a director took an action that would otherwise have been considered negligent but not for the director’s reliance on the opinion of a lawyer that it was proper. An attorney/director, however, cannot of course claim reliance on her or his own opinion as a defense against a claim.
Vicarious Liability. In performing the duties of a director, an individual serves in her or his individual capacity and owes a duty of loyalty to act in the best interests of the organization. If a director is serving in such capacity as an agent and at the direction of her or his employer, the employer may be subject to vicarious liability for actions taken by the director.
Insurance. The role confusion issue may extend to whether insurance will cover acts or omissions of an attorney/director. Directors’ and officers’ (D&O) insurance generally covers certain acts or omissions of a director acting in such capacity but will not cover legal advice offered by an attorney/director. Professional liability or malpractice insurance generally covers certain acts or omissions of a lawyer acting in such capacity but will not cover such individual if acting in the capacity of a director. Because it’s often unclear in what capacity an attorney/director is serving, some professional liability insurance carriers will not provide coverage where legal advice is being given to an organization on which the insured also serves as a director. Further, where it’s not clear in what capacity an attorney/director was acting, both D&O and professional liability insurance carriers may deny coverage.
Tips for Attorney/Directors
- Inform management and the board about your role and the issues regarding attorney-client privilege up front.
- Identify in what capacity you are communicating (make sure it’s accurately reflected in the minutes).
- Refrain from voting on material financial transactions with your law firm.
- Identify potential gaps in coverage between your professional liability insurance and the nonprofit’s D&O insurance.
- At all times when rendering legal advice, exercise the independent professional judgment required of a lawyer (e.g., advising against illegal action even if favored by the board).
- Diligently perform your duties as counsel, within the limits of applicable law, once an action has been approved by the board even if you disagreed with the action as a director.
Part of a 1/13/16 presentation for the Bar Association of San Francisco: Duties and Responsibilities of Serving on a Nonprofit Board.
Lawyers’ Service on Nonprofit Boards (American Bar Association)
The Lawyer as Director of a Client (American Bar Association)
Comment 35 to ABA Model Rule 1.7
A lawyer for a corporation or other organization who is also a member of its board of directors should determine whether the responsibilities of the two roles may conflict. The lawyer may be called on to advise the corporation in matters involving actions of the directors. Consideration should be given to the frequency with which such situations may arise, the potential intensity of the conflict, the effect of the lawyer’s resignation from the board and the possibility of the corporation’s obtaining legal advice from another lawyer in such situations. If there is material risk that the dual role will compromise the lawyer’s independence of professional judgment, the lawyer should not serve as a director or should cease to act as the corporation’s lawyer when conflicts of interest arise. The lawyer should advise the other members of the board that in some circumstances matters discussed at board meetings while the lawyer is present in the capacity of director might not be protected by the attorney-client privilege and that conflict of interest considerations might require the lawyer’s recusal as a director or might require the lawyer and the lawyer’s firm to decline representation of the corporation in a matter.