Many nonprofits use the term “ex officio director” (or “ex officio board member”) without a clear understanding of what the term means and how to properly incorporate one or more ex officio directors in their governance structures.
Definitions
The term director refers to an individual serving as a voting member of the board of directors of a corporation. Directors are fiduciaries of a corporation, meaning that they owe fiduciary duties of care and loyalty (and sub-duties, including of obedience and confidentiality) to the corporation. Under California’s Nonprofit Public Benefit Corporation Law, such duties are stated as follows:
A director shall perform the duties of a director, including duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner that director believes to be in the best interests of the corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.
Ex officio is a Latin term that means by virtue of one’s office.
When the terms are combined, both retain their full meaning. Accordingly, an ex officio director has all the rights and obligations of a director, including the right and responsibility to vote on each matter presented to the board for action. Ex officio in this context simply identifies the method in which the director position is filled, automatically (by operation of law) by virtue of holding another office.
For example, the Executive Director (E.D.) of one organization might be an ex officio director of an affiliated organization. If the E.D. resigns from such position, she would no longer be a director because it’s only the person in that office that is the ex officio director.
This would also be true if the E.D. of a nonprofit corporation is an ex officio director of the same nonprofit corporation. If she was hired as E.D., upon her start as E.D., she would also automatically be a director on the board, with all of the rights and obligations of an other director. She would not be subject to elections, and she would hold the position of director for as long as she remained E.D. and the bylaws provided that the E.D. was also an ex officio director.
It is a common mistake for many nonprofits to use the term ex officio to mean nonvoting. This is not the meaning of the term of ex officio and can result in an ex officio director for such a nonprofit to have a legal claim to voting rights as a director on the board. If this is not intended, the bylaws should be amended to correct the error. For more information on this issue and how it is addressed under California laws, see this article I wrote for CalNonprofits.
Why Have an Ex Officio Director?
Nonprofit corporations may have several reasons for desiring an ex officio director.
Outside the Corporation
In the case of affiliated organizations, it may serve to create legal connections between the organizations that help assure they operate in some coordinated manner. For example, one organization may have its chair of the board be an ex officio director of a subsidiary or other affiliated organization. There might also be reciprocal arrangements between two organizations so that each of their chairs serve as ex officio directors of the other organization. Such governance structures are sometimes used in contemplation of a future merger between the organizations.
Inside the Corporation
The ex officio director may also relate to an internal office/position within the same organization. Most commonly, the E.D., CEO, or Chair of the Board may, pursuant to the corporation’s bylaws, be an ex officio director. For the E.D. or CEO, this may serve to ensure such individual has a voice on the board and is able to contribute to board actions in more than an advisory manner. Because the E.D. or CEO serves at the pleasure of the board and, generally, should have her performance reviewed, and compensation approved, by the board, this arrangement is seen as problematic by some. However, I believe this has to be analyzed on a case-by-case basis. While the inherent conflict can create challenging legal and public relations issues to overcome, there may be some instances in which the E.D.’s or CEO’s leadership is pivotal and best utilized by concurrent service as a director. Where the number of directors is not small, the vote of the E.D. or CEO as an ex officio director may not lead to substantial problems, particularly if such individual abstains and recuses herself from final deliberations and votes in which she has a clear conflict of interest.
How Do You Create an Ex Officio Director Structure?
The ex officio director structure is typically created by a provision in the corporation’s bylaws regarding how directors are selected. While the practice of having ex officio directors has been around for many years, not every state’s laws contemplate ex officio directors. This can create problems both with respect to the lawful authorization of ex officio directors and the term of an ex officio director (which should be for the period such individual holds the office that is tied to the ex officio authorization in the bylaws).
California AB 2557
On September 10, 2018, a bill addressing ex officio directors, AB 2557, was signed by Governor Brown and chaptered. For California nonprofit public benefit corporation, Section 5220 of the Corporations Code was amended to add the following:
(f) If authorized in the articles or bylaws of a corporation, all or any portion of the directors may hold office ex officio by virtue of occupying a specified position within the corporation or outside the corporation. The term of office of an ex officio director shall coincide with that director’s respective term of office in the specified position entitling him or her to serve on the board of directors. Upon an ex officio director’s resignation or removal from that position, or resignation or removal from the board for any reason, the term of office as a director of the corporation shall immediately cease. At that time, the successor in office shall become an ex officio director of the corporation, occupying the place of the former director.
Substantially similar provisions were included for California nonprofit mutual benefit corporations, nonprofit religious corporations, and cooperative corporations.