Publications: Ask the Legal Expert - August 2007

If I suspect one or more members of the board of directors of doing something unlawful how should I report it?

Directors of a not-for-profit or a business entity have certain fiduciary duties to the organization. These include a duty of loyalty, fair dealing, and exercise of reasonable business judgment decisions affecting the organization. They cannot put their personal interests ahead of the organization.

Boards should have and follow a written conflict-of-interest policy that prohibits directors from discussing or voting on contracts that provide direct economic benefit to an individual director: For example. a director who is a general contractor cannot vote to award a construction contract to build or remodel the facility. If, however, the conflict of interest policy is followed and the remainder of the board votes to award a contract, it is not illegal.

However, if the directors take any actions that a reasonably prudent business person would not take, the individual directors may be personally liable. This does not mean that directors are liable for poor business judgments, as long as the directors properly studied the business risks and reviewed appropriate information to make such decisions.

Fraud and theft must be reported to govemment authorities. In our next column, we will address the need for and structure of corporate compliance, including fraud and abuse hotlines and how whistleblower actions factor into an employee reporting suspected wrongdoing.

Reproduced with permission from McKnight's Long-Term Care News.

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