Guide for Charities, by the California Attorney General
DIRECTORS AND OFFICERS OF PUBLIC BENEFIT CORPORATIONS
Every corporation must have directors and ofﬁcers. Legally, a public beneﬁt corporation (deﬁned in Chapter 1- Guide for Charities) may operate with only one director. However, most charities operate with three or more directors, which is strongly recommended. In addition to directors, every public beneﬁt corporation is required to have a president, a chief ﬁnancial ofﬁcer and a secretary. Additional ofﬁcers may be appointed. The powers, duties, and liabilities of directors and ofﬁcers of public beneﬁt corporations are governed by California statutes. Directors are required to discharge their duties consistent with a ﬁduciary obligation to the charity. (Corporations Code section 5000 et seq.)
Powers and Duties of Directors
The directors of a nonproﬁt public beneﬁt corporation are responsible for conducting the corporation's affairs and for exercising the powers of the corporation. Directors may delegate many of their powers to others, such as ofﬁcers and employees, but the directors are ultimately responsible for all corporate decisions.
Directors may be elected (usually by members) or designated (by the board of directors or other persons). The provisions for election, resignation, removal, terms of ofﬁce, quorum necessary for action by directors, action by executive committee, delegation of powers, and other important issues affecting directors are generally covered by California statutes. Provisions governing these matters should be set forth clearly in the corporation's bylaws.
Compensation of Directors.
Charities may not pay excessive or unreasonable compensation to their ofﬁcers and employees. The board of directors or an authorized committee of the board, and the trustee or trustees of a charitable trust, must review and approve the compensation of the president or chief executive ofﬁcer and the treasurer or chief ﬁnancial ofﬁcer to assure that it is reasonable. (Government Code section 12586.)
Most directors of public beneﬁt corporations serve on a volunteer basis, and do not receive compensation, other than occasional reimbursement for actual expenses of attending meetings (mileage, parking fees, meal costs). However, California law permits directors to receive reasonable “compensation as a director or ofﬁcer,” and distinguishes such compensation from other payments to directors that raise conﬂict of interest questions. Reasonable compensation paid to a director or ofﬁcer is not “self-dealing” and it does not impair the ability of the director to serve as a “disinterested” director in reviewing other corporate transactions. California law does not suggest what amount of compensation to a director is reasonable. That is determined on a case-by-case basis according to the particular facts and circumstances. The Attorney General audits payments to directors that are more than nominal.
Standards adopted by the Wise Giving Alliance state that trustees and directors should be volunteers and not compensated other than for expenses. Those standards are not legally binding. Liability of Directors
In general, directors of nonproﬁt corporations, like directors of business corporations, are usually not personally liable for the debts, liabilities or obligations of the corporation. A director's personal liability to third parties (parties other than the corporation itself) is very limited. California law on directors’ liability is complicated and has been changed frequently by the Legislature. However, a director of a public beneﬁt corporation may be held personally liable to repay damages to the corporation itself where he has breached his duty of care or loyalty to the corporation.
1. Disinterested Director Who Acts in Good Faith With Reasonable Care Is Not Liable to Corporation
A director of a public beneﬁt corporation who performs his or her duties in good faith, in a manner the director believes to be in the best interest of the corporation, and with reasonable care and inquiry under the circumstances has no personal monetary liability to the corporation in an action based on alleged failure to discharge the director's duties. This protection against liability does not apply to a director who engages in self-dealing or who makes or receives a prohibited loan or distribution of the corporation's assets.
2. Volunteer Director Not Liable to Third Parties in Certain Circumstances
Although California statutes (Corporations Code sections 5047.5, 5239) purport to protect volunteer ofﬁcers and directors of charitable corporations against personal liability for monetary damages to third parties under certain circumstances, these statutes cannot prevent the ﬁling of lawsuits against individual directors and ofﬁcers of nonproﬁt corporations. It can be expensive for an individual director to pay an attorney to defend the director against a civil lawsuit. For this reason, it is important for directors to review the matter of“directors and ofﬁcers” insurance. (See discussion under Chapter 4.) Moreover, these statutes do not protect ofﬁcers or directors from liability in a lawsuit brought by the Attorney General.