Board Members and Conflicts of Loyalty

One of the most difficult concepts for association board members to apply is the duty of loyalty, particularly as it relates to loyalty owed state/national organizations compared to that owed to the local/regional chapter of the organization.

Directors understandably have feelings of commitment and loyalty to their local constituent societies (chapters). In fact, it is not uncommon for state/national directors to serve concurrently as an officer or director of a chapter. Under these circumstances, the opportunity, appearance and reality of conflicts of interest frequently occur.

Duty of Loyalty.

Under California corporate law, a director is bound to put the interest of the corporation always above his/her own personal interests. He/she must act in a manner he or she believes to be in the best interests of the corporation and all of its members.

California case law goes even further. It provides that the “... duty of undivided loyalty applies even though the members of the board may also serve on subsidiary bodies or groups which make up the constituent element of the corporation.” In short, directors are sent to the state/national board to use their best effort and judgment to serve the best interests of the entity and its members as a whole, not simply to cast votes as directed by the chapter.

Conflicting Loyalties.

As noted above, it is not unusual for a person to serve on both the chapter board and the state or national board of directors. A director is fully bound by the duty of loyalty to each board. Thus, a director is in an untenable position if conflicts of interest should arise between the entities. In such cases, a director cannot legally continue to serve both entities; he or she must either full disclose the facts relating to conflict and abstain from voting, or resign from one position or the other.

Director Communications with the Chapter.

Communications between a director and his/her chapter can be challenging, particularly when a state board takes action strongly opposed by the chapter. A director should take extra care explaining adverse board actions. It is important that members of the chapter understand that their point of view and issues were discussed and considered. It is equally important that the differing views and arguments raised by others are communicated. Finally, it is critical that the director support the decision of the board even if he or she voted against it. For example, a director in such a situation might say: ‘I made sure the board understood our concerns, I argued them forcefully. I suggested several changes to the action that would make it more acceptable to this chapter, and some of our suggestions were incorporated into the action. However, compelling arguments in favor of the action were also made, and the board’s decision was to take the action. Although I voted against the action, I support it and am committed to it, and believe it is in the best interests of the association as a whole.’

Refusal by a director to support the decisions of the board, or criticizing the decisions of the board outside of a board meeting, are acts of disloyalty. If a board member cannot support the decisions of the board, or feels that he or she must criticize the decisions of the board, the director must resign. If the director refuses to act with loyalty or resign, he or she should be removed from office.

Freedom of Thought.

Some directors argue that such a standard impinges on free speech. This, of course, should never be true. Board discussion must be open and frank. The fiduciary duty of care requires it. However, once the decision is made, the director is not entitled to criticize the decision unless doing so is in the best interests of the entity and its members. Members who are not directors are not subject to this higher duty.

These ideas may seem harsh, controversial or challenging, but a board cannot and need not be disrupted by a disloyal director. Periodic training on this subject is beneficial, as are board discussions of their expectations of other directors concerning loyalty, and resolution of differences of opinion.

If you have questions about this or any other association topic, please do not hesitate to contact our office.