Serving on a Board of Directors? Mind your Ethics
Conflicts, EthicsLawyers are routinely invited, cajoled, persuaded, pressured, or otherwise asked to serve on a board of directors. Nonprofits and for-profits alike seek the mental dexterity and contacts lawyers have, and they may even be hoping for a bit of “free” legal advice. Board service can also be rewarding for the lawyer, giving her an opportunity to invest her time into an organization that aligns with her interests. School boards, religious organizations, public interest entities, and public companies are many of the groups that benefit from having a lawyer serve as a board member. However, such service raises several ethical considerations for the attorney and may impact the attorney’s liability protections. This article focuses primarily on nonprofit service but many of the items discussed apply to for-profit service as well.
DUTIES OF A BOARD MEMBER
An understanding of the duties applicable to all board members is a necessary foundation for the discussion to follow. The Texas Business Organizations Code obligates a board member to act “in good faith, with ordinary care, and in a manner the [board member] reasonably believes to be in the best interest of the organization.” Stated another way, a board member owes three duties: the duties of care, loyalty, and obedience.
- The duty of care imposes a burden to act as a reasonable board member would in the same or similar circumstances, including to ensure that the organization’s assets (people, money, place, and good will) are prudently utilized under the mission and vision of the organization.
- The duty of loyalty requires the member to act in the organization’s best interests, not in the best interests of the individual director or an outside party.
- The duty of obedience obligates the board member to ensure that the organization obeys its bylaws, follows its stated mission, and complies with applicable laws and regulations.
ETHICAL CONSIDERATIONS FOR THE LAWYER ACTING AS A BOARD MEMBER
The duties imposed generally on board members can make board service tricky for lawyers, given their own ethical obligations when providing legal advice (and thus acting as lawyers, whether intending to or not). Even when an attorney board member does not intend to act as the organization’’s attorney, he may inadvertently create an attorney-client relationship through his actions or words. The following discussion highlights the areas of common confusion or difficulty for the lawyer board member.
What hat is she wearing?
Role confusion is a common source of difficulty for the attorney board member. Some common areas where an attorney board member may overtly or inadvertently provide legal advice include reviewing the bylaws, reviewing contracts, or counseling on employment matters. Is she giving legal advice or merely her best judgment as a board member? Which hat does she want to wear? The attorney board member must be very clear in her own mind what hat she wishes to wear so that she can protect herself and the board from an unintended relationship.
The lawyer who is serving as a board member but does not intend to act as the organization’s lawyer must make that clear early and as often as necessary to dispel any confusion. The lawyer may provide a formal letter to the board at the beginning of board service indicating that the lawyer will be acting as a general board member and not serving as the lawyer and that all advice given will be general and not legal. After that initial communication, the attorney should remind the other members that she is not providing legal advice as often as is necessary to ensure that those hearing her input will not mistake it for legal advice. Remember, an attorney-client relationship can be implied “if the lawyer knows a person reasonably expects him to provide legal services but does nothing to correct that misapprehension.” Valls v. Johanson, 314 S.W.3d 624, 633 (Tex. App.–Houston [14th Dist.] 2010, no pet.) (citation omitted).
If the lawyer intends to act in a legal capacity as well, certain risks also attend. For example, are other board members giving unwarranted deference to the lawyer’s opinion in a way that could call into question the attorney board member’s duty of care? Or, are the other members giving short shrift to the attorney board member’s commentary because they do not understand it to be legal advice? Clarity is paramount, so the attorney board member should carefully identify the capacity in which she is acting, which she can do formally through a letter similar to the one referenced above or a limited-scope representation agreement for paid or pro bono legal services, or at a minimum by, informally through stating her capacity during the discussion.
What are the actual areas of competence?
If the attorney board member serves both as a board member and in a legal capacity, he must be careful to remember his ethical duties concerning competence under TDRPC 1.01. For example, an attorney board member whose primary practice area is family law may not be competent to advise a nonprofit on the purchase of real estate. Not only is the attorney board member ethically obligated under Rule 1.01 to decline such representation, he is also under a duty as a board member to act in good faith and with care and loyalty. Giving legal advice outside of his areas of competence would call into question each of those duties and obligations.
Are the communications privileged?
When it’s not clear what capacity the attorney board member is serving in, coverage by the attorney-client privilege is at risk. If the attorney board member intends for the communications to be privileged but has not clearly indicated that she is serving both as a member and as an attorney, the protection could be challenged. Similarly, even if the advice is clearly intended as an attorney-client communication, if it’s recorded in publicly-available minutes, the privilege is waived.
Is there a conflict?
Conflicts can arise regardless of whether the attorney board member is also acting as an attorney. The obvious conflicts occur when the lawyer’s other client(s) become adverse to the organization on whose board the lawyer serves. TDRPC 1.06 expressly prohibits representing opposing parties in the same litigation and in related matters when the clients’ interests are materially and directly adverse. But what conflicts could arise when the attorney board member is not acting in a legal capacity?
A board member has a general duty to act in good faith, on mission, and with loyalty to the organization. Those obligations can generate conflict for the attorney board member serving only as a board member when the organization’s goals are adverse to another client of the lawyer or her firm. For example, if the organization’s mission involves lobbying for longer incarceration for convicted criminals, and the attorney board member’s law firm is a criminal defense firm, a conflict could arise. So too where the organization fights for homeowner’s rights but the lawyer’s law practice defends the rights of homeowner’s associations against individual homeowners. Although these are not conflicts addressed by the TDRPC, they are practical conflicts the attorney board member should be sensitive to as she continues her board service.
Does the attorney still have his independence?
In addition to identifying ethical conflicts prohibited by the TDRPC, the lawyer who serves in a dual role must also carefully consider whether serving in such a role with the duties generally imposed on all board members creates a conflict between the lawyer’s duties as a board member and the lawyer’s obligation in TDRPC 2.01 to “exercise independent professional judgment and render candid advice.” Will the fact that the other members are of one mind about an otherwise legal action cloud the lawyer’s contrary professional judgment about that action? Will his legal opinion be clouded about the after-the-fact consequences of a board action on which he voted? Comment 16 to TDRPC 1.06 recognizes the potential conflict that may arise in these situations and advises, “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.”
These ethical considerations must be properly addressed and resolved by the attorney board member, but they are not the only considerations the attorney board member must undertake.
LIABILITY AND INSURANCE CONSIDERATIONS FOR THE LAWYER ACTING AS A BOARD MEMBER
In most nonprofit organizations, the board members are ultimately responsible for the actions of the organization. But they are not without protection should legal issues arise from their actions. They are protected in at least two ways: the Texas Business Organizations Code and insurance.
The Texas Business Organizations Code protects board members from liability when they act in good faith, with ordinary care, and in the best interests of the organization. They are also protected when they act in good faith reliance on others, in certain situations, like in delegating investment authority or when seeking religious advice for a religious organization. Moreover, the Texas Business Organizations code expressly excludes a board of directors from the duties and obligations imposed on trustees of trusts.
As further or additional protection, nonprofit organizations and attorney board members may also carry professional liability insurance that protects the attorney board member during board service. However, each policy, whether Directors and Officers for the organization or Professional Liability for the attorney, may contain exclusions for actions taken as a board member. A D&O policy may exclude legal advice and a PL policy may exclude acts or omissions occurring during board service. Lawyers are encouraged to review both policies prior to beginning board service.
FINAL THOUGHTS
Board service is incredibly rewarding, and lawyers make perfect targets for board service because of their problem solving skills, community connections, and, frankly, their obligation to pro bono efforts. Given the potential pitfalls of serving in a dual capacity, a lawyer considering joining a board to be a member and its attorney should be uber diligent in evaluating his obligations as a board member contrasted with: 1) potential conflicts; 2) attorney-client privilege matters; 3) ongoing confidentiality requirements after the service ends; and 4) the lawyer’s ability to exercise independent professional judgment as an attorney. Aligning those responsibilities can be difficult, but the upside joy and distinction received from board service will outweigh the effort.
