[CCWG-ACCT] Regarding Fiduciary responsibility of the Board

Rinalia Abdul Rahim rinalia.abdulrahim at gmail.com
Tue Oct 6 07:04:35 UTC 2015


Very well explained, Greg.
+1.

Rinalia
On Oct 5, 2015 3:57 AM, "Greg Shatan" <gregshatanipc at gmail.com> wrote:

> This and similar discussions have gotten a little unmoored from the legal
> underpinnings relevant to this particular case.  Talking about "fiduciary
> duty" as a monolithic concept is not all that helpful.
>
> For the members of a board of a U.S. non-profit, "fiduciary duty" is not
> an amorphous or singular concept.  It really breaks down to three specific
> duties to the corporation:
>
>
>    - the duty of care,
>    - the duty of loyalty, and
>    - the duty of obedience.  This last duty is unique to non-profit
>    boards, while the first two apply to all boards (for-profit and
>    not-for-profit).
>
> Board members are required to carry out these duties “in good faith,”
> meaning honestly, openly, and faithfully in all organizational actions.
>
> More specifically, these duties can be defined as follows:
>
> *Duty of Care*: This is a duty to use at least the same level of care
> when attending to the non-profit's business as would a reasonably prudent
> person would use in conducting their own personal affairs.  In the board
> context, this means attending board meetings and getting to be
> knowledgeable and informed about the matters the board deals with.  It also
> means using well-informed independent judgment to make objective decisions
> that are in the best interest of the corporation.
>
> *Duty of Loyalty*: This is a duty to act in the best interests of the
> corporation and not for their own advantage. Directors must put the
> corporation’s interest in any decision ahead of their own personal interest
> (including personal business interests).  Directors need to expressly
> attempt to avoid or resolve any potential conflict of interest related to
> any transaction.  Clear conflict of interest policies are a key part of
> making sure that board members act consistently with this duty.  (These
> policies cover disclosure of potential conflicts and include a process for
> handling conflicts when they occur.)  While this may not be relevant in the
> ICANN context, the duty of loyalty requires that corporation have the
> opportunity to take advantage of an opportunity that comes before the
> corporation before a director can take that opportunity privately.
>
> *Duty of Obedience*: Board members of a nonprofit must be true to the
> organization’s purposes and goals, as stated in the articles and bylaws.
> Each board member must be faithful to the organization’s mission.  Members
> need to make sure that any action taken by the non-profit is consistent
> with the corporation’s articles of incorporation and bylaws, as well as its
> status as a not-for-profit, tax-exempt corporation (note this is not the
> same thing as being a charitable or non-revenue generating entity, it
> relates to the purposes and uses of revenue).
>
> Board member's Duty of Care and Duty of Loyalty are owed to the
> corporation and not to "amorphous" others.  *That is why the Duty of
> Obedience is critical here.*  This requires the board to be "obedient" to
> the mission and purpose and goals of the corporation, as set forth in the
> Articles of Incorporation and the Bylaws.  This distinguishes the
> non-profit Board from the for-profit Board, which only has duties to the
> corporate body itself. While in a sense the duty of obedience is a duty to
> the corporation, it is really a duty to the underlying *raison d'etre* of
> the corporation, and not to the current corporate body as it stands.
>
> There is clearly a balancing act that needs to take place here -- in
> particular, the duty of obedience can sometimes conflict with the duty of
> loyalty and with the corporation-centric aspects of the duty of care.  It
> means looking beyond the immediate needs of the corporation and staying
> true to the public benefit reasons the corporation exists.
>
> In the posts above, I would say that Bruce is emphasizing the Board's Duty
> of Obedience, while Nigel is emphasizing the Board's Duty of Loyalty and
> Duty of Care.  It is not an "either/or" situation.  In truth, an ICANN
> Board member needs to act consistently with all three duties, and I would
> say a key difficulty is in balancing the duty of obedience against the
> other two less altruistic duties.  Clearly there is a reason why non-profit
> board members have a duty of obedience and for-profit board members don't
> -- it is because the duty of obedience is powerfully linked to the public
> benefit that the corporation provides.  Without appropriate attention to
> the duty of obedience (i.e., attention to the mission, purposes and goals,
> to the Articles and Bylaws, and to the broader public good for which a
> non-profit exists), a non-profit is essentially a failure as such.
>
> Greg
>
> On Sun, Oct 4, 2015 at 3:43 AM, Nigel Roberts <nigel at channelisles.net>
> wrote:
>
>> Bruce:
>>
>> This is helpful, but, I think, your answer confirms my reservations
>> regarding the careless use of the fiduciary terminology.
>>
>> Directors have a fiduciary duty to the Corporation, not to an amorphous
>> 'internet community'.
>>
>> In fact, under trust law and Equity, one cannot hold something on trust
>> for such a beneficiary as the "internet community as a whole" since the
>> object towards which one has the fiduciary duty (that is to say, the owner
>> of the ultimate property) cannot be identified with sufficient precision.
>>
>> This was discussed in the English case of The Queen -v- District Auditor
>> (on the application of West Yorkshire MCC).
>>
>> As an English case, this would persuasive precedent in California only to
>> the extent that there are no California case or statutory provisions, so I
>> do not submit this as being decisive of the question.
>>
>> But it's certainly on on point, and remains influential precedent
>> throughout those countries whose legal systems have have equitable
>> jurisdictions (such as the USA, Canada, UK, and former British colonies)
>> and include trusts and fiduciaries.
>>
>> The differences between a fiduciary duty and an ordinary duty of care are
>> reasonably well understood. Indeed, my home jurisdiction, as it is a global
>> financial centre has chosen to regulate, at a fairly detailed level, the
>> activities of professional fiduciaries.
>>
>> As a former Board member of a similar (national) organisation to ICANN,
>> of course, I understand the need for, and the nature of the training you
>> refer to.  But I sumbit the nature of the Directors' duty you refer to, is
>> towards the corporation, in the pursuit of the goals set out in the
>> Articles, and NOT towards the internet community, as such a duty would be
>> regarded as legally unworkable.
>>
>> Thus a director should act in the best interest of the corporation. If a
>> director proposed the corporation become a promoter of the next Kylie
>> Minogue tour, or a producer of a Hollywood movie, he or she would be acting
>> ultra vires their fiduciary duty -- as this is not in accordance with Arts.
>> 3 or 4.
>>
>> But hiring Ms Minogue to perform at the next ICANN Gala in London or New
>> York in pursuit of the corporations normal goals, might not be ultra vires,
>> depending on a number of factors specific to the occasion, including price,
>> and whether it advanced the goals in Arts 3/4.
>>
>>
>>
>> Nigel
>>
>> PS: An ICANN Director's fiduciary duty to the corporation should not
>> override the reason he or she was seated by an SO or AC -- which is, IN THE
>> PURSUIT of the corporation's public benefit role, to provide the
>> perspective of the section of the community that seated them.
>>
>> So while a Director has a fiduciary duty to the corporation this does not
>> extend to a prohibition on representing the views of their particular
>> section of the community, and voting accordingly, so long as they do not so
>> capriciously or ultra vires the Articles.
>>
>>
>>
>> On 03/10/15 23:54, Bruce Tonkin wrote:
>>
>>> Hello Nigel,
>>>
>>> From the link you have provided:
>>>>
>>>
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>
>
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