Board of Trustees
Fiduciary Obligations of Trustees
May 14, 2002
TO: The Board of Trustees of The Internet Society
RE: Fiduciary Obligations of Trustees
2002 has brought with it substantial changes to the system of governance and membership of The Internet Society (" ISOC "). As you know, the composition of the Board of Trustees of ISOC (the " Board " or the " Trustees ") will in the future be made up of elected and appointed representatives from each of the different ISOC "expert groups":
- Organizations - commercial, non commercial and educational
- The engineering community (the Internet Architecture Board and the Internet Engineering Task Force); and
- The general membership (through chapter representation).
The new system for appointing and electing members to the Board will enable ISOC to be more responsive to the concerns of all of ISOC's stakeholders. However, with any change comes new challenges. One such challenge will be to ensure that each member of the Board acts in the best interests of ISOC as a whole, and not simply in the interests of the constituents who elected or appointed such member to the Board. As another election season is underway, it is an opportune time to review the fiduciary duties of Trustees.
This memorandum is a primer on the subject of fiduciary duties of the Trustees, is general in nature and does not purport to be a comprehensive review of the law of fiduciary duties of directors of a not-for-profit corporation. If any questions arise as to applicable law in the context of specific actions or circumstances, counsel should be consulted.
Fiduciary Duties of Trustees
The duties of trustees or directors of a not-for-profit corporation generally are governed by the law of the corporation's jurisdiction of incorporation, in this case the not-for-profit corporation law of the District of Columbia. While D.C. statutory law does not address the fiduciary duties of directors of a not-for-profit corporation specifically, D.C. courts have held that directors of a not-for-profit corporation are required to act "honestly, in good faith and with a reasonable amount of diligence and care." In this respect, courts, including the D.C. courts, have held that directors of a not-for-profit corporation owe the corporation and its members duties of care and loyalty , much like directors of any other business corporation.
It should be noted that the District of Columbia does not have a substantial body of law concerning the fiduciary duties of directors of a not-for-profit corporation; accordingly, this memorandum relies upon general principles of corporation law in both the not-for-profit and for-profit arenas. Moreover, D.C. corporation law generally is not well-developed even in the context of business corporations. D.C. courts have stated, however, that they would rely upon general principles of corporation law, particularly those contained in decisions rendered by Delaware courts, to resolve matters that are unsettled under D.C. law.
Consistent with the foregoing principles, as Trustees of ISOC, you have fiduciary duties of care and loyalty to ISOC and its members. The duty of care requires that you act in good faith, on a fully informed basis and in a deliberative manner. It generally requires that you exercise the care of an ordinarily prudent person in similar circumstances.
The duty of loyalty requires that you act in the best interest of ISOC without the influence of any conflicting interest, including any personal interest or any interest of any other person or organization. This duty requires that you be both independent and disinterested. To be independent, your decisions must be based solely on the merits of the issue before you rather than extraneous considerations or influences. To be disinterested, you must neither appear on both sides of the transaction nor expect to derive any personal financial benefit from it (as opposed to a benefit which devolves upon ISOC or all members generally).
Thus, in order to properly discharge your fiduciary obligations, you must exercise your best business judgment on behalf of ISOC and its members. Even if a proposed action is endorsed by ISOC management, in order for the Board to approve such action, you must independently determine, and reasonably believe, that the proposed action is in the best interests of ISOC and its members.
Trustees are reminded that the duty of care and the duty of loyalty is owed to ISOC and to all of its members. Under the new election procedures, Trustees are elected or appointed by different communities within ISOC. However, a Trustee's fiduciary duties are owed to all of ISOC, not just the electorate or group that elected or appointed such Trustee. Accordingly, it would not be appropriate for a Trustee to evaluate a proposed action or decision while taking into account only the interests of the stakeholder who elected or appointed such Trustee. Each Trustee must act in the best interests of ISOC and all of its members and constituents and not limit his or her considerations to a specific group within ISOC.
Guidelines for an Effective Board
A well-structured and proactive process with respect to proposed actions will both demonstrate the Board's effort to fulfill, and provide the means to satisfy, the Board's fiduciary duties to ISOC and its members. In simplistic terms, Trustees must be independent, active, well-informed and meaningfully consider each action or decision presented to them. While there is no precise formula for this undertaking, there certainly are various guidelines both as to structure and conduct that you should follow.
Among other things, you should:
- Become adequately informed regarding all relevant aspects of any proposed action or decision;
- Actively ask questions regarding any and all aspects of a proposed action or resolution, including questions regarding the information you receive as well as the strategies and alternatives considered;
- Be active participants in all aspects of the decision-making process, including assessing the relative merits of a proposed action; and
- Consider whether expert legal, financial or other advice should be obtained in connection with a proposed course of action or decision. It should be noted that Trustees are entitled to rely on the opinions and reports of the corporation's management and its financial and legal advisors with respect to matters reasonably believed to be within their expertise.
One additional note on Board process is warranted. The board of trustees of ISOC is charged with setting the policies and direction of ISOC. In order to do so effectively, the Board meets several times per year and frequently has less formal discussions by e-mail throughout the year. This is the manner in which policies and strategies are set by the board. Board members should not attempt to establish ISOC policy by unilaterally approaching members of ISOC's staff and discussing matters that fall under the Board's supervision. If a Board member wishes to propose business for consideration, a board meeting or e-mail to the entire Board is the proper forum. It is inappropriate for board members to determine ISOC policy outside of this process, particularly by approaching staff members individually with policy issues that have not been vetted at the board level.
If you have any questions regarding any of the matters addressed in this memorandum, or as to any other matters the Board may consider, please let us know. We would be happy to discuss these and other issues with you in more detail.
Stuart D. Levi
Jeremy London
Stern v. Lucy Webb Hayes National Training School for Deaconesses and Missionaries , 381 F. Supp. 1003 (D.D.C. 1974).
See Washington Bancorporation v. Said , 812 F. Supp. 1256 (D.D.C. 1993); Robinson v. R&R Publishing Inc. , 943 F. Supp. 18 (D.D.C. 1996).
