Fiduciary Duty Is the Law

By Steve Dunham    //    Volume 25,  Number 6   //    November/December 2017

The fiduciary duty to higher education institutions is the single most important legal principle for a board member to understand. Eight points of law related to fiduciary duty are highlighted below.

1. Fiduciary duty law is state law, but most of the basic principles are similar in all states. The American Law Institute, which publishes Restatements of the Law, has a current project titled “Charitable Nonprofit Organizations” that is a useful guide for boards and senior management. The draft Restatement includes a “Governance” section, which includes definitions of fiduciary duty.

2. Fiduciary duty law applies to board members who serve private colleges and universities that are organized as notfor- profit corporations. Although different state laws and institutional duties apply to public colleges and universities, board members frequently owe fiduciary duties to these institutions as well.

3. Fiduciary duty law encompasses two fundamental legal duties that run from the board members to the institution: the duty of loyalty and the duty of care. Both of these include the duty to act in good faith. Some authorities also refer to a duty of obedience, which means the duty to conform to the law and institutional mission.

4. The duty of loyalty is typically viewed as a duty to avoid self-dealing and conflicts of interest between the individual’s interest and the interests of the college or university. This can include not only financial conflicts of interest, but also conflicts due to family, personal, and other relationships. Fiduciary duty law usually does not prohibit conflicts; rather, it requires disclosure, management, and recusal.

5. The duty of care describes the obligation to be informed and provide oversight. For board members of colleges and universities, this includes reading background materials and attending meetings, providing adequate oversight, and making decisions that are in the best interests of the institution and serve its mission.

6. Both the duty of care and the duty of loyalty require board members to make decisions judged by a reasonableness standard. As stated in the draft Restatement, an individual board member must act in a manner he or she “reasonably believes to be in the best interests” of the institution and “with the care a person of ordinary prudence in a like position would exercise under similar circumstances.” An individual board member subjectively believing a particular course of conduct is necessary or appropriate is not enough. Fiduciary duty law applies an objective test: Does the board member “reasonably believe” an action is appropriate and would a “person of ordinary prudence” make the same decision? A board member taking a position that is unjustified under a reasonableness or ordinary prudence standard is inconsistent with fiduciary duty law.

7. A critical component of a board member’s fiduciary duty is the oversight of financial matters. As with other subjects, the duties of loyalty, care, good faith, and obedience apply. This includes complying with state laws addressing prudent investment and expenditure of endowment and other funds.

8. Consistent with overall fiduciary responsibilities, board members may rely on board committees, management, and professional experts. Individual board members cannot abdicate their duties of care and reasonable oversight, but they can delegate decisionmaking authority to others and reasonably rely on their information and advice. This principle is reflected in the common tension between proper oversight and improper duplication and micromanagement.

Fiduciary duty law is central to the responsibilities of individual board members. In planning orientation and training programs for new and existing board members, colleges and universities should include fiduciary duty law presentations by their counsel. Some might even say that the failure of a board member to attend such training could raise a question of compliance with the member’s fiduciary duty.