The Role of Governing Boards
November 20, 2020 | Aging Services Risk Management
Risk managers should have an understanding of the duties and legal obligations of their organization's governing board and work with key leaders in the organization to support the board with regard to its oversight of the organization's risk management, quality, and resident safety activities. Depending on whether the organization is for-profit or nonprofit, the nature of the governing board's legal duties, roles, and responsibilities differ in some aspects, although many similarities exist.
Internal Revenue Service (IRS) regulations require boards of nonprofit organizations with 501(c)(3) tax-exempt status to be composed mostly of independent, community representatives to ensure that no private interests interfere with decision making.
Boards of for-profit investor-owned corporations are concerned with stock prices and maximizing shareholder profits, and typically have smaller boards with members who are paid for governance (Epstein and McFarlan). The Sarbanes-Oxley Act of 2002 established regulations related to the independence of board members of investor-owned companies—board members must not engage in any personal actions that affect their objectivity or that benefit themselves while causing detriment to the organization. The act also requires that investor-owned companies develop a written code of ethics.
Members of governing boards of nonprofit corporations have legal fiduciary duties that generally derive from state nonprofit corporation statutes and common law developed by state courts in the jurisdiction. Many states base their nonprofit corporation statutes on the Model Nonprofit Corporation Act (Revised Model Nonprofit Corporation Act), which sets forth three legal duties of boards of nonprofit organizations—the duties of care, loyalty, and obedience to the organization they serve.
The duty of care includes obligations of keeping informed, remaining engaged, and acting as a reasonable director would act under similar circumstances. The duty of care focuses on basic attributes of common sense, practical wisdom, and informed judgment that would be exercised by an ordinarily prudent person acting in the capacity of a director of a similar organization under similar circumstances. For example, if management fails to inform the board about the facility's operational issues, the board must step in and act with due care in ensuring that the facility is being operated properly. (Center for...