Exercising good board governance in a time of crisis

Exercising good board governance in a time of crisis

By Phil DiComo 

April 16, 2020 

 

Exempt organizations are on the frontlines of numerous challenges related to the current COVID-19 pandemic – from disease prevention and providing healthcare to coping with unheralded spikes in unemployment and food and supply scarcity to mental health issues. In addition to these substantive operational issues, nonprofit leaders must meet additional challenges associated with proper governance. This means exercising good faith decision making in the best interests of their organizations during this crisis.   

 

The current uncertain environment requires boards to provide appropriate oversight of their organizations while using – and often, for the first time, learning – appropriate social distancing measures, phone and video conferencing technologies, and electronic signature software.  

 

What happens if your board of directors must make critical decisions regarding financing, staffing, fundraising and other key issues without the benefit of in-person meetings and, potentially, where meeting quorums cannot be achieved?  

 

Nonprofit leaders should avoid the temptation to vote solely by email or to allow proxy voting, both of which discourage rigorous review and discussion, and have been attached as violations of director’s fiduciary obligations. Boards should take advantage of modern technologies for information sharing, remote meeting facilitation, and electronic signatures. If your current bylaws allow certain matters to be delegated to smaller committees, or an executive committee, you can use those tools for both efficiency and timeliness in decision making. It is likely most organizations can still achieve meeting quorum requirements using phone and video conferencing capabilities. In so doing, directors must exercise authority with their fiduciary obligations in mindand organizations should develop best practices for virtual meetings to ensure that all directors have the opportunity to be heard, and for all issues to be fully discussed.   

 

However, what happens in a worst-case scenario situation where an organization’s board is unable to meet quorum requirements to take needed action? 

 

For example, if your organization has been approved for a line of credit loan or Paycheck Protection Program loan, your lender will require board of director authorization. Your board’s ability to consider and approve the loan may literally be a life or death situation for your nonprofit. Florida law does allow nonprofit directors to exercise certain emergency powers in catastrophic situations which makes quorum requirements and decision-making easier to achieve, among other issues, while also protecting the fiduciary obligations of directors. In order to exercise under these emergency powers, two things must occur. First, there must be some catastrophic emergency and, second, as a result of such emergency, the organization must be unable to achieve a quorum at a board meeting.  

 

It seems logical that a worldwide pandemic might be considered a catastrophic event as may have been contemplated under the emergency powers act of the Florida Not-for-Profit Corporation Act. However, Florida’s statute is vagueand the statute was originally drafted at a time when it was contemplated that such a crisis would likely be an atomic blast or similar physical emergency. If in fact, the commentary for the Model Corporation Act, which served as a sort of template for the creation of Florida’s statute, describes applicable emergencies as a nuclear disaster, an attack on the United States, or an airplane crash or fire. 

 

The Delaware corporate statute describes such an emergency similarly. California law is one of the few statutes that provides a list of very specific events, including a range of numerous natural disasters, enemy attacks and acts of terrorism. California’s statute also provides that any state of emergency proclaimed by the state’s governor or by the president of the United States is an emergency under the emergency powers provision. So, while Florida is vague as to the applicability of the emergency powers provision, it is clear that California organizations may exercise such statute powers as a result of the current COVID-19 crisis. 

 

While there is little guidance as to the applicability of Florida’s emergency powers statute to the current crisis in Florida’s or similar corporation or not-for-profit statutes, there are analogous statutes which govern Florida’s condominiums, cooperatives, and homeowners associations (Florida Statute Chapters 718, 719 and 720, respectively). 

 

Any indecision as to whether the emergency powers provisions of these statutes applies in the current pandemic crisis was clarified on March 27, when the Florida Division of Business and Professional Regulation issued Emergency Order 2020-04, which provides that while the Florida Statutes on emergency powers were drafted in response to emergency events, the statutory emergency powers have the same application under the current COVID-19 emergency declared by the governor of Florida. While these statutes also focus on events, there is a major distinction in that while the events are of a physical nature (like a hurricane or war) and the statute specifically references events causing physical damage, these statutes go on to provide that such events lead to the declaration of emergency powers. This latter component is missing from both the Not-for-Profit Corporations Act and the analogous provision of the Florida Business Corporation Act. Therefore, it is difficult to assume that Emergency Order 2020-04 would provide any assurance to Florida not-for-profit corporations. 

 

The lack of clarity further complicates the issue from the standpoint of protecting directors, officers and employees who take emergency actions during this crisis. The statute makes it clear that if any catastrophic emergency exists, then those taking such action are protected from liability absent some willful misconduct. However, if such action is taken and it is later determined that the current crisis does not rise to the level of an emergency as contemplated by the statute, directors and officers will need to be comfortable that in making a decision about enacting emergency powers that they exercise their fiduciary duties with care and loyalty to the organization. This means that all actions which led to the enactment of emergency powers were taken in good faith and with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and that they acted in a manner they each reasonably believe to be in the best interests of the corporation. It also means they should consider information, opinions or reports provided by professional advisors, including legal counsel.  

 

There still exists a great deal of confusion as to whether the current COVID-19 pandemic and the related State of Emergency declared by Florida’s governor equates legally to an emergency situation where “a quorum of the corporation’s directors cannot readily be assembled because of some catastrophic event.” Exercising emergency powers under Florida Statutes should only be exercised with utmost caution and care, unless and until the state attorney general, court system, legislature or governor address the applicability of these statutory powers. 

 

Organizations can and should first consider whether they are able to continue to hold director meetings using remote meeting technologies to facilitate board meetings or action (including unanimous written consents circulated by document signature programs), and whether current quorum and voting requirements can be met, or  conversely whether they have the luxury to suspend board or committee meetings during this crisis, or whether their executive committee can meet remotely in lieu of their full boards. 

 

If boards are left with no choice but to take emergency action under the act due to an inability to reach a quorum at board meetings, then they should be careful to follow the powers as described in the statute, and to later ratify all board actions taken during the crisis once normalcy returns.

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