A ban on future nonprofit board service is one of the more significant remedies available for a state charity official to address breaches of fiduciary duty owed to a nonprofit corporation.
The most recent application of this remedy occurred in connection with a settlement between a state Attorney General and the former senior executive of a charity formed to provide free legal services to low income residents of the state. The Attorney General had claimed that the former executive had diverted, over a period of time, substantial sums to other charities he controlled. The Attorney General alleged that the transfers were made to enhance his reputation in the community and as a benefactor of charitable organizations.
The settlement provides for the former executive to reimburse the legal aid charity a certain dollar amount. In addition, the former executive admits to numerous breaches of fiduciary duty. Perhaps most significantly, the settlement also bans the former executive from serving as an officer or director of not-for-profit organizations operating in the state for a period of five years.
The threat of reputational damage is increasingly being recognized by charity regulators as a major incentive for the proper exercise of fiduciary responsibilities. The concept of a “future board service ban” is thus an appropriate option to be applied in settlement of state investigations of alleged breach of fiduciary duty, both on its own and together with financial settlements. Whether the ban is permanent of only for a period of years depends upon the circumstances.
