Avoiding the Appearance of Impropriety
When you are on the board of directors and are running a corporation, you may find that certain opportunities present themselves. Some of these opportunities could be situations where you might be able to get something of value for yourself or you might be able to get a family member or a friend a good job. In those situations, you might be tempted to use your position on the board as a springboard for these special interests. However, your stockholders can claim that you are using the authority you have as a board member improperly.
Claims like this are typically resolved through arbitration and similar forms of alternative dispute resolution. However, they are some of the most difficult to predict. The best way to ensure that potential claims do not result in your being fined or losing your position is to avoid the appearance of impropriety. This does not mean that you cannot take advantage of opportunities or help your family members and friends. You just have to bear certain things in mind.
Full Disclosure
One of the first things that you must do is make sure that you disclose the potential conflict to the other board of directors. The cases that generally wind up with the shareholders winning are those in which one of the members of the board fails to disclose the potential conflict to the other board members. Most of the time, this will result in the shareholders being unable to even bring the claim because of the protection of the business judgment rule. This provides significant protection for the decisions of the board, even if one member will benefit significantly from the decision in the 501C3.
One of the first things that you must do is make sure that you disclose the potential conflict to the other board of directors. The cases that generally wind up with the shareholders winning are those in which one of the members of the board fails to disclose the potential conflict to the other board members. Most of the time, this will result in the shareholders being unable to even bring the claim because of the protection of the business judgment rule. This provides significant protection for the decisions of the board, even if one member will benefit significantly from the decision in the 501C3.
Separate Qualifications
One of the other ways that you can protect yourself is by ensuring that separate qualifications are demonstrated sufficiently. This means that when you present the matter to the board of directors, you can also indicate that your friends and family members whom you are trying to help have the necessary skills to be able to provide the work. This makes it even less likely that your shareholders will be able to find a way to bring a claim against the corporation. The more objective the qualifications are, the better.
One of the other ways that you can protect yourself is by ensuring that separate qualifications are demonstrated sufficiently. This means that when you present the matter to the board of directors, you can also indicate that your friends and family members whom you are trying to help have the necessary skills to be able to provide the work. This makes it even less likely that your shareholders will be able to find a way to bring a claim against the corporation. The more objective the qualifications are, the better.
Do Not Attempt to Hide the Connections
While you don't have to advertise the fact that you are hiring your best friend, don't try to hide the fact either. Most importantly, make sure that you don't lie. Lying only convinces your shareholders that there is something wrong. You may be doing it to avoid a scene, but with the electronic age and the ability to research just about anyone through Facebook and Ancestry.com, it's not too hard for people to draw connections. When making the announcement, you should make sure that you include the separate objective qualifications. Don't let the focus be on the fact that you have hired your brother but rather that you have hired someone who meets or exceeds the qualifications for the position.
While you don't have to advertise the fact that you are hiring your best friend, don't try to hide the fact either. Most importantly, make sure that you don't lie. Lying only convinces your shareholders that there is something wrong. You may be doing it to avoid a scene, but with the electronic age and the ability to research just about anyone through Facebook and Ancestry.com, it's not too hard for people to draw connections. When making the announcement, you should make sure that you include the separate objective qualifications. Don't let the focus be on the fact that you have hired your brother but rather that you have hired someone who meets or exceeds the qualifications for the position.
Bear in Mind State Laws
The one thing to remember is the anti nepotism laws that have started cropping up in certain states. Most of the time in states like Indiana, the anti nepotism laws are directed at government offices. However, these laws are being applied to businesses that take on government contracts. They do not mean that you cannot hire or benefit direct family members, but they do set out separate qualifications and standards that family members must meet before being able to start work in that job. Remember that state legislature controls over the case law. So, even if your state's general case law indicate that general full disclosure principles are sufficient, the legislature may otherwise overrule that.
The one thing to remember is the anti nepotism laws that have started cropping up in certain states. Most of the time in states like Indiana, the anti nepotism laws are directed at government offices. However, these laws are being applied to businesses that take on government contracts. They do not mean that you cannot hire or benefit direct family members, but they do set out separate qualifications and standards that family members must meet before being able to start work in that job. Remember that state legislature controls over the case law. So, even if your state's general case law indicate that general full disclosure principles are sufficient, the legislature may otherwise overrule that.
The author a prominent provider of legal advisory services including services such as 501C3 to corporations and business houses.
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