Standard of Care of a Hawaii Nonprofit Corporation Director

The Hawaii Nonprofit Corporations Act (“Act”) specifies that a director must act (1)in good faith; (2)with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and (3)in a manner the director reasonably believes to be in the best interests of the corporation. This standard of conduct is fairly easy to meet and is often times summarized as the duty of care and duty of loyalty.

The Act makes it even easier to meet as it provides that a director is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by:

  • One or more officers or employees of the corporation whom the director reasonably believes to be reliable and competent in the matters presented;
  • Legal counsel, public accountants, or other persons as to matters the director reasonably believes are within the person’s professional or expert competence; or
  • A committee of the board of which the director is not a member, as to matters within its jurisdiction, if the director reasonably believes the committee merits confidence.

If a director meets this standard of conduct the director is not liable to the corporation, any member, or any other person for any action taken or not taken as a director.

Compensated and Non-compensated Directors Distinctions

The Act then distinguishes between compensated and non-compensated directors by providing that any person who serves as a director to the corporation without remuneration or expectation of remuneration shall not be liable for damage, injury, or loss caused by or resulting from the person’s performance of, or failure to perform duties of, the position to which the person was elected or appointed, unless the person was grossly negligent in the performance of, or failure to perform, such duties.

Even though most directors will exercises the duty of care and duty of loyalty described above, the Hawaii Nonprofit Corporation should also provide in its Articles of Incorporation indemnification language so that the director does not have personal liability to the corporation for monetary damages for breach of the director’s duties other than for breach of loyalty, intentional misconduct, improper personal benefit, or conflict of interest.

In addition, as permitted by the Act, the nonprofit corporation should also purchase directors and officers insurance to protect them from claims where the corporation cannot indemnify the directors or does not have the resources to do so.

Contact us and we, as your Hawaii attorneys, can assist you in analyzing your Hawaii nonprofit corporation’s issues.

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