The recent spate of enforcement actions against directors and officers of some of our nation's largest corporations, along with mandated reforms such as those contained in the Sarbanes-Oxley legislation, has raised concerns among nonprofit directors about how stricter standards might affect them. Nonprofit directors want to know to what extent they may have personal liability for the actions of the organizations they serve and what can be done to mitigate risks.

Hawai'i law allows nonprofit organizations to limit the personal liability of their directors. Section 414D-32(a)(5) of the Hawai'i Revised Statutes permits a corporation to minimize the personal liability of a director to the corporation or members of the corporation as it sets forth the limitation in the Articles of Incorporation. The corporation however, cannot eliminate all types of liability.

Additional protection is offered by Section 414D-149(f) and Section 155(e) of the Internal Revenue Service tax code. Those sections provide that directors or officers who serve without compensation will not be personally liable for damage resulting from their performance of duties unless they were grossly negligent.

Most legal cases involving nonprofit organizations focus on the organization as opposed to the actions of its directors. The caveat here, however, is that if a suit is brought against the directors, they would still need to contend with the issue of "gross negligence," most likely through costly legal representation. Many nonprofit organizations have liability coverage for directors and officers — insurance for their defense. Other organizations don't have such coverage because they either can't afford it or, after review, they feel the likelihood of such actions is minimal or there are other means to cover the costs of a legal defense.

As part of an ongoing evaluation of risks facing an organization, boards should periodically review the need for further coverage and other ways to mitigate risk. CompassPoint Nonprofit Services' online resource Board Café reports that whether or not a nonprofit has director's and officer's insurance, there are board practices that reduce the likelihood of a suit, such as preventing conflicts of interest, recording "no" votes in the minutes, ensuring that the organization's employment policies are consistently applied, and communicating effectively to their stakeholders and to the public.

It is clear that a new era of sharpened awareness on ethics and fiduciary duties has added an extra layer of responsibility and commitment for nonprofit directors who are already volunteering their valuable time and energy to these organizations. Still, our systems and policies seek to protect well-meaning directors and encourage civic participation. The larger risk for individual directors is their personal reputation when associated with an organization that is linked to a lawsuit, scandal or investigation. In our community, membership on a board is evidence of the integrity of the organization; when your friends see your name on the masthead, they will trust the organization because of you.

Board members must make sure that the organization has adequate systems in place and that they are accountable to its constituencies — members, donors, clients, community members and others. And they must ensure that the organization is making progress to achieve its mission and work hard to fundraise or secure the resources needed.

But in the end, board service — and the duties associated with it — is about heart. Without the passion for the mission or the people, meeting fiduciary standards is adequate but not meaningful. It is a wonderful way to give back of your talents for the good of others, to meet new people, and learn skills and apply them in important ways. For your sake and for the sake of the organization you serve, it deserves dedication and discipline.

Board members of nonprofits interested in learning more about current issues and responsibilities can attend the Hawai'i Community Foundation's Board Leadership Conference on Nov. 8.

Kelvin Taketa is president and CEO of the Hawai'i Community Foundation. E-mail him at kelvin@hcf-hawaii.org.