[Foundation-l] Fiduciary duties for dummies

Thu May 1 21:07:04 UTC 2008

Dear community and future trustees,

4 years ago, in june 2004, I had the privilege of being elected by the 
community to be a trustee on the board of Wikimedia Foundation.

Needless to say, I felt very honored.
I also remember that I had no idea what "fiduciary duties" meant. I do 
not think the words were even mentionned at that time. Very likely, most 
candidates at that time had no idea either.

To be fair, the Foundation at that time was hardly more than a couple of 
papers in an administration (articles of incorporation), a couple of 
servers and domain names and three trustees (including two I had never 
talked to, Tim and Michael). Probably a bank account as well (though, I 
am not even sure). And that was it.

There was no board manual. There were few meetings. There was no 
decision making procedure. No minutes. No financial statements. No 
policies. No charters. No guidelines.
There were no vehicules for communication between board members, beyond 
our private email addresses. No board wiki. No board list.
There was no office. No staff.

I think you get the idea :-)

Most chapters as of today, probably are more organized than the 
Foundation was in june 2004.

Presumably, most potential candidates to the board this year, will know 
little more than what I knew back in 2004 of trustees role and duties.

Over the years, I tried to overcome my own ignorance, and I would like 
to offer my own simplified knowledge to future candidates. Incidently, 
as Chair, it is my role to "orient" new Trustees. Over the past 18 
months, I tried to collect information so that new Trustees may join the 
board with a better understanding of what the role encompasses, and so 
that they be more efficient early on.

------------

What are the responsibilities of a Trustee.

First link: http://wikimediafoundation.org/wiki/Board_member
This page summarizes the responsibilities of the Board (in its 
entirety), and provides some additional insights. I could not be more 
clear in saying that CANDIDATES FOR THE POSITION SHOULD READ THIS PAGE.

------------

Board manual

Second link: http://meta.wikimedia.org/wiki/Board_manual
I started building this page a long time ago. It is now more or less 
complete, and of course, it should be a work in progress. It is 
certainly not perfect (by far) but as April 2008, this is the more 
accurate and complete document to orient a new Trustee.
Again, I do think candidates should read this page before candidating. 
It might open their eyes on what the job is about.

-------------

Third consideration: fiduciary duties.

Directors are subject to two fiduciary duties in carrying out their 
governance responsibilities:  the duty of care and the duty of loyalty.
Sometimes, there is also reference to the duty of obedience as well (I 
never heard it said in the contact of WMF).

Here are the definitions given by www.boardsource.org.

Duty of Care
The duty of care describes the level of competence that is expected of a 
board member, and is commonly expressed as the duty of "care that an 
ordinarily prudent person would exercise in a like position and under 
similar circumstances." This means that a board member owes the duty to 
exercise reasonable care when he or she makes a decision as a steward of 
the organization.

Duty of Loyalty
The duty of loyalty is a standard of faithfulness; a board member must 
give undivided allegiance when making decisions affecting the 
organization. This means that a board member can never use information 
obtained as a member for personal gain, but must act in the best 
interests of the organization.

Duty of Obedience
The duty of obedience requires board members to be faithful to the 
organization's mission. They are not permitted to act in a way that is 
inconsistent with the central goals of the organization. A basis for 
this rule lies in the public's trust that the organization will manage 
donated funds to fulfill the organization's mission.

I am not quite sure why the duty of Obedience is no more mentionned 
generally. I would argue that this duty is actually precisely at the 
center of our current controversy regarding Trustee appointment or 
election.
In requesting that all Trustees be already wikipedians of some sort (a 
request from many wikipedians), the underlying request is that we should 
make sure all Trustees actually AGREE with our mission. The underlying 
request is that ALL board members should BELIEVE in our values.
However, some WMF trustees and apparently our ED consider that the duty 
of loyalty and care are sufficient to make a good board member. Note 
that this seems to be a general trend these days.

I am not entirely sure what my own position is on the matter. I fear 
that we may have difficulties to find Trustees who deeply agree with our 
vision and values, to fill certain expertises. The same issue is of 
course valid with staff members. It would be difficult to expect all 
staff members to be wikipedians, however, we intuitively consider they 
should be faithful to our mission.

So, I would argue that though we do not list this duty as a 
*requirement*, there is nevertheless an expectation that the Trustee 
will be faithful to the organization.

This is the main reason why I actually wished that we outline clearly 
the MISSION (done last year) and the VALUES (done this year) of the 
organization. We can not expect a new trustee (in particular an 
appointed one) to have these values in mind when joining; but we expect 
him to be completely familiar with them and to respect them as much as 
possible. I would similarly expect the ED and the staff to make their 
best to have these values in mind, EACH TIME they have to make a 
operational decision.

As a reminder: http://wikimediafoundation.org/wiki/Values

Summary
A board of directors has certain legal obligations, known as duties.

* Take reasonable care when making decisions for the organization 
(called “duty of care”)
* Act in the best interest of the organization (called “duty of loyalty”)
* Act in accordance with the organization’s mission (called “duty of 
obedience”)

--------------

With the above principles in mind, let me provide a few comments/examples.

Failure to the duty of care
Failing to attend board meeting is a breach of the duty of care. Failing 
to vote is a breach of the duty of care. Failing to act when informed of 
an illegal act is a breach of the duty of care. Failing to provide board 
minutes is a breach of duty of care. Failing to find a new director when 
there is none and it is necessary, is a breach of duty of care etc...
Quite obviously, it is difficult to sometimes identify what is really a 
  breach.
Family wise, the equivalent of failure would be "not feeding a child to 
the point of him getting sick". However, refusal to give him chocolate 
every day is okay.
Writing policies is a good way to identify what is okay, what is 
borderline and what is non acceptable.

Quite a few policies have been written in the last 2 years. Several are 
quite obviously still missing.
An example of a policy missing is this one: what is to be done when a 
board member is failing to the duty of care ?
As you may imagine, that's a tough one. I hope the board will handle 
this one as early as possible.

Failure to the duty of loyalty
May typically occur when a board member has a business related to the 
activity of the Foundation. He may vote in such a way that will improve 
his business as a primary reason, whilst another decision would actually 
be better for the Foundation. If so, it is a breach to the duty of loyalty.
Incidently, if the community (or chapters) elect a Trustee, whom the 
board can estimate would be/is non-loyal or destructive, it would be a 
breach to the duty of care to not remove this Trustee.
The conflict of interest policy is meant to help avoid such situations.
As you may guess, the challenge is to identify when the Trustee action 
was done with a higher loyalty to another organization.

Failure to the duty of obedience
Voting to stop providing free dumps would be a failure to the duty of 
obedience. This one looks like an easy one.
But when you really look at it, that duty is the one worrying the 
community. This is the area of decision related to "changes of licence", 
"putting advertisement on the website", "not providing financial 
statements to the community", selling out to Mitrocosf, etc...

There are other duties not listed here.
*Duties of oversight
*Ethics
* etc...

This would be very long to list, so I thought it best to rather provide 
a summary of major trends applying to non profits. I expect all 
candidates will make the effort to think about which areas we currently 
cover well, which areas are only partially taken care of, and which 
areas are still "not-taken-care of at all".

--------------

The major developments and trends in principles of governance of 
nonprofit corporations, which seem to apply easily to our organization 
are the following ones:

(source: http://www.icnl.org/knowledge/ijnl/vol7iss1/art_3.htm)

1.  The board of directors of a nonprofit corporation must engage in 
active, independent, and informed oversight of the activities of the 
corporation, particularly those of senior management.

2.  Directors with information and analysis relevant to the board’s 
decision-making and oversight responsibilities are obligated to disclose 
that information and analysis to the board and not sit passively. Senior 
management should recognize and fulfill an obligation to disclose 
information and analysis relevant to such person’s decision-making and 
oversight responsibilities.

3.  If the non profit corporation is appointing members to the Board, it 
should have a nominating/governance committee composed entirely of 
directors who are independent in the sense that they are not part of the 
management team and they are not compensated by the corporation for 
services rendered to it. The nominating committee is responsible 
(amongst other things) for nominating qualified candidates to stand for 
election to the board.

4.  Every nonprofit corporation with substantial assets or annual 
revenues should develop and implement a three-tier annual board 
evaluation process whereby the performances of the board as a whole, 
each board committee, and each director are evaluated annually. The 
board should also develop and implement a process for review and 
evaluation of the chief executive officer on an annual basis.

5.  Each board of directors is responsible for overseeing corporate 
ethics. Ethical conduct, including compliance with the requirements of 
law, is vital to a corporation’s sustainability and long-term success. 
This includes considerations such as Conflict of Interest Policy,

6.  Every nonprofit corporation with substantial assets or annual 
revenue should be audited annually by an independent auditing firm. The 
corporation should change auditing firms or the lead and reviewing audit 
partner periodically to assure a fresh look at the firm’s financial 
statements. The audit committee should be composed of completely 
independent directors and should set rules and processes for complaints 
concerning accounting and internal control practices. It is responsible 
for hiring, setting compensation, and overseeing the auditor’s activities.

7.  The chief executive officer and the chief financial officer of every 
nonprofit corporation should review Form 990 or Form 990-PF and other 
annual information returns filed by the nonprofit organization with 
federal and state agencies.

8.  Any attorney providing legal services to a nonprofit corporation who 
learns of evidence that the attorney reasonably believes indicates a 
material breach of fiduciary duty or similar violation should report 
that evidence to the chief executive officer of the nonprofit 
corporation and, if warranted by the seriousness of the matter, to the 
board of directors.

9.  Every nonprofit corporation should adopt a written policy setting 
forth standards for document integrity, retention, and destruction.

10. Every nonprofit corporation should adopt a written policy to permit 
and encourage employees to alert management and the board to ethical 
issues and potential violations of law without fear of retribution.

---------

I am sorry, this is very long :-)

This is a little part of my 4 years experience. The main difficulties were
* to always run behind Wikipedia. No time to "step back" and think about 
it. There were always more servers to buy, more bills to pay for, more 
phone calls, more lawsuits, more press articles etc...
* whilst running, to build a necessary framework
* and to follow duties, not backed up by policies

It is difficult to say someone is failing to the duty of loyalty... when 
there is no conflict of interest policy.
It is difficult to say someone is failing to the duty of care... when 
there is no expense reimbursement policy.
It is difficult to say someone is failing to the duty of oversight... 
when he is doing the job himself (no one can reasonably oversight his 
own job)

The future board members will be lucky, because there is now a minimum 
of framework. There are policies to refer to. There are guidelines. 
There is a staff to take care of operations.
And mostly, there is experience.

Who can guess where the Foundation will be next year ?

I hope this provides some insights to everyone interested.

Ant