A Duty of Loyalty is a legal duty that essentially means the an officer or director cannot compete with the organization. However, it’s a lot deeper than that.
Firstly, a legal duty is different from a job responsibility. If you breach a job responsibility, you typically get reprimanded at worst. However, legal duties have a lot more force behind them.
For example, if you work at a supermarket, they might fire you if you forget to clean up a spill. However, if you own the store, you owed a duty to the customer who can sue you if they slip and fall. Stores owe a legal duty to customers to clean up hazards. If damage results from a breach of that duty, that’s negligence.
Duty of Loyalty
A duty of loyalty is similar to the duty owed to customers above. However, the officers and directors instead owe the duty to the organization itself. Additionally, their duty is different than simply keeping a safe floor.
In North Carolina, a duty of loyalty means that officer or director will do what is in the best interest of the organization over their own interests. Put another way, an officer cannot directly compete with the organization.
For example, if an officer is in charge of putting on corporate events through the nonprofit, they cannot undercut the nonprofit by offering these directly to the corporations at a reduced price. You have no idea how many times I’ve seen something like this.
Conflicts of Interest
To avoid breaches of this duty of loyalty, organizations need a conflict of interest policy. Conflicts of interest exist when a person is in the position to choose between benefiting the organization and benefiting themselves. You can see how these lead to breaches in the duty of loyalty.
Any potential conflict should be reported to someone higher in the organization and resolved by that authority. That’s the best way to avoid these breaches.