DAVE YOST Ohio Auditor of State Fiduciary Duties

DAVE YOST Ohio Auditor of State { Fiduciary Duties of Trustees of Public Colleges & Universities Presented by: Mark W. Altier, Chief Legal Counsel Ohio Auditor of State 1

Fiduciary Duties of Trustees of Public Colleges & Universities Matters Covered • What is a “fiduciary”? • What are the duties of a fiduciary? v v v Duty of Loyalty Duty of Care Duty of Obedience 2

Requirements for Fiduciary Training • O. R. C. 117. 441 directs: “The Auditor of State shall conduct a fiduciary training program for members and employees of state boards and commissions. ” • H. B. 283, 123 General Assembly; Eff. 9 -29 -1999. 3

What is a Fiduciary?

“Fiduciary Relationship” Relationship A relationship of trust and confidence between two or more persons.

Fiduciary Relationship • In a fiduciary relationship one person justifiably reposes confidence, good faith, reliance, and trust in another whose aid, advice, or protection is sought in some matter. • In such a relationship good conscience requires one to act at all times for the sole benefit and interests of another, with loyalty to those interests. 6

Fiduciary Duty: Common Law Roots Keech v. Sandford (1726) 7

Keech v. Sandford Significance • Keech v. Sandford is a foundational case on the fiduciary duty of loyalty. • It concerns the law of trusts and has affected much of the thinking on the duties of directors in corporation law. • It holds that a trustee owes a strict duty of loyalty so that there can never be a possibility of any conflict of interest. 8

Keech v. Sandford Facts of the Case • A child inherited a lease on Romford Market near London. • Mr. Sandford, a trustee for the child, was entrusted to look after this property until the child reached adulthood. • However, upon the lease’s expiration, Mr. Sandford renewed the lease in his own name instead of the child’s. • When the child (now Mr. Keech) grew up, he sued Mr. Sandford, as his former trustee, for the profit that he had been making by getting the market's lease. 9

The Lord Chancellor ordered Mr. Sandford, the former trustee, to disgorge his profits. “Imust consider this as a Trust for the Infant; for I very well see, if a Trustee, on the Refusal to renew, might have a Lease to himself, few Trustestates would be renewed to Cestui que Use. ”

Key Duties of a Fiduciary ü Act for sole benefit of beneficiary. üAct with the highest standard of care and loyalty. 11

Board Members Have Fiduciary Duties A Board member has a fiduciary duty to the board on which the member serves. 12

Fiduciary Duties Duty of Loyalty. Duty of Care. Duty of Obedience. re Ca Lo ya lty 1. 2. 3. Obedience 13

Duty of Loyalty 14

Duty of Loyalty • Duty owed to the Board and its mission. – Members of Board = trustees. – Board and those it serves = beneficiaries. 15

Duty of Loyalty • A public office is a public “trust. ” • A member may not use his or her appointment for personal profit, gain, or personal advantage. • Must be faithful to the best interests of the Board rather than own personal interests. 16

Loyalty Dilemma • A board member is made aware of the amount which the college or university is prepared to pay for a property. • The Board Member then advises a friend who is the listing agent for the seller. 17

Loyalty Dilemma Would the Board Member breach the duty of loyalty by advising the friend? 18

Duty of Loyalty Conflict of interest = divided loyalty. Not permissible for a fiduciary. 19

Conflict of Interest • Sole duty is to the Board and its mission. • Must disclose potential conflicts between member and the Board and its mission. 20

Impermissible Conflicts • One impermissible type of conflict: • Interests of a financial or fiduciary nature that divest some profit or benefit to someone other than the Board and its mission. • Reason: it divides one’s loyalty. 21

Ohio Ethics Advisory Opinion 93 -001: “Thing of Value” Interpretation § A public official may not take any action, formally or informally. . . § to secure a thing of value if the thing of value could. . . § manifest a substantial and improper influence upon him with respect to his duties. R. C. 102. 03 (D). 22

Thing of Value? Considerations: § Does potential increase in business from competitor’s license revocation constitute a “thing of value” as to the conflicted board member? 23

Thing of Value? Considerations: § Does the matter affect the member’s personal financial interests? 24

Thing of Value? Considerations: § Is the “thing of value” of a substantial nature? v i. e. Of or having substance, real, actual, true; of considerable worth or value; important? 25

Actions to Take 1. Disclose 2. Consult 3. Record 26

Actions to Take Member should immediately disclose conflict of interest on the record. 27

Actions to Take Conflicted member should consult with the Board’s legal counsel to determine if abstention from deliberations and voting is needed. 28

Actions to Take • Make a proper record in the minutes with references to the actions taken: o The disclosure of the conflict publically to the Board. o The consultations with legal counsel. o The abstention from discussion and voting when required. 29

Duty of Care 30

The Duty of Care • A fiduciary must exercise: • Proper care and conscientiousness under the circumstances. • Due diligence for the interests of the beneficiary. 31

Duty of Care vs. Loyalty • “Directors or officers breached their duty of care―in other words, they were lazy and dumb. ” • As opposed to breach of duty of loyalty, which means “they were greedy and put their financial interests ahead of the interests of the corporation and its shareholders. ” v Franklin A. Gevurtz, Corporation Law (2000). 32

Duty of Care • Best described as an obligation to exercise due diligence in performing the functions of the position. • Ultimately, it means making decisions that reflect one’s best judgment on what course of action will produce positive results for the constituency served. 33

Exercising the Duty of Care • Understand the Board’s purpose. • Read the Board’s enabling statute. • Be diligent by preparing for and participating in the Board’s meetings. 34

Exercising the Duty of Care • Be familiar with the board’s policies and procedures. • Be familiar with rules of parliamentary procedure. • Require proper record-keeping and minutes. 35

Duty of Care & Ohio Sunshine Laws It’s important to understand Ohio’s Open Meetings Act and how it applies to boards and commissions: Ø Ø Ø Prior notice of meeting times and locations. Requirement to be physically present to vote. When executive sessions are permitted. 36

Duty of Care & The Public Records Law • Important to understand Ohio’s Public Records Act and how it applies to boards. 37

Duty of Care & The Public Records Law • The general requirement – all records are public; some exceptions. • Follow records retention schedules. 38

Duty of Care & The Public Records Law § Use safeguards to prevent release of confidential information. § Discuss only with proper persons. § Keep confidential materials in a safe location. § Use special passwords to access on Board’s website. 39

Duty of Care & Confidentiality • R. C. 102. 03(B) “No present or former public official or employee shall disclose or use, without appropriate authorization, any information acquired by the public official or employee in the course of the public official’s or employee’s official duties that is confidential…or that has been clearly designated to the public official or employee as confidential when…preserving its confidentiality is necessary to the proper conduct of government business. ” • Violation is a first degree misdemeanor (penalty of up to 180 days in jail and maximum fine of $1, 000). 40

Duty of Care in Financial Matters ü Become familiar with the board’s financial statements. ü Stay within authorized budget. ü Insist on a thorough system of internal controls. ü Read the audit reports and correct deficiencies promptly. 41

Auditor of State’s Duties • Chief Inspector and Supervisor of Public Offices. • AOS conducts site audits at least once every two years renders an opinion on whether the financial statement was fairly and accurately presented. o Checks on public office’s compliance with state statutes. o 42

Auditor of State’s Duties Conducts special audits when fraud, theft or other loss of public money is suspected. 43

Proper Public Purpose Hagerman, 155 Ohio St. 320 (1951) v No precise definition v Generally, a PPP promotes public health, safety, morals, or general welfare v Primary objective to promote public purpose Ø May incidentally advance private purpose v Prospective legislative determination Ø Explicit pre-expenditure board approval o Basis and rationale v Courts will not substitute own judgment Ø Discretion Ø Palpably and manifestly arbitrary and incorrect 44

Proper Public Purpose • Government entities may not make expenditures of public monies unless they are for a valid public purpose. Auditor of State Bulletin 2003 -005 details requirements. o Auditor of State issues findings against public officials who approve expenditures with no public purpose. o The Ohio Attorney General seeks recovery from the liable public official. 45

Duty of Care in Financial Matters • Three Ways to Report suspected fraud: o Online at www. auditor. state. oh. us o Call the SIU Fraud Hotline at 1 -866 -372 -8364 o U. S. Mail - a written complaint to: Ohio Auditor of State Special Investigations Unit 88 E. Broad Street P. O. Box 1140 Columbus, OH 43215 46

Failure to Fulfill Duties • There are potential consequences for intentional and reckless failure of duties. • Dereliction of Duty – R. C. 2921. 44(E) provides: No public servant shall recklessly fail to perform a duty expressly imposed by law with respect to the public servant’s office, or recklessly do any act expressly forbidden by law with respect to the public servant’s office. Ø Violation is a second degree misdemeanor (penalty of up to 90 days in jail and maximum fine of $750). 47

Qualified Immunity for Public Board Members • Public board members have qualified immunity for errors in judgment while acting in good faith and within their authority. >> R. C. 9. 86 • Qualified Immunity Ø Immunity from civil liability for a public official who is performing a discretionary function, as long as the conduct does not violate clearly established constitutional or statutory rights. 48

Duty of Obedience 49

Duty of Obedience • Underlies both the Duty of Loyalty and the Duty of Care. • Requires the trustee to be obedient. v v i. e. The duty not to act beyond the scope of the authority as directed by the principal. i. e. The duty to carry out instructions and abide by restrictions on behavior. 50

Duty of Obedience • The duty of obedience requires directors to act within the scope of the charter, bylaws, and other corporate governing documents and to obey all laws and regulations that apply to the corporation's business. • Provides a standard of legal accountability equivalent to that of enhancing shareholder value in the for-profit sector. • The Duty of Obedience resembles the trustee’s duty to administer in compliance with the founding purpose of an institution. 51

Fulfilling the Fiduciary Duties Summary v Disclose conflicts of interest. v Always put first the interests and mission of the Board on which you serve. v Understand the mission, duties, and responsibilities of the Board on which you serve. v Understand your authority, duties and responsibilities of your Board. 52

Fulfilling the Fiduciary Duties Summary - continued § Request advice from legal counsel when needed. § Demand professionalism (agendas, minutes, background information). § Render informed decisions during properly held meetings. § Keep current with your Board’s subject matter so that you may competently serve. 53

Final Thought It’s An Honor To Serve – So Serve Honorably! 54

Legal Division 88 East Broad Street, 9 th Floor Columbus, Ohio 43215 Email: legaldivision@ohioauditor. gov / contactus@ohioauditor. gov 55

Ohio Auditor of State Dave Yost 88 E. Broad St. Columbus, Ohio 43215 Phone: (800) 282 -0370 Fax: (614) 466 -4490 Email: Contact. Us@Ohio. Auditor. gov www. Ohio. Auditor. gov

DAVE YOST Ohio Auditor of State { Performance Audits and House Bill 384 Shawn Busken, Policy Director

Overview • The Ohio Performance Team • State Agency Performance Audits • House Bill 384, Performance Audits of Colleges and Universities

Ohio Performance Team • Tasked with conducting performance audits on behalf of the Auditor of State. • Conducts state agency and local government performance audits. • Average return on investment: o o o Cities: $17: 1 Public Schools: $23: 1 State Agencies: $29: 1 • Also offers feasibility studies to local governments to determine if they could benefit from shared service agreements.

Ohio Performance Team • OPT specializes in the following areas when it comes to performance audits: o o o Fleet Utilization and Streamlining Shared Services Information Technology Building Utilization Staffing Optimization

State Agency Performance Audits • The Auditor of State is permitted to conduct at least 4 state agency performance audits every 2 years (each biennium). • As of this presentation, the Ohio Performance Team has conducted ______ audits of the following entities: o o o ODOT Dept. of Health ODNR ODE OHFA ODRC o ODJFS o OEPA o ODAG o

House Bill 384 • Introduced in the 131 st General Assembly by Representatives Tim Schaffer and Mike Duffey. • Allows the Auditor of State, at his discretion, to conduct a performance audit of an institution of Higher Education as one of the 4 performance audits conducted every 2 years.

House Bill 384 • The bill has limitations on how much can be charged to a college or university. Full-Time-Equivalent Enrollment Cost not to Exceed 5, 000 or less $125, 000 5, 001 to 30, 000 $250, 000 30, 001 or more $350, 000

Cost of a Performance Audit • The cost may exceed the amounts provided in the bill if there is mutual agreement between the Auditor of State and the state university or college being audited.

Scope of Performance Audit • The code language specifies that the performance audit shall not review or evaluate the institution’s academic performance.

Recommendations • State agencies and institutions of higher education are expected to comply with recommendations; HOWEVER, if an institution does not comply, it must: o File a report explaining why the recommendation was not implemented o Provide testimony as to why the recommendation was not implemented

Access to the LEAP Fund • The Leverage for Efficiency, Accountability, and Performance (LEAP) Fund was originally created to advance the cost of performance audits for local entities that may not have been able to afford a performance audit. • The LEAP Fund operates as a revolving loan program. • The generated savings are used to pay for the cost of the performance audit. • Under HB 384, colleges and universities are also able to access this fund.

Performance Audits for Colleges and Universities • The Ohio State University has elected to be the first university to undergo a performance audit • Work has already begun, in scoping phase.

QUESTIONS? 88 East Broad Street, 5 th Floor Columbus, Ohio 43215 Shawn Busken Presenter Phone: (614) 728 -7235 Email: JSBusken@ohioauditor. gov

Ohio Auditor of State Dave Yost 88 E. Broad St. Columbus, Ohio 43215 Phone: (800) 282 -0370 Fax: (614) 466 -4490 Email: Contact. Us@Ohio. Auditor. gov www. Ohio. Auditor. gov