I am presenting a teleseminar with Lisa Runquist and Alice Anderson for the American Bar Association Center for Continuing Legal Education today at 1 pm Eastern Time (10 am Pacific Time) on the Responsibilities and Duties of Directors of Nonprofits: How to Limit Your Liability. Here is an excerpt from my segment on a few common nonprofit governance problems:
- Perspective. Directors must understand that the game has changed. It’s no longer okay
for nonprofit directors to ignore their fiduciary duties with the excuse that
they’re volunteers. If you accept the position, you accept the responsibilities
and the associated exposure for not meeting those responsibilities. Much
more than ever before, there is scrutiny by the IRS, state agencies, donors,
the media, charities ratings organizations, and the public. And there are
new requirements and methods for organizations to be more and more transparent
– not only about their operations but also about their governance. The
era of the inactive/celebrity/fundraising directors is over.
- A general lack of
understanding of the laws that apply to a nonprofit and to its directors.
It’s critically important for directors to have a general understanding of the
overlays of federal, state, and local laws. For example, if you’re on the
board of a charitable organization, do you understand the restrictions,
limitations, and possibilities related to executive compensation, lobbying,
political activities, earned income, business transactions with directors and
officers, partnering with a for-profit, maintaining public charity status,
audits, and operating in the zone of insolvency? If not, your
organization may be out of compliance and/or not making full use of its
abilities to further its mission. How well are you doing your job, if
that is the case? Periodic training sessions for boards can be a valuable
tool to help alleviate this problem – and something attorneys should strongly
- A lack of attention paid to
the internal laws of the organization. Is the organization operating in
furtherance of the exempt purpose stated in their governing documents? Do
the directors really know, understand, and govern consistent with their bylaws
and other governance policies? This problem often results when a board adopts bylaws that it copied from another organization without careful thought and consideration about how they work under different circumstances. It's far too common for nonprofits to ignore membership requirements they've inadvertently created, elect a different number of directors than is authorized, and not maintain officer positions and/or committees required under the bylaws.
- A failure to understand that a director,
individually, has no inherent powers even though he or she certainly has
many responsibilities. Of course, the directors collectively as a board
have powers. And individual directors may occupy officer positions with
certain powers or be delegated with specific powers by the board. It’s
common for certain individuals to wear more than one hat in the organization,
and it’s important for the individual to distinguish his or her role when
acting in more than one capacity. By the way, the board chair serves at
the pleasure of the board, not the other way around.
- The upside-down board. This refers to a far too common scenario where the board believes it serves at the pleasure of the executive, who often is the founder of the organization, instead of the other way around. Remember, the board should review the performance of the executive, determine the executive's compensation, and, if necessary, replace the executive.
- Delegation without due
care or sufficient oversight. It’s perfectly appropriate and necessary
for boards to delegate management and certain governance-related tasks to staff, committees, officers, and task
forces. But boards cannot delegate oversight. How do boards
provide oversight? (A) By adopting and ensuring implementation of policies
covering conflicts of interest, document retention and destruction, whistleblowers, executive compensation, joint ventures, gift acceptance, and review of the Form 990 annual information return. (B) By developing a legal
maintenance list and budget, and holding the executive accountable for compliance.
It’s not practical for a board to oversee every single payroll tax payment and
approve every single expenditure, so policies must be developed carefully to
allow for appropriate delegation … but with sufficient oversight.