Nonprofit Leadership: Delegation

Businesswoman hand drawing delegate sketch on green background

Nonprofit board members and managers rely on delegating their responsibilities to others. Of course, the size of the organization will dictate the options, persons, groups, and contractors involved. This post is aimed principally at nonprofit corporations with at least a few employees holding management-level responsibilities and will not discuss the very important employee – independent contractor distinction, which requires its own examination.

Board Delegated Authority

Boards are ultimately responsible for management of the activities and affairs of a nonprofit corporation. Typically, boards delegate management to a chief executive (often going by the title of president or executive director) and oversee financial performance and, to some extent, the executive’s performance.

Delegation by the board to the chief executive must be carried out and monitored with reasonable care, which generally involves the following factors (“Delegation Factors”):

Careful selection of the chief executive.
Clear written descriptions of the chief executive’s powers, duties, and responsibilities, and key expectations of their performance.
Appropriate empowerment of the chief executive, ensuring they have adequate resources, experience, and training to reasonably exercise their delegated powers.
The legality of any directives and the consistency of such directives with the organization’s mission, values, and responsibilities to the communities it serves.
Regular review of the performance of the chief executive.
Ongoing support of the chief executive, including through oversight and accountability measures.

Delegation of duties and responsibilities to other officers and to committees* may also be effected by governing documents and policies and job and committee descriptions approved by the board. Except where the delegated authority is purely advisory, the board should have in place some system of oversight and accountability. This would be particularly critical where important duties and responsibilities are delegated to persons who are not fiduciaries or employees of the organization.

* Committees for purposes of this post refer to any body of individuals other than the board acting with delegated authority on behalf of the nonprofit regardless of name. Committees may include bodies called advisory boards, honorary boards, emeritus boards, boards of regents, board committees, advisory committees, steering committees, fundraising committees, subcommittees, and task forces.

Management Delegated Authority

The chief executive customarily delegates some of their management authority to different persons and groups. Delegation of duties and responsibilities may also be effected by other managers as well as HR policies, job descriptions, and custom.

In delegating authority, managers must of course be aware of the Delegation Factors as appropriately modified and applied in the specific cases before them. However, managers will generally be expected to provide much greater and more regular oversight and support than expected of a board. Further, some managers may be expected to customize job positions and duties, taking into account both (1) the available talent and their individual skills, strengths, weaknesses, and aspirations; and (2) external circumstances, including financial, technological, cultural, legal, political, geographic, and social. All of this is in context of the manager’s responsibilities regarding risk management, change management, communications management, programmatic management, fundraising, general administration, and legal compliance.

Shared Leadership

Demand for shared leadership structures and for information on such structures continues to rise, particularly with movement organizations and organizations focused on community power-building. It makes sense for such organizations to desire to delegate more authority to persons who are impacted by their missions and decisions. But those legally responsible and accountable for those organizations must also consider legal compliance, whether they agree with those laws or not, and both organizational and personal risks.

Fiduciaries, like board members, trustees, and certain officers, have fiduciary duties to act with reasonable care in the best interests of the organization. Failure to meet those duties can result in personal liability to the fiduciaries, and the organization’s insurance may not cover such failures. While fiduciaries may be able to delegate management authority to others, the fiduciaries must do so diligently and will remain ultimately responsible for managing the activities and affairs of the organization and for directing exercises of the organization’s powers. Similarly, fiduciaries may be able to rely on information, opinion, and reports of certain others, but the fiduciaries must do so only when it would be reasonable.

Shared Leadership Challenges – Generally …

Not everyone who wants some authority over the activities of an organization wants the legal responsibilities and personal risks associated with being a fiduciary.
Fiduciaries don’t want to be held accountable and personally responsible for the acts (or omissions) of others outside of the fiduciaries’ control

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A large number of decision-makers may be very difficult to assemble for important discussions related to certain decisions
A large number of decision-makers may dilute the vote of very active and informed voters with the vote of minimally active and informed voters
A large number of decision-makers may increase the number of voters more concerned about their individual interests over those of the organization
A large number of decision-makers may make it very difficult for important discussions to take place in a manner that allows everyone to contribute their opinions
Requiring only a small portion of the decision-makers to be able to constitute a quorum for making decisions may discourage broader participation (free-rider problem) and allow for a segment to strategize on making decisions that a large majority may strongly oppose
The larger the group required to participate in the decision, the slower the decision-making process, and the more unlikely that the organization would be able to respond quickly to address urgent needs or make course corrections

Legal Entity Options

A corporation and a limited liability company (LLC) generally offer limited liability protection to owners, members, directors, and officers so they will not be held personally responsible for the organization’s debts and legal obligations, subject to certain exceptions, particularly for their own actions or inactions where they had a duty to act
An unincorporated association (except unincorporated nonprofit associations formed in some states), a partnership, and a sole proprietorship generally offer no limited liability protection as described above

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A (business) corporation, benefit corporation, and social purpose corporation have owners that have certain rights – some inherent and some as may be described in a shareholders’ agreement
A nonprofit corporation generally has no ownership
An LLC and partnership have members or partners that are the owners of these entities and have certain rights – some inherent and some as may be described in an operating or partnership agreement
An unincorporated association has members with certain rights – very few inherent and some as may be described in a membership or similar agreement
Corporations of any type generally have more rules and requirements governed by state laws relative to LLCs, partnerships, and unincorporated associations

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A corporation is governed by a board of directors; directors each have fiduciary duties of care and loyalty (true even for cooperative corporations, but they may be established with the requirement that all members also be directors)
An LLC either has a manager (a fiduciary) or is managed by its members (who would be fiduciaries when acting as managers – though this concept gets more complicated when a member is a legal entity rather than an individual)
A partnership either has a general partner (a fiduciary) or is managed by its partners (who would be fiduciaries when acting as managers – though this concept gets more complicated when a partner is a legal entity rather than an individual)
An unincorporated association’s fiduciaries are those members who act in such capacity with such authority

Tax Status Options

(Business) corporations, benefit corporations, and social purpose corporations are taxable entities
Nonprofit corporations may be taxable or tax-exempt under different sections of state and federal tax laws, including, from a federal tax law perspective, Internal Revenue Code Section:
- 501(c)(3) – charitable organizations
- 501(c)(4) – social welfare organizations
- 501(c)(5) – labor organizations
- 501(c)(6) – business leagues
LLCs and partnerships are pass-through entities for federal tax purposes, meaning they don’t pay federal income taxes, but an LLC’s and a partnership’s profits and losses pass through to their members or partners, respectively, who may have tax implications from such income or losses
Unincorporated associations may be pass-through entities, but unincorporated nonprofit associations may be tax-exempt

Some Scenarios

Nonprofit corporation – 501(c)(3), public charity

Membership organization – members vote for the board; members are delegated with certain authority pursuant to the bylaws; board creates committees with member representation and delegates certain authority to such committees
Charitable purpose; limited lobbying (but generous limits under 501(h)); no electioneering
Legal requirements that prohibit excessive compensation and payments, including to anyone with substantial influence over the organization (severe tax penalties)
Ability to obtain tax-deductible charitable contributions and grants from foundations

Nonprofit corporation – 501(c)(4)

Membership organization – members vote for the board; members are delegated with certain authority pursuant to the bylaws; board creates committees with member representation and delegates certain authority to such committees
Social welfare purpose; unlimited lobbying (but generous limits under 501(h)); some electioneering, so long as it is not the organization’s primary activity
Legal requirements that prohibit excessive compensation and payments, including to anyone with substantial influence over the organization (severe tax penalties)
Limited ability to obtain grants from foundations (private foundation grants only if expenditure responsibility is exercised)

Nonprofit corporation – Taxable

Membership organization – members vote for the board; members are delegated with certain authority pursuant to the bylaws; board creates committees with member representation and delegates certain authority to such committees
Legal requirements that may prohibit excessive compensation and payments (under state laws)
Limited ability to obtain grants from foundations (private foundation grants only if expenditure responsibility is exercised)

LLC – Nonprofit Member

Sole owner – nonprofit organization
Flexible purpose and activities, but with some limitations to protect the nonprofit member’s tax-exempt status (if applicable)
Flexible management structure, but with some limitations regarding the nonprofit member’s participation to protect its tax-exempt status (if applicable)
- LLC manager could be a separate entity that allowed for participation on decisions by a broad group of stakeholders (e.g., using electronic communications and perhaps responses to threshold questions in order to participate in the vote), subject to certain limitations to assure appropriate legal compliance and risk management and the nonprofit member’s ability to replace the manager (or require the manager to make changes in order to keep its position as manager)
The nonprofit member may provide substantial funding for the LLC if it would be consistent with advancing the member’s tax-exempt purposes

There are many more factors and nuances to any structure, and the possibility of creating affiliated structures that may collectively provide for greater flexibility, options, and complexities. Working with a knowledgeable lawyer may help establish an appropriate framework and foundation before one or more organizations are created or modified to pursue the desired venture.