Have you been asked to serve on a nonprofit board? If so, what legally related aspects do you need to learn? Or if you have just added a new director to your organization, what do you need to share with them? New directors should be well equipped to serve well on nonprofit boards. Here are key tips to promote organizational vitality, mission advancement, and leadership success.
1. Understand the Mission
What is the organization all about? The nonprofit’s mission should be clearly set forth not only in its website and other PR materials, but also in its articles of incorporation and bylaws as its purpose statement and guiding compass, orienting and focusing its activities, distilled for easy articulation to others, but broad enough for long-term durability. For additional background on developing an effective corporate purpose statement, please see our prior blog article.
As reflected in bylaws, directors should be expected to agree with the mission. If the organization is religious, directors may additionally be required to agree with a statement of faith or similar doctrinal positions. Such alignment is key, since directors serve as ambassadors of a nonprofit’s mission.
2. Understand Each Person’s Board Role
Nonprofit boards consist of directors, who may be voting or non-voting, and officers. Directors are responsible for the organization’s overall operations – i.e., the proverbial buck stops with them collectively and individually. The nonprofit’s bylaws will identify which directors are entitled to vote on governance matters – usually all directors except perhaps for an executive director who serves on staff, an emeritus director, or others in special positions. Officers are persons who serve designated roles such as president, vice-president, treasurer, and secretary. Such roles should be identified and defined in the organization’s bylaws, and often only directors may serve in some or all of such officer positions.
Some organizations’ bylaws additionally provide for ex officio positions, for persons who serve the organization by virtue of their office. For example, a senior pastor of a church may serve ex officio as chairman of the board (to reflect desired leadership), or a president of one organization may serve as an ex officio director of a closely related second organization (to promote their close connection).
3. Understand Fundraising Expectations
The fundraising “buck” stops with the nonprofit board too. A nonprofit may delegate significant fundraising work to its executive staff, development personnel, and others, but ultimately the board is responsible for ensuring that the organization is sufficiently funded for its short-term needs and long-term goals. Directors serve as the face of the organization too, whether at fundraising events, making donor visits or calls, or cultivating additional networking opportunities. Knowing the nonprofit’s mission, key accomplishments, and strategic plans are all important to a director’s effectiveness.
Correspondingly, each director should understand his or her own personal donation expectations. Is there a set dollar amount expectation? A “give or get” policy, whereby each director should personally give individually or seek sufficient donations from others? Or do funds come primarily from elsewhere, such as government grants? Expectations should be clearly articulated for everyone’s benefit.
4. the Bylaws
An organization’s bylaws are an important corporate document that contains its internal governance rules, including the number of directors, directors’ terms, election and terms of officers, meeting procedures, committees’ establishment and scope of authority, conflicts of interest and dispute resolution procedures, and financial and signatory authority. As such, bylaws serve as a helpful training and reference tool for your board. Directors should be familiar with the organization’s bylaws and should periodically evaluate them to ensure they still fit the organization’s goals for governance, smooth operations, and clarity. When they do not, then either the board’s practices should change or the bylaws should be updated.
5. Understand the Director’s Other Responsibilities
Aside from potential fundraising work, what must each director do in his or her board service? It may be helpful to identify how much time per month is expected, at least roughly speaking (e.g., 2 hours, 10 hours). As a general best practice, each director should also be appointed for a specified term (e.g., two years, three years).
Showing up is of prime importance – attending meeting, participating in calls, serving on committees, and otherwise engaging in the organization’s activities. The nonprofit board should meet regularly, to address matters important to effective operations and promote continued mission achievement. Correspondingly, minutes should be taken at each board meeting by the corporate secretary, with the board later reviewing and approving them. Resolutions and action items should be recorded in the minutes, along with attendance information, quorum, topics discussed, and related points.
As another key aspect of their job, directors need to stay attentive to the nonprofit’s financials. This responsibility includes evaluating and approving the annual budget, as well as reviewing financial statements including revenue/expense reports and balance sheets. The board’s role here is imperative, as part of the organization’s internal controls, to prevent financial impropriety, to ensure that charitable assets are properly and efficiently used.
The board is likewise charged with overseeing the organization’s charitable, religious, or educational programs. Directors thus should regularly evaluate program activities and progress, such as through written reports, discussion at board meetings, and follow-through steps.
Do these responsibilities mean that directors should micro-manage a nonprofit? By no means! Directors serve best as the “bumper guards” for a nonprofit, keeping it on mission, planning strategically, approving corporate policies, asking probing questions, and otherwise exercising “constructive skepticism” in exercising oversight.[1]
6. Understand the Director’s Underlying Fiduciary Responsibilities
Each director owes legal duties of care, obedience, and loyalty to the organization. These are known as “fiduciary” duties, based on the Latin word for trust. Directors are thus entrusted with taking care of their nonprofit organizations.
A director’s role is reflected well in the duty of care, to exercise reasonable diligence and due care in conducting the organization’s affairs as described above. In addition, each director owes a duty of loyalty, to put the best interests of the organization first. Such matters are typically addressed through conflict of interest policies and accompanying annual or other periodic conflict of interest disclosure statements. Last, the duty of obedience requires directors to adhere to the organization’s corporate purposes, ensuring that the organization’s programs and activities are consistent with such purposes and its mission is uncompromised by other competing interests.
For more information regarding fiduciary duties, see our prior blog articles concerning the duty of care, duty of obedience, and duty of loyalty.
7. Understand How to Address Conflicts of Interest
On a related note, every nonprofit should have an established policy for handling conflicts of interest, and it should be consistently followed. As noted above, directors’ fiduciary duty of loyalty prohibits them from using their position of trust for personal advantage at the organization’s expense. Such advantage is most commonly financial, but it may be otherwise – such as favoring family members or friends over organizational needs, or using confidential information gained from board service for improper purposes. The board should have a conflict of interest policy that sets procedures for identifying and addressing conflicts of interest, including required disclosures, recusals from board discussion, careful independent director evaluation, and resulting votes on the organization’s best interests. For additional guidance, see our prior blog article.
8. Understand the Nonprofit’s Basic Legal Structure
A nonprofit is typically a “legal person,” formed as a corporation under state law. Consequently, the organization may owe annual or other periodic state reports, such as annual reports to a Secretary of State, charitable solicitation registration (depending on specific fundraising activities), and “franchise” tax reports (such as in Texas or California).
In addition, a nonprofit is typically tax-exempt under federal tax law, qualifying as a Section 501(c)(3) public charity, a Section 501(c)(4) social welfare or “action” organization, a Section (c)(6) trade association (promoting a line of business), or as some other type of tax-exempt entity. Regardless of tax-exempt type, the nonprofit will owe an annual Form 990 information return. The only exception is for nonprofits organized and operating as churches, their denominations, or their auxiliaries. (For more information on Form 990 filing requirements, see our blog article here.)
Board members should be aware of these filing requirements and make sure they are fulfilled.
9. Understand the Risks
A common question among directors is whether they may be held personally liable for the board’s and organization’s actions. While state nonprofit laws generally protect directors of a nonprofit board from personal liability for acts performed in their volunteer capacity as directors, this protection is not absolute. For example, directors may be liable for breaches of their fiduciary duties, gross negligence in fulfilling such duties, or willful or wanton conduct.
The risk of personal liability and significant costs associated with a lawsuit may deter individuals passionate about an organization’s mission from serving on the board. To remove this barrier to service, the organization should do two things.
First, include an indemnification provision in the bylaws. Indemnification is a legal procedure by which an organization agrees to hold its directors harmless and reimburse its directors for liabilities, expenses, and other losses incurred in the event of a lawsuit or other proceeding. If a lawsuit is brought against one of the organization’s directors by another person, it may generally indemnify the director so long as he or she acted in good faith and a manner he or she reasonably believed to be in the organization’s best interest. Further, organizations may be required under state law to indemnify one of its directors when such director is successful in defending an action brought against him or her personally.
Second, and for optimal protection, organizations should also obtain ample directors’ and officers’ insurance. Such insurance typically covers the cost of legal defense for lawsuits brought against directors and officers. Given our litigious society, such insurance coverage may prove quite valuable indeed.
For more information regarding director liability and indemnification, see our prior blog article.
10. Understand the Past, to Plan for the Future - With a Corporate Notebook Too
Educating new directors on the organization’s history will also provide a deeper understanding of its mission. Board training materials should describe the organization’s background, such as the vision that sparked the organization’s creation, what the organization has learned over time and how this has impacted its vision, and key events that have shaped the organization’s governance, programs, and activities. Sharing this institutional knowledge will help each director more effectively guide the organization’s activities and remain focused on its mission.
A corporate notebook, whether maintained electronically or in a hard-copy version, may prove invaluable toward achieving such goals. Such notebook should contain an index, key corporate documents like bylaws and articles of incorporation, recent board meetings, recent financials, the organization’s most recent Form 990 filing, corporate policies, and other important governance documents. The notebook thus may serve as both a valuable training tool and ongoing board resource.
Bringing It All Together
Ideally, each nonprofit director will embrace his or her role enthusiastically and with a strong commitment to serve the organization well. Understanding these legal and related practical dynamics should help them optimally lead their organization with excellence, joy, and mission success.
[1] See American Law Institute, Principles of Corporate Governance: Analysis and Recommendations 89 (1994) (recommending “[a] collegial relationship that is supportive as well as watchful . . . challenging yet positive, arm’s length but not adversary.”); and M. Peregrine, “Independence” and the Nonprofit Board: A General Counsel’s Guide, Journal of Health Law (Fall 2006) (citing related American Bar Association Task Force Report at 27-29)).
