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Joining a Nonprofit Board in a Post-Enron World

March 2003

Are you thinking of becoming a member of a nonprofit board? Are you already on a board? If so, you probably hope to do a better job than the board members of so many of the corporations that were engulfed in highly publicized scandals last year. The failure of their boards to uncover wrongdoing at places like Enron, WorldCom, and Tyco made headlines around the world. Less noticed were failings in the nonprofit world. The entire board of the United Way of the National Capital Area, for example, resigned last fall amid allegations that the organization was misusing its funds. This article will give you some practical advice to help you avoid these pitfalls. Note: This article is provided for informational purposes only and is not intended to serve as legal advice.

Before You Join the Board

Before you join a board, you should learn all you can about the organization. Look it up on the GuideStar database and check out its mission, goals, accomplishments, and financials. The organization's GuideStar Analyst Report, available for a small fee if the organization is large enough to file a Form 990, will help you analyze the organization's financial health. The Analyst Report will track the organization's finances over time and compare its numbers to those of organizations in the same field and the same geographic area. Ask, too, to see any audited financial statements, the articles of incorporation and by-laws, and any other documents that may shed light on the organization.

Armed with the paperwork, ask questions about the way the organization really works. How often does the board meet? What time commitment is required? Will you be expected to raise money? What expertise are you expected to bring to the board? Does the organization provide orientation to new directors or training to current directors? How are new directors chosen?

You will also want to know if the organization carries directors and officers liability insurance and, if so, what is covered. You may decide to join the organization even without insurance if you decide it is especially well run, but you need to know whether such insurance is in place.

Once You Join the Board

Your job is to govern, not manage. You aren't there to handle the day-to-day functions of the organization. Unfortunately, boards often tend to be either too standoffish or too meddling. The board's most difficult task may be to find the middle ground.

Setting goals

Experts suggest that the board set measurable goals for itself, the executive director, and the organization on an annual basis. This goal-setting session, which might take place at an annual retreat, should also define the roles of the players. How can the board and the executive director best work together to achieve the organization's mission? At the end of the year, the board should evaluate itself, as well as the director and the organization, against these goals.

Meetings

The board should meet at least four times a year, and at least one of the meetings should be in person rather than on the phone. Board members should receive a proposed agenda and all documents that are relevant to the proposed discussion well in advance of the meeting. Contrary to common practice, the actual meetings should encourage questions and dissent, because thorough discussion of each issue is evidence that the decisions were made in good faith, even if they ultimately fail. Between meetings the board should receive monthly reports that summarize the organization's mission-oriented and fundraising activities.

Employment issues

Although the staff will handle the day-to-day management of the organization, the board must supervise the staff. The board actually hires and reviews the performance of the executive director, and it is sometimes involved in hiring decisions for other executives. The staff handles other personnel decisions, but the board should ensure that the organization implements employment policies that are in compliance with all relevant employment laws. By far the largest number of lawsuits that face nonprofit organizations—and their boards—deal with employment issues.

Financial resources

The board must also pay close attention to the organization's financial resources. Board members can no longer afford to daydream or rely on other members with a better understanding of finances when the budget is presented. You need to understand the budget, ask questions, and challenge assumptions, if necessary. You will also need to help the organization acquire and manage resources. Depending on the organization, your role may be limited to approving a fundraising plan or it may actually include asking community members for funds. Whatever the role for specific board members, the board is generally responsible for ensuring the financial health of the organization.

Planning and policies

The board is also responsible for strategic planning and for major policy decisions. These decisions will be made, of course, with input from the staff, but they should not be left for the staff alone.

Accountability and integrity

Finally, the board is responsible for the organization's accountability and integrity. The board can set the tone with a code of conduct and with a strong conflict of interest policy. At least once a year, each board member should formally sign a document revealing any potential conflicts of interest. If a conflict appears with regard to any decision the board is making, the board member should reveal it at that time. State laws don't usually prohibit board members from doing business with the organization on which they sit as board members, but any conflict must be revealed and any exchange of funds must be fair. The intermediate sanctions provisions of the Internal Revenue Code also require that any dealings between board members and the organization be arms-length transactions.

The board should also ensure that the organization has filed all the documents it needs to file with the state, local, and federal governments. These include registrations that allow the organization to do business in the state, all charitable solicitation registrations, and any forms the IRS requires. The board may also want to examine the organization's Form 990 before it is filed with the IRS, as that form has become a public relations as well as an accountability tool.

Legal Duties and Liabilities

State laws generally state that board members have duties of care, loyalty, and obedience to the organization that they serve. Generally speaking, the duty of care is the duty to pay attention to the organization—to monitor its activities, see that its mission is being accomplished, and guard its financial resources. The duty of loyalty is the duty to avoid conflicts of interest, and the duty of obedience is to carry out the purposes of the organization and to comply with the law. If you follow the suggestions above and your common sense when confronted with a new situation, you should be meeting these standards.

You will normally have quite a bit of protection against lawsuits as well. Taking your job seriously and practicing good governance is, of course, the strongest protection. There is also a federal Volunteer Protection Act. In addition, most states protect volunteers and/or state that the organization may indemnify directors for actions they take while pursuing their job. You should also check to see whether your organization's by-laws provide for indemnification and whether the organization carries directors and officers liability insurance. None of these measures is fool-proof, of course, and each statute, by-law, and insurance policy has different nuances, but the risk of legal liability should be quite low if the organization is run well.

Conclusion

Nonprofit organizations need good board members. They need people who believe in their missions and are willing to spend the time to do the job well. If you have read to the end of this article, you may well fit the bill. (For more information on this topic, look at Board Source and Board Net USA.) The organization, its constituents, and those of us who are rooting for stronger nonprofit institutions thank you.

Elizabeth Schmidt
© 2003, Elizabeth Schmidt

Elizabeth Schmidt teaches Nonprofit Law and Practice at the College of William and Mary Law School. She is a nonprofit consultant.