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Archive for the ‘Nonprofits–General’ Category
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Nonprofit board service is prestigious, and invaluable for professional networking. It is also a great remedy for the ennui that sometimes sets in when lawyers work inside big law firms, corporate departments or government agencies, and a cure for the isolation of solo or small-firm practice. A lawyer who serves as a nonprofit trustee is likely to quickly become a trusted and valued member of the team, whose individual contributions markedly enhance a worthwhile enterprise.
Board service may lead to (or in some locales even qualify as) pro bono work. Suitable pro bono opportunities are sometimes hard to find, particularly for corporate or transactional lawyers. Most important is the opportunity to serve the public interest in a meaningful way, to bring professional skills to bear in a collegial context that is different from an otherwise adversarial professional realm.
Why Nonprofit Boards Want Attorneys
For their part, organizations wish to recruit lawyers to their boards for a variety of reasons: legal expertise and perspectives, stature, good judgment, negotiating skills, and of course financial contributions. The fiduciary duty of care requires that board members attend meetings and pay attention to the governance of the organization, overseeing management in fulfillment of mission. In addition, most nonprofit board memberships come with a (stated or tacit) expectation that each member will donate or solicit funds on behalf of the organization. Some organizations have a stated amount, others simply ask that each board member give an amount that is meaningful to him or her.
In addition to governing and personal giving, board members may be expected to serve in an external relations role, advocating for the organization and introducing it to new sources of funding such as private philanthropists, donor advised funds, government funders, corporations and foundations.
Apt Roles for Lawyers on Boards
By their training and professional expertise, lawyers may be particularly suited to fulfill certain roles on boards, for example:
- Legal Committee
- Governance committee
- Audit committee
- Public affairs/government relations committee
- Corporate secretary role
- Ad hoc committee to review and update by-laws
- Development (fundraising) committee
- Grants committee (for grantmaking organizations)
In many nonprofits, particularly those with larger boards, much of the work of the board is carried out through committees, whose activities and recommendations are memorialized in minutes and regularly reported out to the board for discussion, refinement and ratification. Attorneys may be particularly well-suited for the minute-taking role as well as for keeping track of the organization’s adherence to its policies and by-laws.
Some Cautionary Notes
Lawyers joining nonprofit boards would do well to observe some cautions. Many nonprofits, particularly smaller or less-sophisticated organizations, may erroneously believe that having a lawyer on the board is the same thing as having a lawyer. They may not recognize that the establishment of an attorney-client relationship is a formal matter, with an engagement letter (legally required in some states) and stated professional understandings as to scope of the representation, fees/fee waivers, and expenses. For their part, the lawyers may not be in a position to deliver legal services to the client for any number of reasons: core competency, time and availability, conflict of interest, lack of malpractice insurance, lack of bar admission in that state, or otherwise.
When attorneys do agree to represent the organization as well as serve on its board, they should be mindful of the following risks:
- Document the inception, scope and terms of the attorney/client relationship. Some states’ professional responsibility rules require a written engagement letter setting forth these matters.
- Avoid private inurement – nonprofit resources being used improperly to enrich the attorney or the law firm. The actuality or appearance of a prohibited private inurement relationship between the organization and the attorney can avoided by providing services pro bono. If the engagement is on a fee-bearing basis, the attorney should be sure to follow the organization’s conflict-of-interest policies and, once the relationship is cleared by independent directors, the attorney should be sure to follow requirements for ongoing disclosure of fees.
- Privilege waiver can occur if the attorney/director fails to flag when she is taking off her director hat in the board room and commencing the rendering of legal advice as counsel. See, e.g., Deutsch v. Cogan, 580 A.2d 100 (Del. Ch. 1990) (holding that lawyer’s communications with other board members or management were while she was wearing her “director hat” and not her “lawyer hat,” and that the communications are discoverable in litigation); see generally Model Rule of Professional Conduct 1.6.
- Conflicts of interest can arise, for example, if the lawyer is asked to give a legal opinion on board actions in which the lawyer participated. Another example: if the organization is party to a litigation, the lawyer may be unable to try the case on behalf of the client, especially where he may be a witness.
- Gaps in liability coverage: Some legal malpractice insurance underwriters will not cover either the lawyer or her firm if one of its lawyers serves on the board of the client; other policies will provide coverage only where the lawyer was acting as a lawyer but not as a director. This can lead to disputes between the D&O carrier and the malpractice carrier about whether the lawyer was acting as a lawyer or as a director, and ultimately can lead to a lack of adequate coverage altogether.
- Higher standard/greater liability: will a director who is also a lawyer be held to a higher standard in what they know or should know about company matters? This question has been litigated and answered in the affirmative in a number of states in the for-profit context. Query whether courts would apply a heightened standard to a lawyer acting as a director of a charity.
The opportunities and pleasures of serving on a nonprofit board are manifold. Lawyers should embrace the chance to lead, learn and grow. At the same time they should be mindful of the potential pitfalls of undertaking a dual role, and take appropriate steps to mitigate the risks.
To locate board member opportunities in New York City visit BoardServeNYC.
Lesley Rosenthal is Vice President, General Counsel and Secretary, Lincoln Center for the Performing Arts and author of the bestselling Good Counsel: Meeting the Legal Needs of Nonprofits (John Wiley & Sons 2012)
I am the Development Manager for a small nonprofit that operates on a budget of around $500,000 a year. Something came up this year for the first time, and I’d like your opinion.
The ticket price to our annual benefit is $100, and we routinely send acknowledgements to guests that $50 of their $100 ticket is deductible. This is a fairly accurate estimate of the value of the food, drink and entertainment cost, and according to our business manager and auditor, standard best practices (as well as the way benefit tickets have been handled at every nonprofit for which I have ever worked, during the past 20+ years).
This year, we got an RSVP from one guest with a note saying, check to follow. When the check arrived, it was from a donor advised fund with a letter stating that endorsement of the check would confirm that the full amount was tax-deductible and that no goods or services had been received in exchange. My Executive Director and I felt that to treat this differently from all other benefit ticket purchasers would be inappropriate, and compromise the integrity of our nonprofit. I contacted the donor advised fund representative, and explained the situation. I made it clear that the woman would be welcome at our event, but that we would not deposit the check without further instruction from him.
At the benefit, the woman handed me a check for $50. She was very kind, but basically said, these things are done all the time, there’s a fine line, you are on the wrong side of it, but “you’ll learn.” She also told me that the board member who invited her will be speaking with me about this.
I realize this is a relatively small amount, but it’s a larger principle. One of the reasons I value my job at this particular nonprofit is that there is a strong commitment to integrity, consistency and transparency here. My ED and I both feel that we made the right call; but this is very likely not the end of it, as we haven’t heard yet from the board member.
What do you think?
Sincerely, Just Following The Rules
It’s not a matter of what the Nonprofiteer thinks; it’s what she knows, and you know and your Executive Director knows. There’s nothing at all “fine” about the line between deductible and non-deductible payments: the IRS permits deduction of the amount that goes to the charity, and not of the amount that goes into a guest’s belly. It’s what any lawyer would refer to as “a bright-line rule.” So maybe the banquet guest just got her lines mixed up.
Seriously, this isn’t even a close call. What this person has asked you to do is to lie to the IRS on her behalf. Let’s leave aside ethics, integrity, all those mushy things. Lying to the IRS is a really bad idea–just ask Al Capone.
Now, is your agency likely to be audited for breaking the rules (also known as “the law”)? No. Nor is the guest likely to be audited for misreporting her charitable contributions. But that’s not a reason for you (or her) to pretend that she received no value for the money she handed over. You were wise not to endorse the donor-advised fund’s check embodying such a pretense, and you will continue to be wise by not issuing a tax-deductibility receipt for the $50 personal check she ultimately forked over.
If and when the Board member comes at you, you will reiterate what we all know to be true: that the IRS does not permit you to certify the food, drink and entertainment costs as tax-deductible contributions, and that you’re sure she wouldn’t want an agency she governs to participate in such a dangerous and false maneuver. If she presses, observe that the guest may make any use she pleases of her cancelled $50 check.
If the Board member continues to press, turn the matter over to the Board president. It’s her/his responsibility to make sure no one member of the Board in any way tarnishes the reputation of the whole group. If s/he resists addressing the issue, try using the words “tax evasion,” and if s/he continues to resist, try using the word “fraud.”
You don’t have to be in the business of judging or disparaging the guest (though she richly deserves it. Wealthy enough to have a donor-advised fund and wailing about $50?). But you likewise don’t have to be in the business of abetting her dishonesty. And if anyone argues, “Well, it’s only $50,” make sure to agree. “Our agency’s good name isn’t for sale,” you’ll say. “But if it were, it would cost a hell of a lot more than $50.”
Keep on abiding by the law, and may the Force be with you.
Query whether a failure to file annual 990 reports should be grounds for determining that a nonprofit organization is not actually a charity, and therefore not eligible for property tax exemption. Pittsburgh thinks so, apparently; but if being stupidly managed disentitled organizations to charity status, how many small nonprofits would remain standing?
This is the latest in a series of battles between Pittsburgh nonprofits and their host city. The Nonprofiteer thinks the city should follow Willie Sutton’s advice and go where the money is, and stop trying to squeeze blood from these teeny-weeny turnips.
On the other hand, maybe these battles aren’t really about revenue at all.