Posts Tagged ‘governance’

Lawyers As Nonprofit Directors – Maximizing Opportunities, Mitigating Risks

March 17, 2013
By Guest Poster Lesley Rosenthal
Note:  This article is a recap of Lesley Rosenthal’s presentation at Proskauer’s 17th Annual Trick or Treat Tax Exempt Seminar, November 29, 2012Attorneys can reap enormous rewards by serving on nonprofit boards.  Lawyers derive tremendous personal satisfaction in governing an organization that is meaningful to them.  They can do the public good by participating in a charity that feeds the poor, heals the sick, enlightens through culture and education, or preserves the environment.

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)

Dear Nonprofiteer, Is the banquet deductible?

March 5, 2013

Dear Nonprofiteer,

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

Dear Following:

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.

Dear Nonprofiteer, When is a Board member not a Board member?

February 28, 2013

Dear Nonprofiteer:

I came across your website as I was searching for information on Board members’ volunteering in programs. I’m wondering if you might have some advice on a situation I’m trying to handle.

I work in a service agency, which relies heavily on volunteers. Recently, one of our volunteers became a Board member. She has continued volunteering in the program and a couple of issues have come up that the program director would normally address quickly and easily with a volunteer. However, because this volunteer is now also a Board member, there is a hesitation because she is somewhat of a boss.

The issue has been brought to the attention of the Board president.  He and the program director have different ideas on how to handle the situation.  The president wants to handle the situation one on one because he doesn’t want to discourage other members from volunteering more.  The program director wants a limit on how much time a Board member can spend volunteering in a program.

I’m the Executive Director and can see both sides.  I’d like for the president to deal with it one on one, but to then adopt a policy/guidelines for Board members as volunteers to avoid conflicts of interest.  I can see where this particular person likes to make decisions and that easily oversteps the program director’s role.

I’ve been searching on line for a policy around this, but have found nothing.I would greatly appreciate any insight or resources that you might have to help with such an issue.

Sincerely,

Clowns to the Left of Me, Jokers to the Right

Dear Clowns:

This is only a problem because of what seems to be a fundamental misconception about the role of Board members, as opposed to the Board as a whole.  No individual Board member is “somewhat of a boss;” in fact, from the standpoint of the program director, the only boss she has is you, the Executive Director.  You, on the other hand, answer to the Board as a whole, and the Board as a whole has the right to hire, evaluate, discipline and if necessary fire you if it’s not satisfied with the job you’re doing.

But there’s a reason the Nonprofiteer keeps repeating “as a whole . . . as a whole.”  Individual Board members have no supervisory responsibility for personnel, even when they’re members of the Personnel Committee.  Personnel decisions belong to the Executive Director, except for decisions about the Executive Director’s tenure which belong to the Board—all together now—as a whole.

So the Nonprofiteer doesn’t see any reason why there should be a policy prohibiting Board members from volunteering in the program, or limiting the amount of time they can spend doing so.  What there should be is

  • a statement by the Board president to the volunteer in question that there seems to have been some confusion, what with her going from volunteer to Board and back again, and that it needs to be clear that when she’s a volunteer she’s not a Board member.  He doesn’t need to go into the subtleties of her general lack of power as an individual Board member.  He just needs to tell her that in the land of program, the program director is king, and thus that she should expect the program director to treat her exactly as she was treated before she joined the Board—that is, to supervise her.
  • another statement by the Board president to the program director reiterating what he said to the volunteer and reassuring  her that she’s not dealing with “somewhat of a boss” and should therefore not hesitate to resolve the problem with this volunteer as with any other.  And
  • a third statement by the Board president to the entire Board at the next Board meeting, leaning again on the “confusion” meme: “We’ve had some questions about the circumstances under which Board members are welcome as program volunteers.  So I thought I’d make clear that each of us is welcome under all circumstances—but when we’re program volunteers, we shed our Board identities like fur in the summertime.  None of us is enforcing policy, or overseeing staff, or evaluating operations—we’re just volunteering.  Which ought to be a great relief for each of us!”  Thus he’ll encourage Board members to volunteer without having them confuse their collective governance role with their individual participation role.

The reason you can’t find any relevant policies is that this isn’t an occasion for policies—it’s an occasion for common sense applied to clearly-understood roles.  Or, in other words, there’s no need for a conflict-of-interest policy because individual Board members have no recognizable interests; their task is to participate in group decision-making about what’s good for the agency.

If you also have a Board Personnel Committee that tries meddling with individual personnel decisions (as opposed, say, to writing policies and procedures applicable to all personnel), then you have a bigger version of the same problem and need to have a bigger discussion about the difference between the Board—what?—as a whole and individual Board members.

But there’s no reason either the problem or the discussion should lead you to limit Board members’ participation as program volunteers.   As a Board member told the Nonprofiteer just last night, the main satisfaction Board members get from their often thankless jobs is contact with the people you serve.  Unless your goal is to produce unhappy Board members and a short-handed program director, you don’t want to restrict or prohibit that contact.

Or, more pithily: damn the Board member!  Full speed ahead!

Dear Nonprofiteer, If I smell a rat, should I just hold my nose?

February 4, 2013

Dear Nonprofiteer,

I’m dealing with a tough situation and I could really use some help. I live in a  quiet rural community outside of a large town.  A neighbor moved away many years ago and turned his home into a “non profit” event center, mostly doing a huge wedding business (illegally by the way, as they’ve been asked to cease and desist by the county).

They now seek to legalize and expand their already enormous operation.  The neighboring residents object to this expansion due to noise, traffic and pollution. (They are looking to go to 7 days a week and build additional events structures.)

There is a hearing coming up and in an effort to find more info to bolster our argument, I’ve been looking into their “non profit”.

I discovered that one of the “non profits” they filter money through is a “therapeutic riding center” for disabled children located in another community.  The manager of this non profit is the daughter of the people in question, and they are also the only 2 officers of the non profit.

There is no website, no phone number and the address is an office building.  If you Google any other “therapeutic riding centers” they all have websites and info and photos of beaming disabled kids.

I smell a rat. How do I go about having them looked into by the powers that be?

Signed,

If I Don’t Watch Out For The Neighborhood, Who Will?

Dear Neighborhood Watch,

What you’ve described is such a tangle that it reminds the Nonprofiteer of those What’s Wrong With This Picture? puzzles in which the task is to identify the 47 not-very-hidden mistakes in the drawing.  Or, in other words, a law school exam.  So she’ll take an issue-spotting approach.

Issue #1 is a building-and-zoning problem, namely, that your neighbor is operating an illegal business.  If a cease-and-desist order has been issued and ignored, you should notify the sheriff and/or the county board and ask what is being done to enforce the order.  If you receive no response, send a copy of the letter to the local newspaper.  Voila: instant enforcement.

Issue #2 is another building-and-zoning problem, namely, that your neighbor wishes to expand his/her illegal business.  Obviously he can’t do that unless and until he comes into compliance on his current activities.  Probably in your efforts to compel him to do so, you should also copy the county executive and/or the zoning administrator and/or the Zoning Commission, and point out that his previous failure to comply with the law suggests that he’s not the sort of person to whom one would wish to grant additional license.

So far nothing we’ve discussed has anything to do with nonprofits. You’ve taxed only the Nonprofiteer’s long-rusty powers as a zoning lawyer. No business, whether nonprofit or for-profit, can operate in violation of the building and zoning laws.

But then we come to the nonprofit part, where once again there are two issues.

Nonprofit Issue #1: Can one operate a legitimate nonprofit without a Website?  Merely to ask the question is to answer it: of course.  Perhaps the group is spending all of its money on helping disabled children and none on an office or a Website.  But if parents of disabled children are unable to access the group’s services—because there’s no phone number and letters to the address go unanswered—then there are grounds for concern.  Contact the state agency responsible for the oversight of nonprofits (in some states this is the Attorney General’s Office, in others the Secretary of State’s Office, in still others a separate Charitable Bureau) and explain that you’re unable to access the services of this nonprofit and therefore you wonder if it is in fact pursuing its mission.  Copy the newspaper and again you should see fairly prompt action in the form of at least a preliminary investigation.

Nonprofit Issue #2: Can one operate a legitimate nonprofit in which the sole employee is the child of the sole members of the Board of Directors?  While this is unattractive (to say the least), it’s actually fairly common among small and newly-formed nonprofits.  All the work is done by the founders and their relatives, because they’re the only ones aware of the agency and passionately committed to its mission.  Provided that the group’s bylaws contain the conflict-of-interest policy required by the Internal Revenue Service, employing relatives is not automatically grounds for presuming that the agency is a sham.  On the other hand, the fact raises enough questions that you might include it in any letter you send to the charitable oversight authorities pursuant to Nonprofit Issue #1.

Frankly, though, the real concern here is that your neighbor is disturbing you by operating an unlicensed roadhouse.  Let sleeping nonprofits lie, and focus on shutting down the event space so you can get some sleep yourself.

Dear Nonprofiteer, . . . And we all lived happily ever after, thanks to you!

December 25, 2012

Dear Nonprofiteer,

It was at this time one year ago that I wrote to you about my horrible “School Director” job. Your reply helped me see that it was not only horrible, but hopeless.

For six months, I’d been optimistic in thinking the situation couldn’t possibly be as absurd as it seemed. Surely there was some logical (and legal) explanation for all the things that made my jaw drop, one after another — I just needed to understand how it made sense. (It didn’t.)

I repeatedly asked for clear communications with the board, and for clarity about my relationship with them individually and collectively. That too was sure to happen any day, I thought, and everything would be cleared up and straightened out. (They didn’t tell me when the meetings were scheduled, let alone allow me to speak with them.)

You may recall that the Board Chair was also Artistic Director of the organization and director of the “professional” performing group; also, the highest-paid employee, hour for hour. Yet as a resident of another state, this Uber-Boss was a very rare presence in the building, with no direct knowledge of school operations or clientele.

Worse, all of the other board members were involved in the organization—performer, teacher, parent, etc., so they were ever-present in non-board-member roles. I wondered things like: If a board member is acting in her role as a teacher, must I take orders from her? If a board member is acting in her role as a parent volunteer, must I acquiesce to policies that favor her child? And is the Uber-Boss EVER not the boss of everybody? (Answer: No.)  Like a team of Gladys Kravitzes, they scrutinized me minute-by-minute and gossiped in personal phone calls. (You know the game of “telephone,” where the original statement gets garbled? Like that, except it started out garbled.)

I was a subordinate not worth listening to until the day I resigned. Then they wondered why! (I didn’t bother to explain.)

It stung for a long time, and it still pains me to think about it. I put my heart and soul into my work there, and accomplished a lot for them in a short time. Goodness only knows what was told to faculty and parents, as only one parent has made any contact with me since I left. The organization is in my community, and I dread running into board members in the grocery store. It’s like some special nonprofit arts brand of PTSD.

I only wish I’d had your advice sooner, because you were so right. My “normal” is back to normal, free from being bossed, berated and belittled. I work with wonderfully creative people, with mutual respect and appreciation, and make more money with far fewer hours and none of the stress. And when “Board of Directors Horror Stories” come up among colleagues, I can top them all. Easily.

Thank you for helping me restore my sanity! It’s been a good year, and no doubt 2013 will be even better. Signed,

Happily No Longer Hanging

Dear Happily:

That’s terrific–”some special nonprofit arts brand of PTSD.” Over Christmas dinner the Nonprofiteer was telling her own tragic story of working in the nonprofit arts world, and though it’s been nearly 30 years, she can taste the bile in her throat every time the subject comes up. So don’t be surprised if you’re not fully recovered a mere six months later.

The other really powerful observation you’ve made is that you weren’t worth listening to until you resigned. It’s not clear why nonprofit Boards are so frequently deaf until it’s too late, but it’s certainly the case; and then they wonder why they have trouble keeping personnel!

Finally, you’ve offered a word to the wise: nonprofit arts Boards dominated by people whose primary connection to the organization is through their non-Board roles are nonprofit arts Boards looking for trouble. If roles and responsibilities aren’t clear, nothing gets done and everyone blames everyone else. People should have to choose how they want to be involved in the organization; and, if the artists’ fear is that the Board will take the group away from them, the artists should arrange to be represented on the Board—but as a group, not as individuals. Representing your fellow artists is one thing; feathering your own nest is something else, and the latter is conduct unbecoming a Board member.

Thanks for letting us know you made a change for the better—you never know who may be out there in nonprofit arts hell, reading and being inspired.

From Law Students to Nonprofit Trustees

November 26, 2012
And now a word from the Nonprofiteer’s favorite guest poster, Lesley Rosenthal of Lincoln Center in New York:

Making the rounds at law schools for Good Counsel: Meeting the Legal Needs of Nonprofits, I’m heartened to meet so many students interested in serving on charities boards in their communities.  My recent talk at Harvard Law School about how law students and young lawyers can start preparing for the trustee role is available here.

Dear Nonprofiteer, How do we reach consensus on our Executive Director’s performance while preserving every Board member’s perspective?

November 20, 2012

Dear Nonprofiteer:

What is the best way for a Board to review its Executive Director?  Our current review process involves each Board member’s completing a review of the ED and then our Board president’s “averaging” the reviews (without further debate or discussion from the Board) into the final document.  While this is an effort at broad input, in reality it results in producing only the most general review, with minority viewpoints often dropped.

As  Board treasurer I work with the staff and Executive Director often in different ways than other Board members and this give me the opportunity to see areas of weakness and strength others may not see.    Likewise I’m sure other Board members, due to their unique positions of involvement, are seeing still different weaknesses and strengths but because their observations may not be those of the majority,  they never make it into the final report.

Signed,  Minority Report

Dear Minority:

You’ve put your finger on an important but oft-neglected aspect of nonprofit management: the need (as in the wider political arena) to protect the rights of the minority while preserving democratic governance by a majority.  Nonprofit Board members are often so averse to conflict that they unintentionally shut down opposition—even their own—to preserve the illusion of unity, or at least consensus.

But it’s not consensus if it doesn’t include acknowledgement of minority opinions, particularly when those opinions are informed by special expertise.   Board members are charged with governing agencies, which largely means overseeing the work of the Executive Director.  Many Board members ask how that’s possible when everything they know about the agency comes from that selfsame Executive Director; and the only good answer is to secure information from within the Board itself.

As Treasurer, you know whether the ED is a spendthrift or a penny-pincher; whether s/he manages cash flow well or whether every month is a festival of white knuckles; whether s/he is carrying the appropriate share (or much more, or much less) of the fundraising burden.  If you don’t share these data with the rest of the Board, all the other members are operating in needless dark.

The Nonprofiteer suggests that you propose to the Board president a relatively minor modification of the current approach:  that after s/he’s crafted what’s designed to be a consensus report on the Board’s behalf, s/he bring it back to the Board for final approval.  At that time, every Board member should get to see the comments of every other Board member, which enhances the likelihood that someone will say, “Wait a minute–we can’t gloss over these comments about how the Executive Director abuses the staff in public.”

The Board president probably wants to make sure that the ED isn’t getting feedback from all directions, because that sort of cacophony is to no one’s benefit.  That’s a fine goal, but it should be balanced with the goal of making the ED’s review as comprehensive and nuanced as possible.  Your agency’s decision to gather all the Board feedback gets you half the distance to the goal line; sharing and incorporating that input as a group will earn you a touchdown.

Dear Nonprofiteer, If I’m not supposed to know about it, how can I complain about it?

October 29, 2012
Dear Nonprofiteer:My wife is the development director for a nonprofit animal welfare organization. I am a dues-paying member of the group, which entitles me to a vote, and to have input at group meetings.

Is it improper for me to express my concern to the board members about policies and practices I have a problem with? My wife has asked me not to, and I understand why.

Last year, I was chairman of the group’s nominations committee. We were charged with recruiting and vetting potential candidates for our board of directors. The application process involved assessing the candidate’s background, skills, network and, not to put too fine a point on it, access to people with deep pockets. This year, the chair of the board made a decision on her own to revise the board member application so that it more closely resembled the application our prospective volunteers fill out. I also have a problem with the fact that all the nomination committee members this year are also board members. I’m not saying that our present board is completely dysfunctional, but even so, I would think that if even if a partially dysfunctional board is picking out its own replacements, that’s like perpetuating the problem.

There are other problems I have with the group, but those two are ones I feel strongly about. The problem is that I wouldn’t know this information except through my wife, because board meetings are not open to the general membership. Even employees aren’t allowed to attend unless they are invited or ask for (and are granted) a spot on the agenda. That’s another thing I have a problem with.

What is my recourse?

Signed, On the Outside Looking In
Dear Outside:
The real question is, what recourse do members have when the Board of Directors is leading the organization in a manner unsatisfactory to its members?  And that in turn is dependent on the group’s bylaws.  From what you’ve reported, the Nonprofiteer gathers that the organization is Board-governed rather than member-governed, meaning that members have very little power.  You say you have “a vote . . . and input at group meetings;” but it seems that votes at group meetings aren’t binding on the Board of Directors, which holds the real power.
But even if the group can overrule the Board of Directors, you’re only one member of the group.  Your “recourse,” such as it is, is to persuade your fellow members that something is rotten on the Board, and secure a group resolution (binding or not) proposing that the Board Nominating Committee include members who are not on the Board and/or that the Board members’ job description be revised to emphasize the need to give and raise funds.
But you say you wouldn’t know about the membership of the Board Nominating Committee, or the revision of the Board members’ job description, except through your wife.  That strikes the Nonprofiteer as bizarre: neither of these things can be considered confidential.  So you’re well within your rights, as a member of the group, to say to other group members, “We don’t even know who’s on the Nominating Committee, or what they’re looking for—how come?” and to petition the Board to release this information.  That way you’re asking a question that any group member would ask—”Who’s being recruited to the Board, to do what, and by whom?”—and not breaching the confidentiality of Board-meeting conversation.
On your general point: most nonprofit Boards are self-renewing, recruiting new members through a committee of old members.  It’s a best practice to have the Nominating Committee chaired by someone who’s leaving the Board rather than someone who’s staying on it, and it’s probably also a good idea to have the Nominating Committee include representation of the organization’s various constituencies (including, in your case, the group); but there’s nothing suspicious or untoward about an all-Board Board Nominating Committee.
In sum: don’t express your opinions to Board members, particularly concerning things you’re not supposed to know.  DO express your opinions to fellow group members, and if you’d like to know who’s on the Board Nominating Committee and what they’re looking for, secure a group resolution to that effect and have it presented to the Board as an inquiry by the collective.
In other words: don’t embarrass your wife.  Her income is at stake.

Dear Nonprofiteer, Can a donor dictate the use of her gift? How about if she’s the Executive Director? How about if she’s also on the Board?

October 11, 2012

Dear Nonprofiteer:

I was wondering if it is ethical for an Executive Director to donate to the organization she runs, designating her donation to bonuses or pay raises for the employees that work for her.  She is not paid, thus can remain on our Board.  Seems like a conflict to me.

Signed, Wondering

Dear Wondering:

The Nonprofiteer sees a conflict of interest in the situation you describe, all right, but it doesn’t have to do with the donation.  Any donor can specify the use to be made of his/her gift, and if those terms strike the recipient organization as too onerous it can simply refuse the gift.  A donation from a foundation restricted to paying the salary of a particular staff member—or to giving salary increases to staff members across the board—would be unexceptionable, and in fact would represent a refreshing understanding by the foundation community that people who work for nonprofits need to clothe their kids and pay mortgages, too.

But.

When the donor is the Executive Director, a gift of this kind might be seen as a way of buying (as opposed to earning) loyalty from the staff.  On the other hand, who’s in a better position than the ED to know that her staff members are overworked and underpaid?

But.

It’s the job of the Board to create and implement the agency’s budget, a budget which presumably includes a line item for staff salaries.  It isn’t really kosher for the Executive Director to unilaterally override this governance decision by whipping out her checkbook.

But.

If there’s a consensus on the Board that the staff is underpaid, and/or that it’s time for a raise if only there were money,  the Executive Director’s decision to alleviate that situation (and capacity to do so) should be as welcome as a similar decision by any other donor.

But.

The Nonprofiteer doesn’t understand “She is not paid, thus can remain on our Board.”  The Executive Director, regardless of her compensation status, should serve as an ex officio member of the Board—that is, a Board member by virtue of her position and not in her individual capacity.   If the Executive Director was on the Board first, she should have resigned when she took on the duties of Executive Director.  The Board’s power is concentrated largely in its ability to evaluate, hire and fire the Executive Director, and if necessary to go into executive session to do so—that is, to kick the ED out of the room.  But if the ED remains a Board member, she can’t be removed from the room, therefore she can’t be discussed frankly, therefore she probably can’t be removed, therefore the Board has no power at all.

So the conflict is between the ED-qua-ED and the ED-qua-Board member.  These two roles cannot coexist, and the balance of the Board should demand that the ED choose one or the other.  This is why it’s not even a good idea to permit a Board member to serve as ED on an interim basis—because the “interim” tends to become the “interminable” without anybody’s noticing.

So.

Now we’re back to the question of the gift.  If the ED remains on the Board, her contribution should be counted toward her mandatory give-or-get; but first the balance of the Board should vote on whether to accept the gift with the conditions she’s attached to it.  The ED-Board member, naturally, would recuse herself from this decision on the grounds that she—what?—has a conflict of interest, in this case between her role on the Board and her role as an individual donor to the agency.

By the same token, if the ED leaves the Board but remains at the agency, the Board once again has the right (and the obligation) to vote on whether to accept the gift she’s offered with the conditions she’s attached to it.  Naturally, this discussion would take place in executive session, with the ED excused from the room.  If Board members think this is a great opportunity to enhance compensation, they should accept; if they think this is a sneaky maneuver to undermine their budget authority, they should reject; but in any case the ED has no right to have her gift accepted unless and until the Board approves it.

To review: the question of the ethics of the donation doesn’t even arise unless the Board neglects its fiduciary obligation to evaluate gifts for unacceptable conditions.  The questionable ethics here are those of all concerned—Board members and ED/Board member alike—in permitting one person to fill two roles.

Once you’ve given someone a disproportionate share of power, you can’t be surprised when she makes a play for a further disproportionate share of power, in this case by brandishing a checkbook.  But the power to prevent the gift lies in the hands of the remainder of the Board, and if they fail to exercise it, they’re the ones whose ethics are questionable.

Nonprofit Corporate Governance: The Board’s Role

April 19, 2012
Editor’s Note: This article originally appeared on the Harvard Law School Forum on Corporate Governance and Financial Regulation; it is reposted to the Nonprofiteer by permission of the author Lesley Rosenthal.   Ms. Rosenthal is the general counsel of Lincoln Center for the Performing Arts and the author of Good Counsel: Meeting the Legal Needs of Nonprofits. Bart Friedman, senior partner at Cahill Gordon & Reindel LLP, contributed to this post.
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Governing boards in the for-profit and nonprofit contexts share many legal precepts: the oversight role, the decision-making power, their place in the organizational structure, and their members’ fiduciary duties. But in the nonprofit setting, misconceptions about corporate governance abound. Are board members primarily fundraisers? Cheerleaders? A rubber stamp to legitimize the actions and decisions of the executives? Do they run the organization to the extent staff is unable? Are they window-dressing to spruce up the organization’s letterhead? If they are rich or famous, must they attend board meetings? How do they know whether they are doing a good job, or when it is time to go? Despite the common ancestry and legal underpinnings, nonprofit corporate governance places heightened demands on trustees: a larger mix of stakeholders, a more complex economic model, and a lack of external accountability. This post explores how substituting a charitable purpose for shareholders’ interests affects the board’s role.

In organizations of all kinds, good governance starts with the board of directors. The board’s role and legal obligation is to oversee the administration (management) of the organization and ensure that the organization fulfills its mission. Good board members monitor, guide, and enable good management; they do not do it themselves. The board generally has decision-making powers regarding matters of policy, direction, strategy, and governance of the organization.

The board of a well-governed nonprofit organization, like the board of a well-governed profit-making company, will do all of the following:

  • Formulate key corporate policies and strategic goals, focusing both on near-term and longer-term challenges and opportunities.
  • Authorize major transactions or other actions.
  • Oversee matters critical to the health of the organization— not decisions or approvals about specific matters, which is management’s role—but instead those involving fundamental matters such as the viability of its business model, the integrity of its internal systems and controls, and the accuracy of its financial statements.
  • Evaluate and help manage risk.
  • Steward the resources of the organization for the longer run, not just by carefully reviewing annual budgets and evaluating operations but also by encouraging foresight through several budget cycles, considering investments in light of future evolution, and planning for future capital needs.
  • Mentor senior management, provide resources, advice and introductions to help facilitate operations.

Similar to for-profit corporations, the power to control and oversee the management of the affairs and concerns of a nonprofit corporation is set forth in its corporate charter. Generally speaking, state law permits both kinds of corporations to self-direct significant allocations of power and responsibility, and then requires them to follow their own corporate governance and operational policies. The familiar fiduciary duties of care, loyalty, and – sometimes – obedience, undergird these requirements in both sectors.

In a well-governed organization of either the for-profit or nonprofit kind, the board does not permit executives to run and dominate board meetings, set agendas, or determine what information will be provided to board members. Under the leadership of an active and functioning board chair, there is adequate opportunity at board meetings for members to receive and discuss reports from not only the chief executive, but also, as appropriate, directly from other executives, in-house and outside professionals, and independent consultants if necessary. Time should be reserved for executive sessions, at which management should be excluded so that its performance may be fully and freely discussed.

Mission is what distinguishes nonprofits from their for-profit cousins: Nonprofits have missions instead of owners or shareholders. While the prime directive for board members of for-profit organizations is to ensure the highest possible value for owners, by contrast, nonprofit board members’ prime directive is mission fulfillment.

Board independence and board attention are of paramount importance in good nonprofit governance.  The independence of the board is key because of the non-distribution constraint – nonprofits exist to serve the public interest, not to benefit owners or other private parties.  Business or family relationships between the organization or its executives and a board member or her firm are frowned upon and should be strictly scrutinized under a conflict of interest policy administered by independent directors.  Even absent outright business or family relationships, a common shortcoming of nonprofit boards is that they are too small, too insular, or too deferential to the founder or chief executive.

Another frequent error of nonprofit boards is inviting new members because of their marquee name within a certain field of endeavor (e.g., a famous dancer on the board of a dance organization) or their means and inclination to donate, without due consideration to the person’s ability and availability to fulfill fiduciary duties, providing the critical oversight function. The governing body of a nonprofit must be made up entirely of people in a position to govern it—setting the strategic direction of the organization and overseeing management’s execution of the mission. Wealthy or prominent persons— donors, artists, scientists, public officials, and others—with an interest in the organization’s program but lacking the time, availability, or expertise to provide meaningful oversight may serve the organization in a non-fiduciary capacity, such as an honorary or advisory board, donors’ circle, or professional council.

Governance is more complex in charitable nonprofits for a number of reasons. Public charities (501(c)(3) organizations) are intended to serve a public purpose, and the board must bear in mind that broad interest.  Depending on its mission, history, and geographic reach, a nonprofit may also have specific stakeholders or different groups of stakeholders, some or all of whom may be represented by categories of board members under the organization’s by-laws. The interests of the organization’s ultimate clients, who may be indigent or otherwise disadvantaged, are another important consideration. The organization’s management and workforce may be paid less than their for-profit peers for similar work – if at all – further complicating the board’s oversight duties. In addition, nonprofit trustees may feel role-strain – or worse – because of real or perceived obligations to interact with, attract – or even be – charitable donors. These additional factors make nonprofit board decision-making arguably a much more complex process than the straightforward mandate of maximizing return.

Moreover, nonprofits’ economic models may be more complex than for-profits’ models, including a dynamic blend of earned revenue (ticket sales for a symphony, fee-for-service billings by a hospital, tuition payments to a university) and contributed income (annual fundraisers, “Friends of” membership groups, end-of-year solicitations, capital campaigns). Wealthier nonprofits with endowments can also count on a stream of revenues from investments. In harsh economic climates, however, there is a high correlation between reduced contributions and weaker investment returns. Compounding the difficulty, hard times on the revenue side often coincide with heightened demand for organizations’ services, particularly social services, increasing expenses and creating cash crunches, trouble balancing budgets, or even persistent deficits. Savvy nonprofits have added “third streams” of revenue to supplement and diversify traditional two sources. Entrepreneurial initiatives may include leveraging real estate or other assets, monetizing treasure troves of intellectual property know-how, or engaging in joint ventures with fellow nonprofits or even commercial entities. In envisioning and evaluating such enterprises, board and management must observe regulatory requirements and consider tax implications.  In lean years and in growth years, the board must be deeply engaged in overseeing the organization’s investments, its other sources of revenue and expense, and the planning of new initiatives.

What happens when board members fail?  In theory, the mechanism in a for-profit corporation for correcting errant board members is straightforward:  if the investors don’t like what the directors are doing, they vote them out of office. But in the absence of investors, nonprofit boards must be self-correcting. No one has ever made a tender offer because a nonprofit was inefficient. Moreover, governmental agencies regulating the sector tend to be small and under-resourced, making it highly unlikely that any but the most obvious misconduct will be detected and corrected from the outside. Unless board members are doing something illegal or are term-limited out of office, they may serve in perpetuity, giving them ultimate power over the organization. In this regard, nonprofit trusteeship is a unique and privileged role.

By a number of measures, nonprofit and for-profit board governance are similar: the board’s oversight role, its decision-making power, its structural place within the organization, and its members’ legal duties. The similarities end, however, where shareholder interest in maximizing returns gives way to mission fulfillment, a multiplicity of stakeholders, more complex business models, and self-accountability rather than external accountability.


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