Standards apply to nonprofit boards, too
News of an alleged major theft from a local charitable organization brings to mind the conundrum facing every charity: Getting well-qualified, volunteer board members willing to put in the work and accept the risks. These community-conscious volunteers have the same legal duties as highly paid corporation boards.
This is not something to sign up for, regardless of how well-intended, without a serious commitment, and a degree of humility. Few charitable boards get professional training, yet they can be held to professional standards.
The Idaho Attorney General’s manual “Service on an Idaho Charitable Board of Directors” outlines the roles, rights, and responsibilities under the Idaho Charitable Corporation Act.
Role: Fundamentally the role is akin to a fiduciary — someone who holds a position of trust and from whom scrupulous good faith and candor is expected. Each board member is ultimately responsible for the charitable organization’s mission and trust assets. This role begins with active participation, keeping focused on the mission, and being familiar with the articles of incorporation (outlining its general purpose) and bylaws (governing rules).
Rights: To make informed decisions, each board member may “reasonably” rely on information received from staff, lawyers, accountants, outside advisers, and board committees. That includes the right to access to all of these people, as well as the nonprofit’s books and records.
Responsibilities: Charitable boards have three important duties entrusted to them: care, loyalty, and obedience.
Duty of care
This is the level of competence expected. It doesn’t mean board members can’t make mistakes. It does mean each must act with common sense and informed judgment, such as:
1. Active participation by regularly attending meetings, reviewing reports, reading minutes, etc.
2. Making “reasonable inquiries” to get information necessary for informed decisions. When a problem may exist, the board has a duty to inquire into facts and circumstances.
3. A duty to investigate and respond to warnings or reports of officer or employee theft, mismanagement, or malfeasance. The bottom line is that a board member acting with due care is informed about the organization’s activities.
Duty of loyalty
Board members must have undivided allegiance and not use for personal gain any information obtained from his or her position on the board; discuss confidential board business with outsiders; or base decisions on anything other than the organization’s stated public purposes. This doesn’t mean there can never be any business connection, but conflicts of interest can arise. The board should establish a written policy for addressing such conflicts, including disclosure of financial interests, withdrawal from discussions when a potential conflict is identified, and abstention from voting. The IRS offers a sample conflicts of interest policy in appendix A of the instructions for IRS Form 1023.
Duty of obedience
1. Laws. This is an obligation to stay focused on the mission, in compliance with articles of incorporation, bylaws, and tax-exempt status; and lawfully using its funds. The law includes requirements of proper notice to members for meetings, holding regular meetings, appointing board members, and carrying out the mission. Minutes of board meetings and records of all actions taken should be kept and maintained. Boards may adopt a variety of policies useful for governing, such as those addressing conflicts of interest; financial documentation; expenditures; fundraising; and staff hiring, retention, and compensation.
2. Financial controls. Boards must ensure financial records are kept current and accurate, including reviewing and approving annual budgets. The treasurer should provide (e.g., through an accountant) current and thorough income and expense statements, balance sheets, and budget status reports, preferably in advance of meetings. This includes watching for and keeping track of potential problems.
3. Donations. All donations must be used to further the organization’s stated mission, although donors may designate their donations to a particular purpose within it. If so, the charity must comply.
Some charities contract with professional fund raisers. It’s important to hire a reputable, trustworthy fund raiser (including references and investigation) pursuant to a clear, written contract that clearly sets forth the duties and compensation. Most donors reasonably expect that most of their contributions will go to the charity and not to a fund raiser. It is generally considered unethical for a fund raiser to be paid a percentage of funds raised.
Liability
Even volunteer board members can become defendants in a lawsuit. However, to encourage charitable board service, lawmakers enacted a “qualified immunity” law, so such boards can’t be sued for ordinary negligence. They can, however, be sued for “grossly” negligent, willful, or fraudulent acts. Some charities buy directors and officers liability insurance. Including indemnification provisions in the organization’s governing documents can also help minimize board member’s liability.
More AG-recommended resources include the “Handbook for Idaho Charitable Corporations” available from the Idaho State Bar at 208-334-4500, the Idaho Charitable Center at Idahocharitables.org, and Irs.gov/charities.
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Sholeh Patrick, J.D. is a columnist for the Hagadone News Network who has served on several charitable boards. Contact her at Sholeh@cdapress.com.