In Eastern Massachusetts, Maine, Rhode Island and Vermont
For the most part, charities depend on volunteers to govern them. These volunteers donate their time and talents for a variety of reasons. Some are interested in the charity's programs; others believe that such a position can bring them respect and prestige. But probably the most common motivations are a sense of civic duty and the satisfaction that comes from "doing a good deed."
Whatever the motivation, joining a charity's board of directors should not be done without investigating what such a commitment will entail. Prospective board members should thoroughly understand the role, function, and responsibilities of a nonprofit governing body.
The board as a fund-loving party
Personal wealth and prestigious names traditionally have been among the most
important criteria nonprofit organizations have used in selecting volunteer
board members. Board members with well-known names lend credibility to the cause
and help convince donors that the specific organization they are supporting is
not self-serving or "fly-by-night."
In addition, it has long been an expected part of a board member's role that he or she make a significant donation to the organization. The theory behind this principle is that a generous contribution by a board member indicates a true interest and belief in the organization's purpose.
Board members may also be asked to raise funds for the organization from their business and personal contacts. In fact, many philanthropic organizations seek board members not because of their own ability to give, but because of their ability to induce others to do so.
A word of advice: Check it out!
Before agreeing to serve on a charity's board, take a good, hard look at the
organization to ensure that it is worthy of your efforts.
The first step is this process is to ask the organization for information about its overall purpose, current programs, finances (including both audit and budget), governing structure, and fund raising efforts. Ask for articles of incorporation, by-laws, and information about any past or present legal problems the organization has encountered.
Key questions to consider include the following:
Program description and overal purpose:
Financial information:
Governing board information and bylaws:
Solicitations:
Legal procedings:
Who has the answers?
If you have questions that are not answered by the written materials, ask the executive staff of the organization or members of the existing board.
Current board members can shed light on the real responsibilities of board membership. These people can tell you about their level of involvement, how many hours of their time such service takes, how tasks are assigned, and who wields the power.
Keep in mind, however, that current board members may be influenced by the desire to "land" a new member and may gloss over problems. If you sense this might be the case, the advice of those who have served on the organization's board in the past can be extremely helpful to you. Former board members can be more frank about problems such as lack of governing structure or an uncooperative chief executive officer. On the other hand, favorable remarks that your membership on that board can be a positive experience.
Board members and executives of other organizations in the same field can provide information as how the organization and the board with which you are getting involved are perceived by their peers. Be alert to comments about weaknesses and ask the organization itself about any problems. Do keep in mind that these organizations are competing for the same donor's dollar, and take this potential bias into consideration when weighing their comments.
Another good source of information is the charities registration agency in the state where the organization is located or the states in which it solicits contributions. Normally, the registration agency is part of the attorney general's office. State files, which are open for public inspection, generally contain information about the organization's history, current finances, and legal actions. If there has been legal action, explore it as fully as possible. Learn what steps were taken to remedy the situation and discover the final outcome.
Another suggestion is to check with independent monitoring organizations to find out whether the charity whose board you are interested in joining meets voluntary standards set up to encourage ethical practices among charities. Does the charity provide full information to these organizations on request? If not, why? If it does not meet one or several standards, ask the organization's existing board members additional questions. Noncompliance with basic, voluntary standards that are recognized and respected by the philanthropic sector can sometimes be a sign that something is a miss in the management of the charity.
Is time on your side?
"Can I afford to give the time it takes to be an effective board member?" is a
key question for you to consider. In addition to attending board meetings, you
should expect to spend time preparing for those meetings, serving on
subcommittees, appearing at fund raising events, and contacting potential
donors. A 1979 Touche Ross survey of 308 business executives on nonprofit boards
revealed 93% considered "a willingness to give time" the second most important
qualification for board membership, following "a great interest in the
organization's purpose."
Evaluate your other commitments and figure out how you will find time for serving on a board of directors. It is not fair to the organization for you to agree to serve when you know you do not have enough time to do a good job. You should also be wary of lending your name and reputation to an organization you don't have time to monitor.
What doesn the board do?
Inherent in virtually any nonprofit board membership today are two main
functions. The first involves reviewing and approving the charity's programs and
budget. The second pertains to evaluation and assessment of the organization's
progress in meeting its goals. Underlying these functions is the board's
fiduciary or stewardship responsibility for the organization's finances and its
responsibility for setting policies for the overall operation of the charity.
Programs
In a nonprofit organization, the board must first develop a statement of purpose, then establish long-and short-term goals related to the purpose. Established organizations should review their statements of purpose periodically and change them when necessary.
For instance, the board of an animal welfare organization might decide its general purpose is "to save animals from extinction." Once the purpose or overall goal is agreed upon, the board must decide how to go about accomplishing it. Should the organization conduct research into the reasons animals are becoming extinct and pass the results along to conservationists? Should it make the public aware of the problem and ask them to lobby Congress for changes in the laws? Should it physically intervene and prevent hunters from killing certain animals?
Armed with its statement of purpose and a list of reasonable, measurable goals, the board must then select staff officers to oversee these programs. Working closely with the staff, the board periodically reviews program goals and sets new goals as the old ones are attained. The board plays the leading role in these processes, as it bears the primary responsibility for the organization's operations.
A board that does not develop, communicate and provide the tools to work toward its established program goals is ineffective in its most basic purpose.
Budget
The budget is the financial plan of the organization. The budget translates the
program and management goals of the organization into dollars-and-cents
projections. It is the most tangible manifestation of the board's program plans.
It must be developed in a clear manner to provide understandable directions for
appropriation of funds at all levels. The board should approve the
organization's financial plans, but should delegate to the staff the authority
to administer the finances on a day-to-day basis. By doing so, implementation of
the budget becomes much smoother and the chance of making arbitrary decisions
diminishes.
In developing the budget, the board should first consider the programs it wants to support and then decide on fund raising strategies that will generate the necessary income. The previous year's financial statements are a good starting point for most organizations starting new programs will have to rely on estimates.
In addition to providing an overview of the organization's plans, the budget should be specific enough to be used as an accurate measure of the organization's progress throughout the year. The board and staff of the organization must both be committed to the budget to make it work.
Financial Management and Evaluation
The board should periodically review the organization's plans and budgets to
determine how well the organization is performing. The best way to do this is to
require periodic financial and program reports from the staff. Such reports can
show comparisons between budgeted and actual income and expenses, progress on
the establishment of new programs, numbers of people served by existing
programs, progress on the goals outlined in the beginning of the year, and/or
staff performance. These reports should be prepared at regular intervals,
preferably monthly or quarterly, so the board has time to change direction to
correct any problems that might arise.
Major decisions, including those involving the fund raising activities, should not be made without board approval. The board should be aware of the results of all fund raising methods, not only in terms of financial return, but also how the fund raising campaigns are being conducted and how the public perceives the appeals. If the board is actively involved in overseeing fund raising efforts, it can spot ineffective approaches and introduce the proper changes. Although normally the staff is responsible for the research and development of the fund raising proposals themselves, it is the board that has final responsibility for the text of the appeals.
Every aspect of the organization's operations should be evaluated. In fact, the board should even scrutinize its own performance from time to time. This scrutiny should include a look at the way new members are selected, the way responsibilities are divided among various board members (i.e., Is one person doing all the work? Would a committee system help?), the way decisions are made, and conformity with the bylaws.
Everything accounted for
Any board of directors must have members who are adept in both business and
financial matters. Without this knowledge a board is lacking in a crucial area
of the management function and simply cannot fulfill the responsibilities it has
to the organization's donors, nor can it be effective in planning or reviewing
operations.
Just as the board member of a for-profit corporation has a responsibility to its stockholders, the member of a nonprofit board has a responsibility to the contributors. The board is the donor's agent; it works for the donor to ensure that the donor's contributions are used wisely. Unlike stockholders, donors generally do not have a say in the way a charity is operated, so they must trust the board to exercise its judgment in a matter consistent with their expectations. Thus, it is crucial for all board members to have some understanding of the financial position and activities of their organization.
The board should pay particular attention to the preparation of the annual financial statements. If the statements are to be audited, the board must select a qualified firm or individual to conduct the audit and be sure that the information required by the auditors is there. An audit is the only regular outside evaluation of the organization. As such, it provides vital information to potential donors, lends credibility to the organization, and helps the board gauge progress in relation to last year's financial statements and the current year's budget. Ideally, the board should review and approve the final draft of the audit, meet with the auditors to discuss any problems, and take steps to correct any deficiencies the auditors discover.
Committees
Although final responsibility for these and other functions of a nonprofit
organization rest with the board as a whole, every member does not necessarily
have to participate in each decision. Many boards create systems in which small
committees are assigned responsibility for specific areas. This system can be
very beneficial to boards, especially large ones, as it eliminates the need to
route every decision through the entire board. When approval by the whole board
is required for all decisions it can slow progress.
For example, a finance committee whose members possess a strong financial understanding can be a plus for virtually any organization. The finance committee might be assigned primary responsibility for the preparation of the budget and the audit. Since a committee has fewer members than the full board it can meet more frequently, concern itself with more details and make decisions more efficiently than the full board.
Board and Staff
A board that insists on having a hand in virtually every decision will impede
progress rather than enhance it. The board must believe in the staff and trust
that it will make decisions on a day-to-day basis consistent with the overall
purpose of the organization. It is crucial that board and staff maintain a good
working relationship to produce the results that donors desire.
Personal liability
The member of the nonprofit organization's board must remember that he has legal
responsibilities to his organization's contributors. A board member can in fact
be held personally liable if his conduct is inconsistent with what common law
states "a reasonably prudent person" might do in a like situation.
Some board members simply do not do their jobs. Board members who do not attend meetings or who do not bother to conduct adequate research before making decisions are guilty of what can be called "nonmanagement." These individuals should be aware that as board members they are legally responsible for the organization's actions, regardless of the level of their actual participation. Whatever the reasons for nonmanagement, be they laziness, ignorance, lack of commitment or lack of time, the consequences can be serious for both the individual and the organization.
Board members who allow personal interests to interfere with their duties are guilty of "mismanagement." Mismanagement can mean "a reckless abandon of care and diligence in performing one's duties," or a "conflict of interest."
Conflicts of Interest
Many nonprofit boards are made up of corporate and business executives who
control businesses for which the nonprofit organization might have use. It is
not uncommon for organizations to face a decision about whether or not to employ
a board member's services.
The most important reason for avoiding a conflict of interest situation is that it is inconsistent with the purposes of charity. As the American Heritage Dictionary defines it, a charity is "an institution, organization, or fund established to help the needy." Charities do not exist to make the people who run them more financially stable.
Board members are expected to make the best use of the funds donated to their organization, as those who contribute expect as much as possible to be channeled to the cause for which they gave. Efficient use of funds should be a high priority, and donor expectations should be carefully considered. A board member's services might be a bargain, but the price an organization might have to pay in terms of below par services or reputation could be greater than the money saved in the first place.
Even if all intentions are good, when word gets out that an organization has transacted business with a board member's firm many are quick to jump to the conclusion that something is a miss. Transactions in which board members are involved can create an impression of sinister motives and cover-ups in the mind of the public. A good question to ask when considering the use of board member firms is "Would we want the donors to know about this transaction and would we feel comfortable explaining the situation to donors?"
Ultimately, conflicts of interest can threaten the organization's tax-exempt status. The Internal Revenue Code requires that charitable organizations be operated for "public benefit," and that there be no inurement to the benefit of any individual. The Internal Revenue Service (IRS) can revoke the organization's tax-exempt status if the group is found to have been operating for the personal benefit of any individual. This does not pertain only to those instances in which the transaction is detrimental to the organization. As stated in the IRS' Exempt Organizations Handbook:
...exemption may be lost even though the transaction ultimately proves profitable for the exempt organization....Thus, the test is not ultimate profit or loss but whether, at every stage of the transaction, those controlling the exempt organization guarded its interests and dealt with related parties at arm's length.
More stringent regulations apply to private foundations since this is where the IRS perceives the bulk of potential problems will occur.
A Landmark Case
In 1974, U.S. District Court Judge Gerhard Gessell issued a ruling in the
landmark case Stern v. Lucy Webb Hayes National Training School for Deaconesses
and Missionaries, better known as "the Sibley Hospital case." Parents of several
children who had been patients at the hospital alleged that costs of care were
unnecessarily high because the board of trustees had mismanaged the hospital's
assets and had realized personal enrichment through depositing the hospital's
cash in financial institutions in which they had significant financial
interests.
Judge Gessell concluded that financial advantage had not been realized by the board members and that the hospital had incurred no damage. This decision, however, did not mean that the trustees had behaved admirably, and the court took the opportunity to make that clear to them:
It must be made absolutely clear that board membership carries no right to preferential treatment in the placement or handling of the Hospital's investments or business accounts.
Judge Gessell did not stop there. He went on to strictly admonish the trustees that a board member has breached his fiduciary duty if:
What made the Sibley Hospital case the landmark it has become is the simple fact that the trial took place at all. By permitting the parents to sue the board members for such offenses, the court set a precedent of trustee liability.
Although the trustees in this case were acquitted of any actual wrongdoing, the case did confirm that trustees have certain responsibilities and can be held liable for failing to exercise control over those areas of responsibility.
Conflict of Interest Policies
The responsibility and integrity of board members should be enough of a
safeguard against conflicts of interest as any organization might need.
Unfortunately, this is not always the case. Therefore, many boards have
concluded that a more systematic approach to defending against conflicts of
interest, one that acknowledges the fiduciary duty of a board member and
implements it into a formal structure, i.e., a "conflict of interest policy," is
necessary.
The Model Policy
A formal conflict of interest policy does much to reassure donors and protect
board members. However, there is no uniform conflict of interest policy that
would entirely satisfy the needs of all charities. The vast range of potential
conflicts and the need for policies that relate to the specific circumstances of
individual organizations are the two main impediments. But, there are certain
provisions that would seem to fit virtually every organization.
The most important provision for any conflict of interest policy is disclosure. The following example illustrates how such a provision could be worded:
Trustees and administration officials shall disclose in writing to the board of trustees any person to whom they are closely related or organization with which they are affiliated who or which presently transacts business with (the organization) or might reasonably be expected to do so in the future. Each disclosure shall be updated and resubmitted on a yearly basis. An affiliation with an organization will be considered to exist when a trustee or administration official or a member of his immediate family or close relative is an officer, director, trustee, partner, employee or agent of the organization, or owns five percent of the voting stock or controlling interest in the organization, or has any other substantial interest or dealings with the organization.
A board's knowledge of every significant transaction relevant or its organization is crucial in the prevention of conflict of interest situations. The board must not at any time be left ignorant of situations that are potentially harmful, and the members who are involved in these situations should not simply take it upon themselves to decide whether or not their affiliations might be detrimental to the organization. This is the job of the board as a whole.
Another key practice in the battle against self dealing is that of abstention from voting. As Judge Gessell noted, once a board member has disclosed a potential conflict it is important that he refrain from voting on the issue. Some boards might even go so far to mandate that the member leave the room while discussion of the matter is taking place. A nonvoting provision further protects both the organization and the board member from allegations of impropriety.
Beyond these two "essentials," boards should be sure there are policies requiring competitive bids when awarding contracts for fund raising, printing, office supplies and construction work; comparative shopping when making investment decisions and hiring legal counsel; and establishing external review panels for advice on grant awards.
Avoiding An Indemnity Crisis
Even though board members generally carry out their duties as diligently as
possible, cases such as Sibley Hospital have opened the door for increased legal
activity. Consequently, a new expense for nonprofits has arisen: litigation.
When a board member who has acted in prudent manner in the name of the
organization is sued, should he be forced to carry the burden of financing his
own defense? Perhaps it makes sense that the organization he is serving should
pay the bills. Therefore, nonprofits and their boards should be aware of
"indemnification."
Indemnification in this case is the obligation of an organization to pay for or reimburse the board member for any costs or expenses of litigation arising out of the board service. This compensation, however, is only permitted when state laws allow it and when the state and / or IRS determine that the indemnified person acted in good faith and with due care in fulfilling his fiduciary duty.
While organizations should be prepared to pick up the tab, they might not be able to withstand the financial strains that can accompany it. Therefore, out of the need of nonprofit organizations to cover themselves in these instances has arisen "indemnity insurance."
In simple terms, indemnity insurance finances the legal expenses incurred when a board member is sued. The insurance company must be convinced that certain standards of diligence have been met before the organization can be compensated. Indemnity insurance, like any other, is available from commercial companies. And, if a nonprofit organization cannot or will not purchase it, it is also available on an individual basis.
Though no one likes to think that he would ever get himself involved in a suit over his conduct as a board member, today it is more than a remote possibility. For this reason purchasing indemnity insurance should be strongly considered. Without it, an individual might be found innocent of any wrongdoing, but the financial implications of a court battle can be devastating.
Why all the fuss?
Don't forget that when you agree to serve on a nonprofit board, you are
accepting stewardship responsibility for the funds donors have contributed to
that organization. Donors are placing their trust in you, beneficiaries of the
organization's services are depending on you, and the courts are watching you.
If you are a person who values the reputation you have built for yourself
through years of hard work and ethical business practices, you should scrutinize
any organization before you lend it your name and your time. Even the vaguest of
affiliations with an organization whose practices are questionable can tarnish
your reputation and that of your company. Although the rewards of voluntary
service are great, it is important to the future of philanthropy that board
members take their responsibilities seriously.
G110.10/95
Copyright 1994 Council of Better
Business Bureaus, Inc.