Here are a few commonly observed mistakes made by nonprofit organizations when it comes to governance and compliance. If you serve on a nonprofit board, ask yourself whether your organization could use some help addressing any of these important issues.
1. Minimal Understanding of Fiduciary Duty Concepts. A person who volunteers to serve as a director or officer of a nonprofit agrees to faithfully observe duties of good faith, care, and loyalty (and the associated risk of potential liability for failing to fulfill those duties). Increased scrutiny from federal and state authorities, donors, and the media require vigilance at all times. It is no longer advisable to “rubber stamp” committee or staff recommendations or simply abstain from controversial decisions. In today’s world of governance, nonprofit board service comes with real responsibilities and real consequences for those that fail to live up to them. Even a brief orientation for new board members (or a periodic refresher for experienced board members) on the basics of fiduciary duties can be informative, enlightening, and very helpful in reducing the risk of trouble down the road.
2. Too Much Deference to the Executive Committee, Board Chair or the Organization’s Founder. It is important to understand and appreciate that no one owns a tax-exempt nonprofit organization. No one committee, officer, director, or individual can unilateral control the organization. The executive committee, if one exists, is typically charged with acting on behalf of the board when the board is not in session and cannot be easily convened. It is, however, accountable to the full board and should not be permitted to operate without oversight as if a full board of directors did not exist. The chair’s primary duty is typically to preside at board meetings and act as a liaison between the board and staff. The chair does not have the power to override decisions of the board. Similarly, the founder may act as the chief executive and run the day to day affairs of the organization. The founder may also sit on the board, but even founders serve at the pleasure of the board. In some settings, strong-willed executives can be tempted to act as if the governance roles are reversed or, even more dangerous, as if the organization belongs to him or her. While it can be uncomfortable to challenge a fellow board member or ask tough questions during a board meeting (most people dread confrontation), this is an important part of a nonprofit director’s role as a fiduciary. Arguably the most valuable board members are the ones who, calmly and respectfully, will speak their mind during a meeting. A high-functioning nonprofit board will embrace and encourage a free exchange of ideas and open discussion among its members during a meeting. Open, vigorous discussions about key issues typically will yield better outcomes for the organization. A nonprofit board that ceremonially passes every resolution unanimously with little to no discussion should evaluate whether it should be doing more to encourage a thoughtful and open dialogue and better engage its members.
3. Lack of Awareness of Laws Governing Nonprofit Organizations. Many nonprofit board members mistakenly assume that nonprofits operate in a less-regulated environment. In reality, quite the opposite is true. Because exempt organizations enjoy a variety of tax and other benefits under the law, federal and state governments have imposed additional legal requirements that exempt organizations must follow. It is important that nonprofit directors be aware of the various federal, state, and local laws that apply to the organization. Many directors are unaware whether they are governing a private foundation, a public charity, a supporting organization, or another form of tax-exempt entity, all of which are subject to different limits on their activities. Board members should understand the penalties they could face for overpaying key employees or other insiders, for engaging in excessive lobbying or political activities, the impact of failing to pass the public support test, etc. As noted above, ongoing board training and orientation for new board members is often an effective strategy to address this concern.
4. Operating with Outdated, Inconsistent Governing Documents. Over time, many nonprofits change their mission and purpose without updating their governing documents. In addition, many organizations develop governance practices that do not comply with their original governing documents. It is not unusual to see bylaws that call for voting members although no member vote has taken place in many years (if ever) or bylaws with a term that calls for the five-person board of directors and the organization has been governed with a three-person board for as long as anyone can remember. Nonprofit leaders should encourage compliance by conducting regular reviews of governing documents and periodically referring to the bylaws before electing additional officers or directors, creating additional committees, adopting amendments, dissolving, etc.
5. Poor Documentation of Organizational Decisions and Actions. Reasonable people will disagree on how much detail is appropriate to include in the minutes of a board meeting. Too much detail can create risk of controversy and liability while too little can result in a loss of institutional knowledge about why certain decisions were made and provide less evidentiary support of a board’s due care in making decisions. The main point about which there should be no dispute is that documentation is important (meeting minutes, board resolutions, etc.). Documenting nothing is not an acceptable alternative, although it is a common problem. Ask yourself whether your nonprofit organization consistently takes minutes at meetings, approves them at a subsequent meeting, organizes them into a corporate minute book or electronic folder for ease of reference? Does your nonprofit even have a minute book? Exempt organizations are required by federal law to keep certain information available for public inspection, so record keeping is very important for nonprofit organizations for many reasons.
Eric Perkins has over twenty years of experience working with Virginia nonprofits concerning these and many other governance, compliance, and transactional issues. Perkins Law is pleased to offer a flat fee service package to nonprofit organizations. Click here for more details and reach out anytime to discuss.