Non-profits

profit suffers a scandal or, worse yet, fails, a volunteer director can potentially face personal liability as well as reputational damage.

Moreover, unless the organization has a positive culture that respects and values the contributions of its volunteer directors, the joys of non-profit board service can quickly give way to frustration.

A director of a non-profit organization has “fiduciary duties” to the organization, including a duty of care and a duty of loyalty. The stewardship role of a director includes thoughtful oversight of its finances and as well as reasonable efforts to assure the organization meets its commitments and fulfills its mission.

When and if the non-profit faces financial challenges, directors can find themselves attempting to manage a very difficult situation. For example, the controller of a private educational institution in the Northeast recently absconded with millions of dollars, leaving payroll and Social Security taxes unpaid. When this type of federal tax is not paid, a director (even an unpaid volunteer) can be personally liable for the unpaid taxes.

Moreover, public awareness and knowledge of the organization’s failure will do nothing to benefit the reputations of the board members who were “on the watch” when the failure occurred.

In another well-known example involving their football coach, the trustees of Pennsylvania State University experienced firsthand the reputational risks that non-profit board service can entail.

In Arizona, many will remember the scandal that plagued the Fiesta Bowl when its CEO, seemingly with very little board oversight, engaged in serious improprieties that threatened the organization and tarnished the reputations of those involved.

Board service is often regarded either as an honor or as an opportunity to assist a worthwhile cause. No one goes on the board of a non-profit organization expecting to be in harm’s way. Yet, directors must realize that their legal responsibilities are real and exist regardless of their volunteer status.

If legal and reputational risks were present in every situation, only a valiant few would choose to serve on a non-profit board. Fortunately, the risks of board service can be mitigated. Before agreeing to serve, a certain amount of due diligence is appropriate. Questions that might be investigated include:

Is the organization well run? Does it have sufficient (and well-trained) staff? Is the financial staff of the organization competent?

Does the organization have audited financial statements? Who are the auditors? Is it a well-respected firm? Does it have experience in auditing non-profits?

Does the organization have a relationship with a lawyer familiar with the special needs of non-profits?

What information can be learned from the organization’s Federal Form 990 filing, which describes the organization’s financial condition and contains a variety of other relevant information?

What is the organization’s cash position? How many months of operating cash does it have on hand?

Is the organization reliant on a few principal donors? What is the commitment of those donors to continue to fund the organization? How reliant is the organization on funding from other organizations such as the United Way?

What percentage of the organization’s funds come from special events? How efficient are those special events in terms of the percentage of funds raised being available to fund the organization’s activities?

While there is no “one size fits all” set of rules for overseeing a non-profit organization, the following factors are indications that a board of directors has adopted good policies and practices that will hold the organization (and its board members) in good stead:

The board has adopted a clear statement of the institution’s mission, vision, and strategic goals and establishes policies and plans consistent with this statement.

The board takes affirmative steps to assure that the institution operates in compliance with applicable laws and regulations. This includes compliance with wage and hour laws that draw appropriate lines between paid employees and volunteers.

The board has written bylaws and policies and a conflict-of-interest policy that is reviewed with, and signed by, individual trustees annually.

The board accepts accountability for both the financial stability and future of the institution, engages in strategic financial planning, assumes primary responsibility for the preservation of cap-

ital assets and endowments, oversees operating budgets, and participates actively in fundraising.

The board selects, supports, nurtures, evaluates, and sets appropriate compensation for the CEO. The board conducts annual written evaluations for the institution and its CEO.

The board periodically undertakes formal strategic planning, sets annual goals related to the plan, and recognizes that its primary focus is long-range and strategic and is not too far “into the weeds.”

Board composition reflects the strategic expertise, resources and perspectives needed to achieve the mission and strategic objectives of the institution. The board works to ensure all its members are actively involved in the work of the board and its committees.

The board assists the CEO in cultivating and maintaining good relations with the institution’s constituents as well as the broader community.

The board is committed to a program of professional development that includes annual new trustee orientation, ongoing trustee education and evaluation, and board leadership succession planning.

Just as in the case of for-profit corporations, most well-run non-profit organizations maintain indemnification arrangements with their directors as well as directors and officers liability insurance. Potential board members should consider whether it is prudent to serve on the board of an organization that does not have these arrangements in place.

American society could not function as it does without non-profit organizations dedicated to the public welfare. And, those organizations could not function without dedicated directors to guide and nourish them. Nevertheless, those who would serve on a non-profit board should take some basic steps to assure that board service will be satisfying and will not involve undue risks.

Frank Placenti serves as the U.S. chair of Squire Patton Boggs corporate finance and governance practice and is nationally recognized for his work in corporate governance and mergers and acquisitions.