Board Life Cycle

PPPA 6034

Managing Nonprofit Boards

 

Session 2

Legal and Functional Responsibilities

Of Nonprofit Boards

 

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Legal Responsibilities of Boards

  • Care
  • Loyalty
  • Obedience

(Sibley Hospital case, 1974)

 

  • Emerging new questions

(Hershey School, Barnes Foundation)

 

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Governance Documents

    • Charter

 

    • Bylaws

 

    • Policies

 

  • Minutes

 

  • Resolutions

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Charter and Bylaws

Charter (Articles of incorporation)

 

From state government – states broad purposes

(mutual benefit, public benefit, religious)

 

Seldom changed

 

Bylaws

Developed by governing board – specifies governing principles and board operations

 

Easily amended by the board

 

DC Requirements

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Typical Bylaws Content

  • Members/no members
  • Categories of members
  • Size of board
  • Method of election/removal
  • Terms limits
  • Officers and methods of election/removal
  • Committees
  • Meetings
  • Process of voting/quorum
  • Process for amendment

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Legal Considerations

  • Private benefit and self inurement
    (excess benefit transactions)

 

    • Conflict of interest policies

 

  • D&O insurance
  • Separation of related entities

Conflict of interest policy example

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Intermediate Sanctions

 

 

    • Fly swatter, not atom bomb

 

    • Personal liability of trustees

 

  • Personal liability of staff

Intermediate sanctions

Private inurement

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Sarbanes-Oxley Act (2002)

  • Protection for whistle-blowers*
  • Audit committee and external auditors

Committee must have financial expert

Audit committee hires outside auditor

Audit firm cannot also consult

Firm must change partner every five years

  • CEO must certify financial statements
  • Conflict of interest

No loans to board or executives

Must disclose executive code of ethics

  • Retention of documents used in investigation or bankruptcy*

 

 

*Required of nonprofits under Sarbanes-Oxley

 

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Form 990, Part VI

  • Form 990
    990N postcard if revenue < $50K
    990EZ or 990 if revenue $50-200,000
    990 if revenue >$200,000
  • New form implemented in 2009 includes Part VI, governance questions

Food and Friends Form 990 Part VI

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Executive Compensation

  • Standard of reasonableness

 

  • 3 IRS questions for governing boards:

 

What governance is exercised over executive compensation?

 

What is the basis for the executive’s compensation

and benefits?

 

What internal controls exist for review and approval of executive travel and entertainment expenses?

(AU and Smithsonian cases)

 

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Board Best Practices on Executive Compensation

  • Independent compensation committee
  • Full board review of executive comp
  • Rely on objective data, surveys, consultants
  • Document data and discussion in board minutes

(Rebuttable presumption of reasonableness)

Compensation resources

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Self-Regulation and Best Practices

  • Independent Sector principles

2015 edition

  • Standards for Excellence Institute

Governance standards

Board Functional Responsibilities
(What do boards actually do?)

  • Appoint the CEO
  • Assure good management, but stay focused on policy
  • Approve the budget and assure adequate resources
  • Raise money
  • Oversee investment of the endowment, if any
  • Approve strategic plans
  • Represent community/advocate for organization
  • Approve and oversee programs (but not manage)
  • Assure focus on mission
  • Provide sounding board for CEO
  • Monitor performance, hold management accountable

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Board Life Cycle

 

  • Start up

(founding board/ working board)

 

  • Adolescent

(first executive director, growing staff,

struggles to define roles, founder syndrome)

 

  • Mature

(differentiation of roles, board structure highly articulated,

may be questions about board’s purpose, board complacency)

Why Boards Underperform
(Chait, Holland, Taylor)

  • Tension between watchdog and advocate roles

 

  • Part-time amateurs, full-time professionals (staff controls information and agenda)

 

  • Philosophical differences between board and staff

 

  • All stars, no constellation (a huddle of quarterbacks)

 

  • Low stakes

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Closing Humor

 

Email in real life

https://www.youtube.com/watch?v=HTgYHHKs0Zw

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