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Board Member's Fiduciary and Governance Responsibilities - Board Members' Series (Part 5)

Posted by Chris Valponi, CPA on Feb 19, 2019 6:38:00 AM

Part 5 of a 5 Part Series 

Can board members be held personally liable for actions of the organization? Yes!Board member fiduciary responsibilities

Agreeing to sit on a board for a nonprofit is a great way to donate your time and expertise. However, it comes with a great deal of responsibility. Board members often feel that they are just "advisors" to management and don't have a strong understanding of their legal responsibilities. It may come as a surprise that board members could be held personally liable for actions of the organization if they haven't upheld their fiduciary responsibilities.

Incorporated not-for-profits have the same benefits of limited liability that a corporation does, which means that board members and officers of a non-profit organization will not be held personally liable if issues arise. However, this is only true if board members have not breached their "fiduciary responsibility".

 Legal fiduciary responsibilities vary by state, but typically consist of the Duty of Care; Duty of Loyalty and Duty of Obedience.

  • The Duty of Care requires a board member to act with diligence and in good faith. In other words, do what an ordinary, prudent person would do under similar circumstances.
  • The Duty of Loyalty requires board members to act in good faith and in the best interests of the organization, rather than their own. Being loyal means avoiding conflicts of interest or conduct that is not transparent.
  • The Duty of Obedience obligates directors to ensure the mission of the organization is upheld and continued. To do this, directors must work to ensure a common understanding of the organization's mission among the board members, dedicate the resources of the organization to its mission, and comply with the law.

As a Board member there are other, more specific fiduciary and over-all governance requirements that you should also be aware of:

Executive Hiring, Performance and Succession

Management and employees all directly or indirectly report to the Board, not the other way around.  There may be certain members of management that are much more knowledgeable, experienced or authoritative within the organization than any individual board member (such as an Executive Director that founded the organization or interviewed/recruited a member of the Board to join), but the Board is still the top level of governance!

To ensure the Board is accountable for keeping its fiduciary responsibility intact, the Board should maintain its authority over the following big picture personnel decisions, though members of management may be involved in the process.

Executive Hiring - The Board should have a visible and active role in the process of hiring all senior members of management, not just the executive director.  Active involvement in these key hires reinforces to all members of the organization that the board is the top layer of governance

Succession Planning – The Board should always have a succession plan in place for top-level executives, whether a change is expected in the near future or not. The board should also be aware of any grant money or contributions that are available to perform executive searches and succession planning consulting.

Performance Reviews – Too often, organizations are hampered by the poor performance of Executive Directors and other senior members of management.  The Executive Director and key members should not be exempted from regular and ongoing performance reviews. It's critically important the board have clear performance metrics that key personnel are measured against.

Specific Compliance Expertise

It's very common for an Organization to be involved in programming areas that have complex and specific compliance requirements.  Non-compliance can jeopardize funding and even the organization's tax-exempt status.  Don't just assume that issues will be brought to your attention, seek them out:

  • Let employee and other members of the Board know about your expertise, so they know to come to you.
  • Assess new programmatic relationships before entering into them to determine if they are:
    • Feasible
    • Have a positive cost vs. benefit relationship
  • Do not expose the organization to unnecessary risks:
    • Read grant documents and seek out specific compliance requirements.
    • Head up the communication of compliance requirements to employees of the organization and/or specifically assign that responsibility.
    • Monitor the organization's compliance on a continuing and timely basis

Long-Term Strategy

The Board is an entity just like the not-for-profit organization it governs. Board members come and go as their terms expire, but each member needs to understand that during their time on the board they have an ongoing responsibility to always assess the long-term strategy of the organization and how to position itself for continued success.  Long-term strategy considerations include:

  • Succession planning (mentioned above)
  • Championing fundraising campaigns
  • Branding and public reputation/recognition
  • Capital campaigns to maintain capital assets such as buildings or construction of new capital assets
  • Capacity building
  • Fostering relationships, partnerships, mergers
  • Long-term budgeting
  • Additional out-of-the-box funding options
  • Anticipating and planning for future changes that could affect the organization’s ability to accomplish its mission
  • Performing long-term risk assessments.

Finally, Your Own Funding!

Whether it's written Board policy or not there is an expectation that you, as a Board member, are "financially" contributing to the Organization.  There are different expectations for different organizations such as:

  • A minimum annual contribution.
  • Expectations of sponsorship of a table or purchase of tickets at a reoccurring event.
  • Expectations that you will secure another donor(s) to make a contribution in your place or you will be the connection between a donor and the organization going forward.
  • Your company will offer matching contributions.
  • In some cases, your expertise or specific role will be accepted in lieu of a donation.

Whether a contribution was discussed or not, upon joining a Board, it is expected that you will materially support the organization and its mission.  The success of a not-for-profit organization directly correlates to the board's financial contributions and ability to drive charitable contributions.

 Do you currently serve on a Board? Zinner & Co. stands ready to help you achieve your organization's goals and fulfill your role. Let's talk

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Topics: Audit and Assurance Department, non-profits, internal control, fundraising

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