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HOW TO KEEP YOU AND YOUR BOARD OUT OF TROUBLE Insights from the King Foundation Experience. 16 th Annual CASA Statewide Conference October 7, 2005. JAN SOIFER. Delgado, Acosta, Braden & Jones, P.C. [email protected] (512) 583-0451.

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How to keep you and your board out of trouble insights from the king foundation experience l.jpg
HOW TO KEEP YOU AND YOUR BOARD OUT OF TROUBLEInsights from the King Foundation Experience

16th Annual CASA Statewide Conference

October 7, 2005


Jan soifer l.jpg
JAN SOIFER

Delgado, Acosta, Braden & Jones, P.C.

[email protected]

(512) 583-0451


Board members of nonprofit organizations have legal duties and responsibilities l.jpg
Board Members of Nonprofit Organizations Have Legal Duties and Responsibilities

  • What are they?

  • What happens if you don’t know?

  • What do you need to do to do it right?


Board members must perform duties l.jpg
Board members must perform duties: and Responsibilities

  • In good faith

  • With ordinary care

  • In a manner they reasonably believe are in the best interest of the nonprofit

    Board members manage the affairs of the organization and formulate policies. Staff members handle the day-to-day operations.


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Question? and Responsibilities

  • What happens when the Board doesn’t shoulder its responsibilities?


Once upon a time l.jpg
Once upon a time… and Responsibilities


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2002 and Responsibilities(Yeckel – cash only)

$81,000+ per month

or

$975,000 per year


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2002 and Responsibilities(Vett – cash only)

$37,500+ per month

or

$450,000+ per year


2002 yeckel and vett cash only l.jpg
2002 and Responsibilities(Yeckel and Vett – cash only)

Yeckel: $975,000

Vett: $450,000+


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Yeckel’s compensation increase 1993- 2002 and Responsibilities

1993: $225,000+

1998: $500,000+

2002: $975, 000

In 9 years, Carl Yeckel’s cash compensation QUADRUPLED


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King Foundation Assets and Responsibilities

  • 1993: $31.5 Million

  • 1998: $48.1 Million

  • 2002: $37.6 Million


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Expert’s Comparables and Responsibilitiesfor Yeckel

  • 1993: $93,000 median

    • (Yeckel: $225,000+ >double)

  • 1998: $117,000 median

    • (Yeckel: $500,000+ >quadruple)

  • 2002: $136,500 median

    • (Yeckel: $975,000 >seven times more)


  • Excessive compensation to carl yeckel l.jpg

    $1,200,000 and Responsibilities

    $1,000,000

    $800,000

    Actual Salary(not including credit card charges)

    Reasonable Salary

    $600,000

    $400,000

    $272,887

    $244,207

    $226,805

    $200,000

    $0

    1993

    1994

    1995

    1996

    1997

    1998

    1999

    2000

    2001

    2002

    Excessive Compensation To Carl Yeckel

    $974,978

    $935,120

    $805,710

    $670,245

    In Thousands

    $536,384

    $430,595

    $345,369

    $136,598

    $129,010

    $116,868

    $126,480

    $116,868

    $104,978

    $98,952

    $101,921

    $96,071

    $93,271

    YEARS


    Vett s compensation increase 1993 2002 l.jpg
    Vett’s compensation increase 1993- 2002 and Responsibilities

    1993: $122,000+

    1998: $250,000

    2002: $451,000

    In 9 years, Vett’s cash compensation almost QUADRUPLED


    Expert s comparables for vett l.jpg
    Expert’s Comparables and Responsibilitiesfor Vett

    • 1993: $74,000 median

      • (Vett: $122,000+ >1.6 times more)

  • 1998: $92,000 median

    • (Vett: $250,000 >2.6 times more)

  • 2002: $108,000 median

    • (Vett: $451,000 >four times more)


  • Excessive compensation to thomas vett l.jpg

    $600,000 and Responsibilities

    $500,000

    $400,000

    $300,000

    $200,000

    $100,000

    $0

    1993

    1994

    1995

    1996

    1997

    1998

    1999

    2000

    2001

    2002

    Excessive Compensation To Thomas Vett

    $451,937

    $394,665

    Actual Salary(not including credit card charges)

    Reasonable Salary

    $367,361

    In Thousands

    $303,432

    $248,461

    $208,772

    $175,205

    $146,141

    $133,628

    $122,120

    $107,913

    $101,918

    $99,919

    $78,172

    $92,326

    $92,326

    $80,517

    $82,933

    $75,896

    $73,684

    YEARS


    Slide17 l.jpg

    Reasonable Compensation: and Responsibilities

    Yeckel: $ 136,598 Vett:: $ 107,913 Mott: $ 60,000

    Actual Compensation, Three Employees $1,568,537

    Reasonable Benefits Obligations @ 20% of Reasonable Compensation

    Benefits Obligations of Foundation (medical and retirement)

    King FoundationYear - 2002Actual Compensation and Benefits vs. Reasonable Compensation and Benefits(not including credit card charges)

    $3,000,000

    Total: $ 2,545,168

    $2,500,000

    + $976,631

    $2,000,000

    In Thousands

    $1,568,537

    $1,500,000

    $1,000,000

    Total: $ 365,413

    $500,000

    + $ 60,902

    $304,511

    Actual

    Reasonable


    Credit cards l.jpg
    Credit Cards and Responsibilities

    • $750,000 charged to Foundation credit cards 1997 – 2002:

      • $400,000 -- Vett (3700 charges)

      • $350,000 -- Yeckel (2000 charges)

    • Reimbursements in 2002:

      • $75,000 -- Vett

      • $124,000 – Yeckel


    Charges for foreign travel l.jpg
    Charges for Foreign Travel and Responsibilities

    • Vett: $25,000 traveling to Mexico, Canada, Italy, France, England and Australia

    • Yeckel: $69,000 traveling to England, Greece, Turkey, Italy, Hong Kong, and China


    Charges for out of state travel l.jpg
    Charges for Out of State Travel and Responsibilities

    • Vett: $88,000 traveling to New York, Colorado, Utah, Virginia, Rhode Island, Wyoming, California, . . .

    • Yeckel: $112,000 traveling to Montana, Indiana, Arizona, North Carolina, . . .


    Charges for meals and entertainment in dallas l.jpg
    Charges for Meals and Entertainment in Dallas and Responsibilities

    • Vett: $56,000+

      • Over 620 charges in 6 years

    • Yeckel: $10,000+

      • Over 160 charges in 6 years


    Charges for gas tolls and auto repairs in dallas l.jpg
    Charges for Gas, Tolls and Auto Repairs in Dallas and Responsibilities

    • Vett: $26,000+

      (not including the cost of the Oldsmobile Aurora)

    • Yeckel: $15,000+

      (not including the cost of the Chevrolet Suburban)


    Charges for books magazines music movies videos etc l.jpg
    Charges for Books, Magazines, Music, Movies, Videos, etc. and Responsibilities

    • Vett: $20,000+

      (Plus an additional $10,000+ for On Line services --AOL, MSN, Juno)

    • Yeckel: $23,500+


    Retail store and other charges l.jpg
    Retail Store and Other Charges and Responsibilities

    • Vett: $31,000+

      (florists, pet supplies and veterinary clinics, shoe repair, camera shops, clothing, etc.)

    • Yeckel: $40,000+

      (pen shops, camera shops, sporting goods, pet supplies and veterinary clinics, hardware stores, gun and military stores, clothing, etc.)


    Health and fitness l.jpg
    Health and Fitness and Responsibilities

    • Vett: $108,000+

      (pharmacies, optical shops, dentists, doctors, fitness centers, nutrition stores, etc.)

    • Yeckel: $22,000+

      (pharmacies, fitness centers, doctors, hospital and medical insurance, optical shops, etc.)


    Slide26 l.jpg
    2002 and Responsibilities

    • King Foundation assets:$37.6 Million

    • Charitable gifts:$1.79 Million

    • Other expenses: $3.28 Million

    • Total expenses: $5.07 Million


    Retirement or deferred compensation deals l.jpg
    Retirement or Deferred Compensation “Deals” and Responsibilities

    • ¾ of last year’s income for life

    • ½ of that for surviving spouse

    • No contributions paid by employee

    • Not approved by the Board

    • When applied to unreasonable salary, results in more excessive compensation


    What did the jury decide l.jpg
    What did the jury decide? and Responsibilities

    • Yeckel and Vett breached their fiduciary duties, committed fraud and received excessive compensation

    • Other members of the Board of Directors also breached their fiduciary duties


    The jury divided responsibility l.jpg
    The jury divided responsibility: and Responsibilities

    • Yeckel 55%

    • Vett 25%

    • Jordan (Lawyer/Director ) 14%

    • Grover + Phipps 3% each


    How much do they have to pay l.jpg
    How much do they have to pay? and Responsibilities

    • Yeckel – over $5.2 million in excessive compensation and benefits, plus interest, plus $10.5 million in exemplary damages, or more than $16 million (and counting)

    • Vett – over $2.3 million in excessive compensation and benefits, plus interest, plus $3.5 million in exemplary damages, or more than $6 million (and counting)


    What happened to the volunteer board members l.jpg
    What happened to the volunteer Board members? and Responsibilities

    • Based on the jury’s verdict, Grover and Phipps would have been responsible for 3% of $7 million or over $200,000

    • Grover settled by paying $200,000, and Phipps forfeited retirement pay valued at $180,000

    • Junkin filed bankruptcy in Oklahoma, and ultimately agreed to the entry of a $300,000 judgment against him


    What about will jordan lawyer director l.jpg
    What about Will Jordan, lawyer/director? and Responsibilities

    • Based on the jury’s verdict, he would have been responsible for 14% of $7 million or almost $1 million

    • He settled before trial for $250,000 – but he’s still fighting his insurance company for reimbursement


    Happily ever after the good news l.jpg
    Happily Ever After? and ResponsibilitiesThe Good News

    • The judge found that Yeckel and Vett’s “retirement contracts” were void, so even if the Foundation doesn’t collect on the judgment, it eliminated $12 million in future liabilities for retirement benefits


    Or not the bad news l.jpg
    Or Not? and ResponsibilitiesThe Bad News

    • Yeckel has paid over $2 million in attorneys’ fees, and is appealing the judgment

    • Vett fired his lawyer and claims to be broke

    • The King Foundation had no insurance to pay for the litigation, and will have paid over $1 million on the litigation and the appeal

    • The Foundation was examined by the IRS and has been assessed additional taxes (based on exclusion of what the jury found to be unreasonable compensation)


    Duties of board members l.jpg
    Duties of Board Members and Responsibilities

    • In good faith

    • With ordinary care

    • In a manner reasonably believed to be in the best interest of the nonprofit


    Question36 l.jpg
    Question? and Responsibilities

    • What does it mean to act in good faith as a director of a nonprofit?


    Good faith l.jpg
    Good Faith and Responsibilities

    • Acting with honesty and faithfulness to the Director’s duties

    • Acting without an intent to take advantage of the nonprofit

    • Acting only after she believes she has sufficient information


    Question38 l.jpg
    Question? and Responsibilities

    • What types of actions should a director take to demonstrate ordinary care in the performance of her duties on behalf of a nonprofit?


    Ordinary care l.jpg
    Ordinary Care and Responsibilities

    • The care that an ordinarily prudent person in a similar position would exercise under similar circumstances

      • Attend meetings

      • Devote a reasonable amount of time to duties

      • Review and understand materials

      • Make informed decisions

      • Ask questions


    Ordinary care continued l.jpg
    Ordinary Care, continued and Responsibilities

    • Ordinary care:

      • Follow the bylaws and other corporate policies

      • Document corporate decisions

      • Take, review, approve and keep minutes

      • Review and approve annual financial statement

      • Monitor corporate finances

        • Expenditures for charitable purposes

        • Expenditures of restricted funds

        • Compensation of executives


    In the best interest of the nonprofit l.jpg
    In the Best Interest of the Nonprofit and Responsibilities

    • Personal, business, or family interest must not prevail over the interest of the nonprofit

    • Belief that action is in best interest must be reasonable


    Absolutely prohibited l.jpg
    Absolutely Prohibited! and Responsibilities

    • No loans or dividends paid to directors

    • No distribution of assets that will make the organization insolvent


    Protections for board members l.jpg
    Protections for Board Members and Responsibilities

    • Reliance on information supplied by others

      • Officers and employees

      • Accountants

      • Attorneys

      • Board committees of which the director is not a member

      • BUT-cannot rely on this information if the director has knowledge that the information is incorrect


    Protections for board members44 l.jpg
    Protections for Board Members and Responsibilities

    • Delegation of investment authority

      No liability for an investment decision as long as the Board selected the investment advisor in good faith and with ordinary care


    Mandatory indemnification l.jpg
    Mandatory Indemnification and Responsibilities

    A nonprofit must pay the director for reasonable expenses incurred by the director after a court order and the exhaustion of all appeals, if the director is successful in defending the lawsuit.


    Permissive indemnification l.jpg
    Permissive and ResponsibilitiesIndemnification

    • A nonprofit may pay reasonable expenses in the following situations if the bylaws, articles, a resolution, or agreement permit:

      • In a civil case if the director acted in good faith and reasonably believed the actions were in the best interest of the nonprofit

      • In a criminal case if the director had no reason to believe the conduct was unlawful

      • Before the completion of the case if the director affirms in writing that he met the appropriate standard of conduct


    Prohibited indemnification l.jpg
    Prohibited Indemnification and Responsibilities

    • A nonprofit may not indemnify a director if:

      • The director engaged in willful or intentional misconduct

      • The director received an improper personal benefit


    Books and records l.jpg
    Books and Records and Responsibilities

    • Keep accurate and complete minutes of board and committee meetings having board authority


    Conflicts of interest l.jpg
    Conflicts of Interest and Responsibilities

    • Have a policy

    • Disclose material facts

    • Compare prices

    • Interested director should abstain

    • Majority of disinterested directors approve in good faith and with ordinary care


    Best practices tip l.jpg
    Best Practices Tip and Responsibilities

    • Every nonprofit should have a written conflicts of interest policy that is followed consistently.

    • The policy should be reviewed by each board and staff member annually.


    Slide51 l.jpg
    RULE and Responsibilities

    Transactions with an interested director must be fair to the nonprofit.


    Question52 l.jpg
    Question? and Responsibilities

    Can the same person be paid as the Executive Director and also serve on the Board of Directors?


    Serving as paid staff member and voting director l.jpg
    SERVING AS PAID STAFF MEMBER AND VOTING DIRECTOR and Responsibilities

    • Not prohibited

    • Probably not best practice

    • Blurs distinction between handling day to day operations and Board oversight


    Best practices tip54 l.jpg
    Best Practices Tip and Responsibilities

    • Avoid problems with excess benefits transactions by adopting a salary and benefits schedule based on comparables (compensation for “like services by like organizations in like circumstances”)

    • Get salary survey information or hire a compensation expert


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    Public Disclosure and Responsibilities

    • Texas law requires disclosure of all records, books, and annual reports of the financial activity of the corporation

    • Exception: the names and addresses of contributors


    Exemptions to access l.jpg
    Exemptions to Access and Responsibilities

    • Texas: nonprofits that solicit funds only from members and do not receive outside contributions in excess of $10,000.

    • Remember: members can see the books and records of a membership organization!


    Other important state laws l.jpg
    Other Important State Laws and Responsibilities

    • There are very specific rules for raffles (see http://www.oag.state.tx.us – search word: “raffles”)

    • Notify the Attorney General if the nonprofit is involved in a lawsuit

    • Pay property taxes or obtain an exemption

    • Check to see if you need charitable solicitation permits in cities where you solicit contributions


    Types of insurance l.jpg
    Types of Insurance and Responsibilities

    • Commercial Liability

      • Protects against negligent wrongful acts causing personal injury or property damage

      • Pays for legal defense and money damages

      • Need minimum coverage for state cap on liability to apply

        • $500K per person

        • $1m for death or bodily injury

        • $100K for property damage


    Directors and officers liability l.jpg
    Directors’ and Officers’ Liability and Responsibilities

    • Protects against intentional wrongful acts if not illegal or actions beyond authority

    • Pays for legal defense and reimburses nonprofit for amounts paid to indemnify directors

    • Pays directors for amounts not covered by indemnification


    Employment practices liability l.jpg
    Employment Practices Liability and Responsibilities

    • Protects nonprofits, directors, and employees for employment-related actions

    • Pays for legal defense and damages


    Workers compensation insurance l.jpg
    Workers’ Compensation Insurance and Responsibilities

    • Protects nonprofit and provides benefits to workers injured on the job

    • Limits recovery: if nonprofit doesn’t carry insurance there is no limit on amount of damages an injured worker can recover


    Other important insurance l.jpg
    Other Important Insurance and Responsibilities

    • Property

    • Automobile


    Best practices tip63 l.jpg
    Best Practices Tip and Responsibilities

    • Have the Board or committee annually review the nonprofit’s insurance policies and scope of coverage.


    Remember the duties of board members l.jpg
    Remember the Duties of and ResponsibilitiesBoard Members

    • Act in good faith

    • Act with ordinary care

    • Act in a manner reasonably believed to be in the best interest of the nonprofit


    Best practices tip65 l.jpg
    Best Practices Tip and Responsibilities

    Consider how the Board’s actions or failures to act will look

    • on the front page of the paper

    • or to a judge and jury


    Slide66 l.jpg
    and and Responsibilities

    You and your nonprofit organization

    are sure to stay out of trouble and

    LIVE HAPPILY EVER AFTER

    The End


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