Business Essentials for Nonprofit Leaders. 2012-2013. Governance of Nonprofit Organizations. Business Essentials for Nonprofit Leaders Thursday August 22, 2013. Goals. Explore the meaning of “governance” in the nonprofit context.
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Business Essentials for Nonprofit Leaders
Thursday August 22, 2013
"Board" or "board of directors" means the group of natural persons vested by the corporation with the management of its affairs whether or not the group is designated as directors in the articles of incorporation or bylaws.
As a general rule, unless prohibited by the articles or bylaws, the Board of Directors may delegate the management of activities of the corporation to committees, provided the committee is comprised of two or more members.
While the Board may appoint committees, such committees may not exercise extraordinary powers.
Specifically, a committee of the board shall not:
Recommend to members or approve dissolution, merger or the sale, pledge, or transfer of all or substantially all of the corporation’s assets;
Elect, appoint or remove directors, or fill vacancies on the board or on any of its committees; or
Adopt, amend, or repeal the articles of incorporation or bylaws.
See North Carolina Nonprofit Corporation Act, N.C.G.S. § 55A-8-25.
Conflicts of Interest Policy (IRS)
Duty to disclose
Duty not to vote on self-interested matters
Annual statement from each board member
Document retention policy (Sarbanes-Oxley§802)
- Crime to knowingly destroy documents and records
- Policy defines how long records will be retained
Nonprofit directors and officers have two primary duties;
The Duty of Care
The Duty of Loyalty
These are owed to the organization and in some circumstances to third parties such as members.
A director shall discharge his or her duties in good faith with the care an ordinarily prudent person in a like position would exercise under similar circumstances and in a manner the director reasonably believes to be in the best interests of the corporation.
See North Carolina Nonprofit Corporation Act, N.C.G.S. § 55A-8-30.
The Duty of Care requires that a Director be informed and act in good faith.
To meet the Duty of Care, Directors must-
Attend Board meetings,
Have access to all organizational information, and
Make ‘informed’ decisions.
The Duty of Care requires board members to seek out information they know they need in order to make an informed decision. This includes information that a board member should know he/she needs in order to make an informed decision based on a reasonable person standard.
Board members have a duty to pursue the corporation’s best interests rather than those of your own or others.(e.g. avoiding conflicts of interest, whether over money or politics)
A director is prohibited from engaging in self-dealing unless there is full disclosure to the board AND the transaction is clearly in the corporation’s best financial interest AND a majority of the board must authorize, approve, or ratify the transaction.
Conflict of interest provisions may be found at N.C.G.S. § 55A‑8‑31.
The Duty of Loyalty requires a director’s faithful pursuit of the interests of the organization, rather than the financial or other interests of the director or another person or organization.
The organization should adopt a clear conflict of interest policy
Define conflicts and provide for resolution
Make sure every board member has a copy of the policy
Incorporate the policy into your bylaws and board training materials
Directors of nonprofit corporations have a unique duty to manage the affairs of the organization so that its property will be used for the “public purposes” for which it was entrusted.
Nonprofit and for-profit boards differ in who they are accountable to:
For profits – Shareholder
Nonprofits are accountable to their members, to the IRS, the Secretary of State and funders.
Potential plaintiffs include:
The Attorney General’s Office
Beneficiaries with a Special Interest
The general public lacks standing.
A member of a nonprofit board may be personally liable for any distributions made by the nonprofit in violation of the North Carolina Nonprofit Corporation Act, when made in breach of the Duty of Care.
See North Carolina Nonprofit Corporation Act, N.C.G.S. § 55A-8-33.
Nonprofit directors are required to discharge their duties of Care and Loyalty:
In good faith
With the care an ordinary person would exercise in a similar situation.
In a manner the officer reasonably believes to be in the best interests of the corporation and its members.
A director is not liable to the corporation, any member, or any other person for any action taken or not taken as a director, if the director acted in compliance with N.C.G.S. § 55A-8-30.
A board’s failure to govern an organization in a way that is inconsistent with the “public purpose” can lead to a loss of the organization’s tax-exempt recognition.
Manage assets to comply with I.R.S. regulations.
Maintain public purpose
Avoid private benefit
Monitor political activity and lobbying
A nonprofit must be operated in a way that is consistent with its tax status. For example:
Not operated for the benefit of private interests or designated individuals, the creator, or family members.
Transactions between the 501(c)(3) and board members that result in gain must be looked at carefully.
What is board service for many Board Members?
“Advisory” and not “active”
The board’s responsibilities are not aligned with the expectations of the members.
Support for decisions can be difficult to build.
Division of work suffers.
Funding and marketing are not efficient.
By clearly communicating board member responsibility and the role of board governance, you can facilitate board involvement and create additional resources to promote the organization’s mission.