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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. jsoi@delgadoacosta.com (512) 583-0451.

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how to keep you and your board out of trouble insights from the king foundation experience
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
JAN SOIFER

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

jsoi@delgadoacosta.com

(512) 583-0451

board members of nonprofit organizations have legal duties and responsibilities
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
Board members must perform duties:
  • 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.

question
Question?
  • What happens when the Board doesn’t shoulder its responsibilities?
2002 yeckel cash only
2002 (Yeckel – cash only)

$81,000+ per month

or

$975,000 per year

2002 vett cash only
2002 (Vett – cash only)

$37,500+ per month

or

$450,000+ per year

2002 yeckel and vett cash only
2002 (Yeckel and Vett – cash only)

Yeckel: $975,000

Vett: $450,000+

yeckel s compensation increase 1993 2002
Yeckel’s compensation increase 1993- 2002

1993: $225,000+

1998: $500,000+

2002: $975, 000

In 9 years, Carl Yeckel’s cash compensation QUADRUPLED

king foundation assets
King Foundation Assets
  • 1993: $31.5 Million
  • 1998: $48.1 Million
  • 2002: $37.6 Million
expert s comparables for yeckel
Expert’s Comparables for 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

$1,200,000

$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
Vett’s compensation increase 1993- 2002

1993: $122,000+

1998: $250,000

2002: $451,000

In 9 years, Vett’s cash compensation almost QUADRUPLED

expert s comparables for vett
Expert’s Comparables for 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

$600,000

$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

Reasonable Compensation:

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
Credit Cards
  • $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
Charges for Foreign Travel
  • 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
Charges for Out of State Travel
  • 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
Charges for Meals and Entertainment in Dallas
  • 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
Charges for Gas, Tolls and Auto Repairs in Dallas
  • 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
Charges for Books, Magazines, Music, Movies, Videos, etc.
  • Vett: $20,000+

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

  • Yeckel: $23,500+
retail store and other charges
Retail Store and Other Charges
  • 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
Health and Fitness
  • 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
2002
  • 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
Retirement or Deferred Compensation “Deals”
  • 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
What did the jury decide?
  • 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
The jury divided responsibility:
  • Yeckel 55%
  • Vett 25%
  • Jordan (Lawyer/Director ) 14%
  • Grover + Phipps 3% each
how much do they have to pay
How much do they have to pay?
  • 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
What happened to the volunteer Board members?
  • 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
What about Will Jordan, lawyer/director?
  • 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
Happily Ever After?The 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
Or Not?The 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
Duties of Board Members
  • In good faith
  • With ordinary care
  • In a manner reasonably believed to be in the best interest of the nonprofit
question36
Question?
  • What does it mean to act in good faith as a director of a nonprofit?
good faith
Good Faith
  • 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
Question?
  • 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
Ordinary Care
  • 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
Ordinary Care, continued
  • 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
In the Best Interest of the Nonprofit
  • 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
Absolutely Prohibited!
  • No loans or dividends paid to directors
  • No distribution of assets that will make the organization insolvent
protections for board members
Protections for Board Members
  • 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
Protections for Board Members
  • 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
Mandatory Indemnification

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
PermissiveIndemnification
  • 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
Prohibited Indemnification
  • 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
Books and Records
  • Keep accurate and complete minutes of board and committee meetings having board authority
conflicts of interest
Conflicts of Interest
  • 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
Best Practices Tip
  • 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
RULE

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

question52
Question?

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
SERVING AS PAID STAFF MEMBER AND VOTING DIRECTOR
  • Not prohibited
  • Probably not best practice
  • Blurs distinction between handling day to day operations and Board oversight
best practices tip54
Best Practices Tip
  • 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
public disclosure
Public Disclosure
  • 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
Exemptions to Access
  • 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
Other Important State Laws
  • 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
Types of Insurance
  • 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
Directors’ and Officers’ Liability
  • 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
Employment Practices Liability
  • Protects nonprofits, directors, and employees for employment-related actions
  • Pays for legal defense and damages
workers compensation insurance
Workers’ Compensation Insurance
  • 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
Other Important Insurance
  • Property
  • Automobile
best practices tip63
Best Practices Tip
  • Have the Board or committee annually review the nonprofit’s insurance policies and scope of coverage.
remember the duties of board members
Remember the Duties of Board 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
Best Practices Tip

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
and

You and your nonprofit organization

are sure to stay out of trouble and

LIVE HAPPILY EVER AFTER

The End