nonprofit board

Balancing risk: What to know when joining a nonprofit board

Joining a nonprofit organization’s board of directors is a noble and powerful undertaking. As a new board member, you’re now playing a large role in the success of the nonprofit’s mission to assist the community.

As a board member, you have to ensure that you’re carrying out the fiduciary duties, which is a mighty responsibility.

Keep in mind, though, that you have the same fiduciary duties, same duty of good faith, same duty of care and same duty of loyalty on a nonprofit board as you have as a member of a for-profit board, says Kendis Muscheid, partner at Ballard Spahr.

You’re in charge of making sure the nonprofit is being accountable with its finances and you’re responsible for making sure the organization is well managed, adds Muscheid.

Yet, despite all of these responsibilities, some business leaders may take easily avoidable risks when they agree to sit on a nonprofit’s board.

“I think sometimes when people go on nonprofit boards, they don’t completely appreciate the fact that they are helping run a business,” Muscheid says.

Joining a nonprofit board is just like running a for-profit business, except the “profits” are just going to different expenses instead of being distributed to shareholders, she says.

Scott DeWald, a partner at Lewis Roca Rothgerber Christie who works with nonprofits, says potential board members may not realize the risk of liability and reputational harm that could stem from failure to oversee a nonprofit.

Directors on nonprofit boards can be held liable for failure to detect misconduct, misusing funds, self-dealing and for authorizing excessive compensation for executive employees.

“One need only to read the news about financial mismanagement, particularly involving a misuse by staff of funds that were donated or provided under circumstances in which some public purposes was intended, to be reminded that directors are expected to be guardians of the integrity of nonprofit activities,” DeWald says.

But there are ways you can protect yourself. Robert Erven Brown, a shareholder at Gallagher & Kennedy, often visits nonprofit boards to explain proper operating procedures for board members. Brown shared several key items with Az Business Angels to keep in mind when navigating the world of nonprofits as a board member.

Follow proper corporate formalities

Brown says this is a key concept when acting as a nonprofit board member. An easy way to visualize this concept is with hats. You should always remember which hat you’re wearing when you’re doing board work. Some hats you have say corporate officer, while others say board member. For whatever hat you may be wearing, it’s important to remember that you’re acting in that role and there are certain limitations and powers. Since corporations are legal entities designed to protect you from personal liability, it’s important to follow these corporate formalities so you’re protected. One example of protecting yourself is to always use the correct signature block when signing for something on behalf of the nonprofit. Brown has seen people become personally liable for a charity’s debts because they failed to clearly indicate that they were signing as an “authorized agent” for the nonprofit. One way to ensure that you’re signing correctly, is to state clearly in the signature on any document you sign that you are signing as an “authorized agent” for XYZ Nonprofit, an Arizona nonprofit corporation, and state your role on the board in the signature.

Understand your role in the nonprofit

You don’t want to go around doing things that aren’t within your wheelhouse when working on the board of a nonprofit. Using the signature example, Brown says, board members are never supposed to sign papers on behalf of the corporation. This is because board members, except for officers, are not authorized agents who are able to act on behalf of the corporation. The only time this rule can be broken as a non-officer member of the board is if the board passes a resolution appointing you as the authorized agent to sign documents.

Never serve on a board unless you’ve collected proper documentation

How could you know what you’re getting into if you haven’t reviewed the paperwork? Before accepting your post as a board member, review and collect sample minutes of past meetings, the Articles of Incorporation and the bylaws. One of the most important things you should verify, though, is that the board has directors and officers liability insurance, along with typical insurance for the nonprofit, such as general liability (with a cybersecurity endorsement), fire and casualty, property, worker’s compensation and automobile insurance. Get a copy of the insurance paperwork and make sure everything is current and regularly renewed.

File annual reports with Arizona Corporation Commission and the IRS

Make sure to file your annual report to the Arizona Corporation Commission, along with any necessary filings with the Internal Revenue Service. If you fail to file your annual report to the ACC, then your nonprofit will lose its corporate charter. If that happens, your nonprofit is no longer a corporation, losing the corporate shield that defends you from personal liability. “If you’re going to be a director, you need to make it your personal responsibility to confirm that the corporation is in good standing,” Brown says.

Follow the Articles of Incorporation and bylaws

The Articles of Incorporation contain a purpose clause which defines the scope of activities which the nonprofit corporation can legally do. Your nonprofit cannot legally do anything outside of this purpose. Otherwise, the persons who take the unauthorized action may be personally liable. It is also equally vital to follow the bylaws — the rules that your nonprofit must follow — for any action to be valid and defensible by law.

One area to follow is when you’re calling for a meeting. To hold a valid meeting of the board of directors, you must be able to prove that you followed the proper rules, such as sending out a written invitation, ensuring the proper number of board members are present for the meeting to be valid and confirm there are enough votes to pass a resolution. Finally, carefully describe these actions in the “minutes” of the meeting and have them signed by the secretary. If these steps are taken, you now have an official act of the corporation defensible at law. Two iron rules, Brown notes, are:

  1. Actions taken in contravention of the bylaws are void or voidable
  2. A reviewing court or jury may conclude that actions that aren’t in writing probably didn’t happen. So be sure to have everything written down in the minutes from each board meeting.

Don’t accept money as a board member

To protect yourself from liabilities, it’s important to not accept money from the nonprofit for your services as a board member (sometimes called an honorarium). As long as you don’t accept money, you’re considered a volunteer who’s protected under Arizona’s Volunteer Protection Act. Under the act, you’re not liable for negligence of the corporation as a volunteer. But if you accept an honorarium, you lose your volunteer status and the protections of a volunteer, Brown says. Of course, you can be reimbursed with a written receipt for reasonable expenditures for corporate business. It is always best to confirm the reimbursement with the CPA or the auditor for the charity.

Don’t serve unless you can attend the meetings

Every board member owes the nonprofit a fiduciary duty to protect the best interest of the nonprofit and its money. If you’re not present at the meetings, then how can you possibly do that, asks Brown. It’s OK to miss one meeting out of 12 in a year, but it’s still important to document the fact that you missed the meeting and have a copy of its minutes so you’re aware of what happened and are keeping involved.

“If you live by those guidelines, then both you and your charity will have a lot less trouble,” Brown says.

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