Court of Appeals to Directors of Nonprofits: “Nonprofit” Does Not Mean “No Risk for You”
WRITTEN BY BRUCE A. ERICSON, JERALD A. JACOBS, AND MARLEY DEGNER
CREATED ON WEDNESDAY, 22 APRIL 2015 12:29
The U.S. Court of Appeals for the Third Circuit recently upheld a $2.25 million jury verdict against the directors of a nonprofit nursing home, holding them personally liable for breach of their duty of care. Their sin? Failing to remove the nursing home’s administrator and CFO “once the results of their mismanagement became apparent.” While the court overturned a punitive damages verdict against five directors (the jury had found nine other directors liable for compensatory damages but not punitive damages), it upheld punitive damage awards of $1 million against the CFO and $750,000 against the Administrator. The decision, while unusual, illustrates that serving on a nonprofit board is not risk-free even if as in this case, the directors do not breach their duty of loyalty or engage in any self-dealing. [In re Lemington Home for the Aged, 777 F.3d 620 (3d Cir. 2015).]
The Lemington Home Case
Founded in 1883, the Lemington Home for the Aged was the oldest nonprofit unaffiliated nursing home in the United States dedicated to the care of African Americans. For decades, the Home had been “beset with financial troubles” and by the early 2000s it was being cited by the Pennsylvania Department of Health for deficiencies at a rate almost three times greater than the average.
In 2004, the Home’s Administrator [Mel Lee] Causey started working part-time while continuing to draw a full salary. That same year, two patients died under suspicious circumstances; an investigation by the Department of Health found that Causey lacked the qualifications, knowledge and ability to perform her job. An earlier independent review also recommended that Causey be replaced. Although the Board obtained a grant of over $175,000 to hire a new Administrator, the funds were used for other purposes and Causey stayed on.
The Home’s patient recordkeeping and billing were in a state of disarray. The Home was cited repeatedly for failing to keep proper clinical records. CFO Shealey stopped keeping a general ledger, instead simply recording cash transactions on an Excel spreadsheet. When a consultant conducting an assessment of the Home for a major creditor requested records, Shealey responded by locking himself in his office, forcing the consultant to “camp outside.” Shealey also failed to collect at least $500,000 from Medicare because he stopped sending invoices.
In January 2005, the Board voted to close the Home, but concealed that fact for three months before filing for bankruptcy. In those three months, the Home stopped accepting new patients, making it less attractive to potential buyers. While in bankruptcy, the Board failed to disclose in its monthly operating reports that the Home had received a $1.4 million payment, which could also have increased its chances of finding a buyer. The court held that these facts supported the jury’s verdict that the defendants had “deepened” the corporation’s insolvency, which the court said was actionable under Pennsylvania law. [777 F.3d at 630.]
The court of appeals upheld the jury’s compensatory damages verdict against the directors despite the Home’s bylaw provision protecting the directors from claims for simple negligence and requiring proof of selfdealing, willful misconduct or recklessness. [Lemington, No. 10-800, 2013 WL 2158543, at *6 (W.D. Penn. May 17, 2013).] Both the court of appeals and the district court held that the evidence supported a finding that the directors breached their duty of care by recklessly (1) continuing to employ the Administrator despite actual knowledge of mismanagement and despite knowing that she was working only part-time in violation of state law; and (2) continuing to employ the CFO despite actual knowledge of mismanagement, including his failure to maintain financial records. [777 F.3d at 628-30; 2013 WL 2158543, at *7; In re Lemington Home for the Aged, 659 F. 3d 282, 286-87 (3d Cir. 2011).] Despite these holdings, the court of appeals reversed the award of punitive damages against the five directors, holding that there was insufficient evidence that they possessed the requisite state of mind and no evidence of self-dealing. [777 F.3d at 634-35.]
The Result in Lemington Home: Unusual But Not Unique
Lemington Home is not the only case in which a court has held that directors of a nonprofit breached their fiduciary duties. Other cases—some new and some old—show how directors of nonprofits sometimes find themselves in the crosshairs, especially after an institution fails.
Perhaps the best-known case is Stern v. Lucy Webb Hayes Nat’l Training School for Deaconesses & Missionaries, 381 F. Supp. 1003 (D.D.C. 1974), where the district court held that the directors breached their fiduciary duties of care and loyalty by failing to supervise the nonprofit’s finances and by approving transactions that involved self-dealing. The court found that the board’s finance and investment committees had not met for over a decade, and the directors had left management of the nonprofit to two officers who worked largely without supervision. Nevertheless, the court declined to award money damages against the directors, opting instead to impose certain reforms on the board.
Starting in 2007, seven years of litigation (and millions of dollars in legal fees) ensued between two nonprofits interested in the creation of a memorial to Armenians who died during the First World War and two of their directors; the nonprofits lost their claims against the directors and ended up having to indemnify them. The district court denied summary judgment on the issue of whether the directors had breached their fiduciary duties but then concluded after a bench trial that the directors’ decisions and the process by which they made them were reasonable and, even if the directors had breached their duty, the corporation could not show that it suffered injury as a result. Armenian Genocide Museum and Memorial, Inc. v. The Cafesjian Family Foundation, Inc., 691 F. Supp. 2d 132 (D.D.C. 2010); Armenian Assembly of America, Inc., et al., v. Cafesjian, 772 F. Supp. 2d 20 (D.D.C. 2011), aff’d, 758 F.3d 265, 275 (D.C. Cir. 2014).
In 2010, the National Credit Union Administration sued the unpaid volunteer directors of Western Corporate Federal Credit Union seeking $6.8 billion in damages on account of the directors’ alleged failure to supervise the credit union’s investment decisions. The credit union had invested heavily in diversified portfolios of securitized mortgage-backed securities; when the credit crisis hit, the NCUA took over the credit union (much the way the FDIC takes over failed banks) and sued the former directors and officers. The district court granted the directors’ motion to dismiss, holding that the directors were protected by the business judgment rule. Nat’l Credit Union Admin, v. Siravo, et al., No. 10-1597, 2011 WL 8332969, *3 (C.D. Cal. July 7, 2011). (Two of the authors of this feature represented all directors and one officer in this litigation.) The officers did not fare as well; the court held that the business judgment rule did not protect them, and at least some officers ended up paying some money to the NCUA and suffering other sanctions.
These cases are unusual, which goes a long ways toward explaining the unusual rulings. Generally, absent fraud, bad faith, a conflict of interest, a wholesale abdication of responsibility, or decisions that are clearly unreasonable based on facts known at the time, the business judgment rule will protect directors of nonprofits from personal liability for a breach of the duty of care. But vindication can take years of litigation and lots of money.
What Are the Lessons of Lemington Home?
You can be sued. To be sure, directors of for-profit corporations are sued far more often than directors of nonprofits, but directors of nonprofits can be sued, nonetheless.
If you are sued, the litigation can go on for years and be very expensive—even if ultimately you are vindicated.
Because litigation—even unmeritorious litigation—can be expensive, directors should not serve without the protection of adequate directors’ and officers’ insurance (D&O insurance).
Directors of nonprofits, despite usually being volunteers, can face personal liability for breach of their fiduciary duties and will be held to much the same standard of care as directors of for-profit corporations.
Some states have enacted statutes dealing specifically with nonprofit directors’ duty of care. Pennsylvania has such a statute: 15 Pa. Cons. Stat. Ann. § 5712 (2011). [See Lemington, 659 F.3d at 290. Likewise, California has such a statute: Cal. Corp. Code § 7231.] But it is far from clear that these statutes offer directors of nonprofits any more protection than they offer directors of for-profit corporations; the differences are subtle, at best.
The business judgment rule offers directors some protection, but it is not an all-purpose shield against claims based on dereliction of duty, let alone disloyalty or self-dealing. To gain the protection of the business judgment rule, a director must be assiduous and informed before making decisions. Specifically:
The board must supervise: it must ensure that the organization’s management are qualified to perform their duties and are actually performing those duties. The failure of the directors in Lemington Home to do this led to their being jointly and severally liable for $2.25 million in damages [777 F.3d at 626, 628.]
The board must seek and follow independent expert advice where appropriate: the directors in Lemington Home failed to follow the recommendations of independent advisors to replace the Administrator, even after being awarded funds to do so. They also ignored the advice of their bankruptcy counsel. [Lemington, 2013 WL 2158543, at *7.]
Special care must be taken if the nonprofit veers toward insolvency:
Before filing for bankruptcy, consider conducting a viability study. In vacating the award of summary judgment for defendants, the Third Circuit in Lemington Home noted that the Board declined to pursue a viability study before filing for bankruptcy and suggested that this called into question the adequacy of their pre-bankruptcy investigation. Lemington, 659 F.3d at 286, 292. Beware the “deepening insolvency” theory. Although not recognized in every jurisdiction, the theory holds directors and officers accountable to creditors if their post-insolvency management increases the losses that creditors suffer.
This article was originally published as a “Client Alert” on PillsburyLaw.com on March 27, 2015. It is reproduced with permission.
Showing posts with label RiskManagement. Show all posts
Showing posts with label RiskManagement. Show all posts
Monday, April 27, 2015
Wednesday, October 22, 2014
Meet, Greet, Grin and Adjust - RISK eNews
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A SOURCE for Tools, Advice, and Training to control risks… so you can focus on your nonprofit’s mission.
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October 8, 2014
Meet, Greet, Grin and AdjustBy Melanie Lockwood HermanAfter a whirlwind month during which we hosted three, back-to-back risk conferences, life at the Nonprofit Risk Management Center has returned to “normal.” What’s normal? Working with dedicated leaders from a diverse array of mission-directed nonprofits on projects ranging from the development of a cloud application for one client’s 2,800 stakeholder organizations, to performing risk assessments and designing in-person and online training. During a planning session for one of the workshops we’re delivering later this month, our team began talking about how personality types and communication styles contribute to the success of a meeting. And since we generally don’t know the personalities and styles of the nonprofit staff members who will be attending one of our custom workshops, we need to be prepared for anything. On that topic, Director of Client Solutions Kay Nakamura shared two articles that poke fun at the personalities that too often derail thoughtful agendas and the important goal of engaging everyone around the table. If you’ve ever attended a brainstorming session, you’ve probably met a few of these troubling attendee types. From the Black Enterprise article, “Top 5 Most Annoying—And Productivity-Stealing—
· Mr. Talk Alot: According to writer Janell Hazelwood, what delights this meeting attendee most is “the sound of their own voice.” She adds that Mr. Talk Alot is also the participant most likely to elaborate on points that need no further elaboration or engage in distracting side conversations.
· Ms. Micro-Issue: This label is assigned to the attendee who cleverly derails the agenda and draws the conversation to a topic that is of great interest and relevance to her, but is arguably off-track and inapplicable to the rest of the group.
From the Fast Company article, “The Top Ten Meeting Personalities,” meet the Multitasker, the Disrupter and the Interrupter:
· The Multitasker: According to Jackie Yeaney, Chief Marketing Officer of Premier Global Services, “All of us are guilty of multitasking during a meeting. Some of us are better at it than others.” Signs of a multitasker? According to Yeaney, “when asked a question, the Multitasker frequently responds with, “Sorry, I missed that. Could you repeat that?”
· The Disrupter: Taking a risk by not knowing exactly how a meeting will wind up is half the fun for many people who attend lots and lots of meetings. But there is a downside to the risk as well. Yeaney writes that “Changing the topic or taking people down a side street, the Disrupter can sometimes uncover new thinking or creative ideas. But the Disrupter can also blow up an agenda and make other meeting participants irritable and cranky. You'll know the Disrupter as they often end a sentence with “… but I digress.”
· The Interrupter: What meeting wouldn’t benefit from a few good ideas? Yes, but, there’s a time and place for every brilliant comment. Yeaney cautions, “When a good idea comes to mind, the Interrupter can't wait to present it to the group. And does … right at that moment! This personality is not inherently bad because hey, it is a GOOD idea. But have caution: combining the Interrupter with distant relatives the Disrupter and the Long-Winded can create meeting anarchy.”
Risk Rescue for Derailed MeetingsConsider the risk tips below to prevent meetings from going off the rails, or to get them back on track when a familiar personality type gets in the way of your plans for a productive and meaningful conversation.
1. Keep it Timely – A great technique to keep a meeting on track is to adopt and follow a timed agenda. A timed agenda indicates the estimated time that will be devoted to each key discussion topic. It’s a great tool for the meeting minder (the chair or facilitator), particularly when that person (you know who you are!) has a hard time interrupting the attendee who seems determined to hear her voice from start to finish.
2. Choose the Chair with Care – Sometimes senior leaders in a nonprofit aren’t the best meeting facilitators. That’s ok. If there are critical topics to discuss, consider choosing the best meeting facilitator, instead of the staff member at the highest pay grade. A great meeting leader knows how to gently move the discussion from topic to topic, how to engage the quiet attendees, and how to respectfully get the disrupters and interrupters to stand down.
3. Keep a Plan B Close at Hand – Meetings go off the rails for any number of reasons, including sabotage by a participant to “stuff happens.” When you fear your agenda is too skimpy for the time allotted, make sure you have a compelling, meaty topic in mind as an add-on. Always ask the group’s permission before going down the new path. If your concern is that the time may be inadequate, make certain you’ve identified one or two topics that can be postponed until the next time the group meets. Again, ask permission to take those topics off the table out of respect for the published end time for the meeting.
4. Be Flexible – A common mistake is to try to control the discussion and the outcomes. The truth is that the most rewarding workshops and meetings often bring things to light that had been hiding in the darkness for too long. Facilitators who lead scripted and rehearsed brainstorming sessions quickly lose credibility and respect. “Why are we here?” and “This was a waste of my time!” are sentiments you don’t want to hear in the hallway or read on the meeting evaluation form.
The futurists who predicted the demise of in-person meetings and conferences during the Internet age have thus far been proven wrong. Many associations are reporting record attendance at their annual conferences, and we heard over and over again at the Center’s recent risk events that conference and video calls are a poor substitute for face-to-face conversations about controversial and troubling risk topics. Yet even a thoughtful agenda is at risk of spiraling out of control when the usual suspects show up. By considering the risk of a meeting gone wrong before you conduct roll call, you’re in the best possible position to increase the odds that your next meeting, brainstorming session or workshop will be time well spent for all involved.Melanie Herman is Executive Director of the Nonprofit Risk Management Center. Melanie enjoys discussing risk issues against the backdrop of a nonprofit’s mission during custom workshops for Center clients. She welcomes your questions about risk management and the Center’s consulting services and cloud applications. She can be reached at (703) 777-3504 or Melanie@nonprofitrisk.org. |
Risk WebinarsFit-to Suit Risk Policies
My Risk Management Policies, Version 2.0 helps you create custom risk policies for your organization in a matter of minutes. Need well-written policies? This cloud app makes policy drafting easy. After completing the quick registration process, search by keywords, categories or peruse an alphabetized list of 150 templates. Each template offers many options to consider. Some of the templates force you to make practical choices. For example, you might prefer an informal style over formal language. Or perhaps you want to strictly prohibit something that other nonprofits allow! With My Risk Management Policies, Version 2.0, custom-fitting policy language to suit your nonprofit is easy and dare we say… fun!
Version 2.0, What’s New?
We’re excited to announce some terrific new features, plus a bold new design. Many of the new features were developed with client feedback in mind. You spoke and we listened!
· Multiple users, one account — The new version has two levels of users: Account Holder and Added User. This means that two or more staff from one organization can collaborate on the drafting of policies. Want to get your outside counsel involved? No problem! The Account Holder for your nonprofit may grant system access to expert advisors through the “added user” feature.
· Policy drafting tips — We’ve added policy drafting tips at the top of many templates. This is our chance to offer a few hints from our years of experience drafting and editing risk policies for nonprofits!
· More policies than ever before — We have added nearly 50 new policy templates and updated many of the templates in the first version, and we’re not stopping there! As always, we welcome your suggestions for new policy types, new policy language, policy options and more. Send your requests to info@nonprofitrisk.org.
To begin developing customized Risk Management Policies for your nonprofit, click here.
The one-time licensing fee for My Risk Management Policies is only $179 or just $29 if your nonprofit is an Affiliate Member of the Nonprofit Risk Management Center.
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Thursday, May 9, 2013
RISK eNews From The NonProfit Risk Management Center
Thank You to our Generous 2013 Risk SUMMIT Sponsors!
The 2013 Risk SUMMIT will convene this August 25 – 27 in Boston, MA. This annual educational and networking event would not be possible without the generous support of the SUMMIT Corporate Sponsors:
HCA Asset Management, LLC, 501c Agencies Trust, Tangram and ProSight Specialty Insurance, Great American Insurance Group, Canfield and NPIP, Charity First Insurance Services, Inc., First Nonprofit Insurance Company, Chubb Group of Insurance Companies, Munich Reinsurance America, Inc., Philadelphia Insurance Companies, Riverport Insurance Company, Hanover Insurance Group, Inc., andArthur J. Gallagher & Co. and our Group of Companies. If you are interested in joining the line-up of sponsors, contact Jennifer Walther, Director of Client Solutions at (202)-785-3891 or at Jennifer@nonprofitrisk.org.
Inspired by Risk
By Erin Gloeckner
The staff members at the Nonprofit Risk Management Center find inspiration from many sources. We are moved by the ambitious missions of our consulting clients. We admire the unwavering dedication of our volunteer board. We marvel at the steadfast commitment of nonprofit leaders who embrace our tough love advice about risk management. Another source of inspiration is the creativity of risk thought leaders who engage their peers in the development or implementation of risk management strategies.
We also try to inspire our clients and AFFILIATE members to embrace risk-taking as a key to mission fulfillment. With risk and mission in mind, I wrote a poem for this week’s RISK eNews.
Molly Up to Bat
An event, a surprise, a fear come to life.
The big moment at the softball game.
My sister steps up, lights glaring, her breath visible in the cold night air.
Copying the others by slapping her bat on the plate. She never did that before.
The man beside me eagerly munches his hot dog.
A tasty reward after watching his son run home.
I squint my eyes, peering at my sister under bright field lights.
I hear the umpire yell twice: “STRIKE!”
Is it fate or chance? Will she strike out or win?
The boy on the mound winds up with a grin.
Focus is written in the lines of my sister’s face as she readies herself to take a swing of faith.
Children cheer in the stands as I shiver, chilly with uncertainty.
I watch, though I am tempted to look away, cowardly.
The ball takes years to cross the neatly trimmed grass, slowed by my nerves… my motherly concern.
I twist the tassels of my scarf as I wait to hear the call…
Then the ‘CRACK’ rings loud as her bat hits the ball!
Her coach screams “HOME!” and she stumbles into a giddy run.
Adrenaline surges through my heart as I begin to jump.
The painted diamond lights her way as she streaks past third.
Smiling ear to ear, she slides into the dirt.
Crowds chant my sister’s name at her first game of softball.
“Molly! Molly! Molly!”
Three swings to risk it all.
If you’re looking for inspiration for your risk management program, read one of our popular eBooks:
Step Up to the Plate
If you have a story of inspired risk management you want to share with your peers, complete the online speaker proposal form for the 2013 Risk SUMMIT: www.nonprofitrisk.org/summit/ speakers.asp. The new deadline for session proposals is May 15. Join us in Boston this August to hit one out of the ballpark by sharing your inspired approach to identifying and addressing the critical risks facing your nonprofit!
Erin Gloeckner is Project Manager at the Nonprofit Risk Management Center, where she coordinates and supports consulting projects for a diverse array of clients. She’s also working on a brand-new book on managing partnership and fundraising risks. Erin welcomes your feedback on this article or questions about risk issues at erin@nonprofitrisk.org or (202) 785-3891.
Wednesday, May 1, 2013
The Greatest Risk of All from the Non-Profit Risk Management Center
Got Risk Insight? Submit a Session Proposal Today
If you’ve figured out how to identify risks, teach safety and risk management to the board, or engage staff members in risk management initiatives… we want you on the faculty of the 2013 Risk SUMMIT. Visit the conference webpage and complete the workshop proposal form before the May 1 deadline.
The Greatest Risk of All
“I’m only human
Of flesh and blood I’m made
Human
Born to make mistakes”
Of flesh and blood I’m made
Human
Born to make mistakes”
– Human, The Human League, © Universal Music Publishing Group, Kobalt Music Publishing Ltd., EMI Music Publishing.
Many leaders of leading nonprofits worry excessively about external threats: competing organizations, fickle institutional funders, increased government regulations, the unpredictable global economy, radical political changes, and the like. Yet the most serious threats to a nonprofit mission arise from the humanity of our workforce. After all, we’re only human. Avoiding conflict, burying mistakes and feeling apprehensive about risk-taking are familiar components of human DNA.
What’s the Risk of Being Human?
· Conflict: When we ignore conflicting opinions or work styles at the board table or in the staff work room, we may rob our nonprofits of the contributions of creative leaders.
· Mistakes: When we severely punish employees for their errors, we may inadvertently cause staff to bury their mistakes.
· Risk Aversion: When we allow fear to extinguish proposed action that is risky, but potentially mission-advancing, we fail to leverage our reputation and assets.
Don’t Eliminate the Greatest Risk
If the greatest risk facing your nonprofit is its human DNA, how can you manage human nature? Here are a few strategies to consider:
· Embrace Conflict: Identify examples of unresolved conflict in your nonprofit and reflect on the consequences. What toll has conflict avoidance taken on your mission? Have high-performing staff or volunteer leaders walked away in frustration? Acknowledge that conflict is normal. Instead of pretending that everyone agrees, dig deep to find the wisdom in disagreement. Applaud the team member who has the courage to say “I disagree, and here’s why,” when everyone else has voted “yes.”
· Bring Mistakes to the Surface: Unearth mistakes and face them head on. Provide a comfortable space in which to step up and fess up to a mistake. Is that comfortable space consistent in the divisions, departments or functions of your nonprofit? How might you reward staff who bring errors, oversights or even wrongful assumptions to light?
· Resolve to Take More Risk: How often is a creative idea dismissed as “too risky?” Instead of allowing gut reactions or protests from your risk manager to stifle creative ideas, reflect on ways to encourage and inspire risk-taking.
The Center offers numerous resources on the topic of human-inspired risk, including the upcoming webinar on HR Risk: Take the High Road without Getting Lost. Join me live on May 1st at 2 pm Eastern, or register to watch the recording at your convenience. You can also check out some of our articles exploring HR risk and reward:
Melanie Lockwood Herman is Executive Director of the Nonprofit Risk Management Center. She welcomes your comments about people and risk or your questions about the Center’s services at Melanie@nonprofitrisk.orgor (202) 785-3891. The Center provides risk management Cloud tools and resources at www.nonprofitrisk.org and offers custom consulting assistance to organizations unwilling to leave their missions to chance.
Saturday, March 9, 2013
National Council of Nonprofits Offers 3 Ways Board Oversight Keeps Nonprofits Out of Trouble
This article was reprinted with permission from Nonprofit Knowledge Matters, a publication of the National Council of Nonprofits.
What is “Oversight” Anyway?
Board members are told that their role is to provide “oversight.” But what does that really mean? We were curious to investigate how board governance “experts” define board “oversight." We compiled this “Top 3 list” in case you are curious too.
1. Follow-through (aka “accountability”). What good is setting policy if the policies aren’t followed? Ellis Carter, Esq., author of the CharityLaw Blog, points out in her piece titled, “Top 15 Non-profit Board Governance Mistakes (From a Legal Perspective)," that exercising oversight is all about making sure that someone (the board) actually follows up on the authority the board delegates to staff and committees:“Oversight is commonly exercised through policies and procedures so long as the board ensures that the policies and procedures are actually followed.” An example of the follow-through challenge for boards is apparent in boards’ relationships with executive directors. In that relationship, appropriate “oversight” includes selecting the “right” person to lead the organization, reviewing and approving the appropriate level of compensation for the staff leader, evaluating his/her performance, and ensuring that there is a leadership succession plan in place. But as we know from numerous surveys and reports, including BoardSource’s Nonprofit Governance Index 2012, one of the oversight balls that boards are most likely to drop is evaluating the executive director’s performance. If boards were better at follow through, they would be regularly evaluating executive directors. More consistent follow-through would also help to avoid common symptoms of tensionbetween the board and CEO that signal insufficient (and indeed, a harmful lack of) oversight.
2. Seeing sustainability, not just dollars (aka “financial oversight”). When a board reviews the organization’s budget or considers whether adequate internal controls are in place, these activities are quite properly part of a board’s financial oversight responsibilities. But too often, the activities focus on the immediate cash flow instead of long-term sustainability. Boards that see their role as monitoring the financial health of the nonprofit, rather than just the financial status, will be more likely to ensure that there will be enough resources in the pipeline to continue providing programs -- or alternatively -- that it’s time to make a course correction. As Jeanne Bell, CEO of CompassPoint, points out in her Nonprofit Quarterly article, "Beyond Financial Oversight, Expanding the Board’s Role in Pursuit of Sustainability," in practice “financial oversight” is often defined as a handful of board members who monitor timely financial reports and drill down on budgets. Unfortunately only infrequently do boards look at the organization’s financial sustainability, which Bell describes as the entire “interdependent mix of programs and fundraising activities that work together to achieve a set of impacts and financial results.” As Jan Masaoka points out in her Blue Avocado article, "Ten Myths About Nonprofit Boards," it’s a myth that approving budgets is the “cornerstone” of the board’s financial oversight. By viewing its financial oversight role through a strategic lens, instead of merely an approve-the-budget lens, boards are more likely to see farther, towards financialsustainability. We like the practical way Andy Robinson and Nancy Wasserman put it in the chapter of The Board Member’s Easier Than You Think Guide to Nonprofit Finances entitled, “Finding the Best Altitude For Financial Oversight.” The authors point out that “inexperienced boards tend to work at the wrong altitude by focusing on details better left to staff….” (How’s that for “oversight”?) They offer a chart illustrating examples of what’s properly the board’s role (example: “use actual financial data for planning, oversight, and evaluation”) versus the domain of staff (example: “develop a diversified fundraising plan reflecting budget goals and organizational needs”).
For more insights from these authors on the board’s financial oversight role, we share this author interview with our readers.
3. Avoiding trouble (aka “legal compliance"). While board members are not expected to know every law or regulation that applies to the operations of the nonprofit they volunteer for, it’s clear that making sure that the nonprofit does not violate any laws (or overstep its mission) is the board’s role. In fact, BoardSource includes legal compliance right at the top of its list of “What do boards do?” What if the board doesn’t know what legal obligations apply? As a fiduciary, the board is expected to either learn – or delegate that role to someone else (which then triggers the follow-through oversight requirement) so that the board can be assured that all the bases are covered. In order to be able to provide oversight in this area, boards should try to learn enough about the applicable legal requirements to ask the right questions, such as “Have we filed all the required annual filings with the IRS?” Fortunately, the IRS has improved its website in recent years so it’s relatively easy to research IRS requirements. For state law requirements, the National Council of Nonprofits’ network of State Associations offers board training and state-specific guidance about legal requirements for charitable nonprofits in their states. Reviewing basic legal requirements during board orientations is one way to prepare new board members for their legal compliance oversight role. But even with that background, some board members may not connect the dots between their own oversight responsibilities and the risks of non-compliance. Charity regulators are not shy about investigating the conduct of a nonprofit board, or even proposing their own list of “best practices” for nonprofit boards (such as this very long list of board oversight recommendations produced by Kentucky's Auditor of Public Accounts). When a legal requirement, such as filing annual reports with a Secretary of State, has been missed, this is a red flag for state regulators to investigate the overall conduct of the board, and that could spell a “heap of trouble” for the nonprofit. Consequently, board oversight for legal compliance needs to be taken seriously.
A board that is governing from a perspective of “Let’s follow-through, stay at the right altitude, and take the high road to stay out of trouble” is more likely to focus on how effective the organization is in addressing its stated mission. A board that takes its oversight role seriously is also more likely to spot issues that could spell trouble for the organization down the road – or around the next bend. When a board realizes that it is accountable for not only the “good,” but also “the bad, and the ugly,” that board is more likely to take its oversight role as a champion for the nonprofit’s mission and fiduciary for its assets seriously; those are the boards that will stay out of trouble.
We hope that these musings on the top three ways boards’ oversight keeps nonprofits out of trouble helps you find the right “altitude” for your own board’s oversight. Don’t forget to check the sidebar for more resources, including our invitation to attend a free webinar, Nonprofit Audits in a Nutshell, on March 28th 3:30-4:30 pm (Eastern), sponsored by First Nonprofit Foundation. Jenifer Holland, a governance consultant with BoardSource, will address the board’s role in the audit process.Join us!
Wednesday, July 28, 2010
Security and Risk Management Training for Cultural Organizations
Theft of historical documents plagues records repositories. With careful planning, awareness of warning signs and proactive security solutions, organizations can reduce the window of opportunity for historical record theft. Archival security expert Mimi Bowling will provide an interactive curriculum on archival security, preparing participants to take immediate action to strengthen their local security programs. Participants will receive a certificate upon completion. There is no cost.
Topics include risk awareness; insider theft; facility design and security technology; security of information systems; working with vendors and contractors; research room management and design; developing institutional security policies; procedures and post-theft response; additional topics as requested by participants.
Representatives of NY¹s historical records community, including archives, governments, libraries, museums, historical societies, schools and non-profits will be given first priority. Additional seats are available for security personnel and law enforcement representatives working with these organizations. Out-of-state representatives and others interested in the
topic are also encouraged to register.
September 13, 2010 (Monday)
Ontario County Safety Training Center
Canandaigua, Ontario, NY
September 14, 2010 (Tuesday)
Erie 1 BOCES
West Seneca, Erie, NY
October 4, 2010 (Monday)
Utica Public Library
Utica, Oneida, NY
October 5, 2010 (Tuesday)
Roberson Museum and Science Center
Binghamton, Broome, NY
March 7, 2011 (Monday)
Historic Huguenot Street
New Paltz, Ulster, NY
April 11, 2011 (Monday)
Crandall Public Library
Glens Falls, Warren, NY
April 18, 2011 (Monday)
Town of Massena
Massena, St. Lawrence, NY
Metro NYC Region and
Long Island Region
Spring 2011
TBA
To register, please email Bturner@mail.nysed.gov or call 518-473-0130. Early registration is encouraged and appreciated; only 25 seats available.
Workshop have been made possible by the National Historical Publications and Records Commission, the New York State Historical Records Advisory Board, and the New York State Archives.
Brittany Turner
Project Assistant
"Lessons from a Theft: Bringing Security Tools and Knowledge to New York's
Historical Records Community"
NYS Archives
CEC, Room 9D58
Albany, NY 12230
(PH) 518-473-0130\
(FX) 518-486-1647
Topics include risk awareness; insider theft; facility design and security technology; security of information systems; working with vendors and contractors; research room management and design; developing institutional security policies; procedures and post-theft response; additional topics as requested by participants.
Representatives of NY¹s historical records community, including archives, governments, libraries, museums, historical societies, schools and non-profits will be given first priority. Additional seats are available for security personnel and law enforcement representatives working with these organizations. Out-of-state representatives and others interested in the
topic are also encouraged to register.
September 13, 2010 (Monday)
Ontario County Safety Training Center
Canandaigua, Ontario, NY
September 14, 2010 (Tuesday)
Erie 1 BOCES
West Seneca, Erie, NY
October 4, 2010 (Monday)
Utica Public Library
Utica, Oneida, NY
October 5, 2010 (Tuesday)
Roberson Museum and Science Center
Binghamton, Broome, NY
March 7, 2011 (Monday)
Historic Huguenot Street
New Paltz, Ulster, NY
April 11, 2011 (Monday)
Crandall Public Library
Glens Falls, Warren, NY
April 18, 2011 (Monday)
Town of Massena
Massena, St. Lawrence, NY
Metro NYC Region and
Long Island Region
Spring 2011
TBA
To register, please email Bturner@mail.nysed.gov or call 518-473-0130. Early registration is encouraged and appreciated; only 25 seats available.
Workshop have been made possible by the National Historical Publications and Records Commission, the New York State Historical Records Advisory Board, and the New York State Archives.
Brittany Turner
Project Assistant
"Lessons from a Theft: Bringing Security Tools and Knowledge to New York's
Historical Records Community"
NYS Archives
CEC, Room 9D58
Albany, NY 12230
(PH) 518-473-0130\
(FX) 518-486-1647
Labels:
Event,
Management,
News,
RiskManagement,
Security,
Training
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