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Legal Responsibilities of Board Members


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  • 1. Bill Taylor
    UW Cooperative Extension Service
    Northeast Community Development Educator
    The University of Wyoming is an equal opportunity/affirmative action institution.
  • 2. Reasonableness & Prudence
    Fulfilling fiduciary responsibilities
    Board members – fiduciaries
    Held to standard of “reasonableness and prudence”
    Must treat organization’s assets and other resources with same care as their own
    Guilt by omission
    Passive or inactive in overseeing activities of organization
    Fail to meet standard of fiduciary responsibility
    UW Community Development Education
  • 3. Board Members as Fiduciaries
    Responsibility traces back to individual board member
    Can be liable for some actions undertaken in organization’s name
    Resources of organization held in trust
    Same obligation toward trust’s assets as to own assets
    Individual members are fiduciaries
    Law imposes same standards for conduct & management as for board as a whole
    Liability exposure for county board members - minimal
    UW Community Development Education
  • 4. Chief Responsibility
    UW Community Development Education
    Maintain financial accountability & effective oversight of organization
    Due diligence:
    Organization is well managed
    Financial situation remains sound
  • 5. Shared Responsibilities
    UW Community Development Education
    Proper organizational management
    Presence of quorum
    Legal action often traced to inattention, passiveness, or captive board members (someone else makes their decisions)
    Members should:
    Attend meetings regularly
    Make independent & justified decisions (not just vote w/ majority)
    Review minutes carefully before approval
  • 6. Accountability
    UW Community Development Education
    Since all board members are liable for their own acts and deeds they need to hold each other accountable.
    Since county-appointed board members’ liability is minimal, this is not as much of a legal issue as just a good governance practice.
  • 7. General Board Responsibilities
    UW Community Development Education
    Review & approve mission statement
    Approve & oversee strategic plan & maintain strategic oversight of operation
    Select, evaluate, determine compensation of CEO
    Evaluate performance & establish compensation of senior leadership team
    Provide for management succession
    Oversee financial reporting & audit process, internal controls, legal compliance
    Hold management accountable for performance
    Ensure inclusiveness & diversity
  • 8. The Three “D”s
    UW Community Development Education
    Duty of Care
    Duty of Loyalty
    Duty of Obedience
  • 9. Duty of Care
    UW Community Development Education
    Directors must:
    Be reasonably informed of organizational activities
    Participate in decisions
    Do so in good faith & with care of ordinarily prudent person in similar circumstances
    Requires members pay attention
  • 10. Duty of Care (cont.)
    UW Community Development Education
    Carried out by:
    Attending board & committee meetings
    Preparing in advance by reviewing reports, minutes, agenda, etc.
    Obtaining information before voting
    Exercising independent judgment
    Periodically examining credentials and performance of staff & volunteers
    Frequently reviewing finances and financial policies
    Ensuring compliance with state & federal requirements, especially annual reports
  • 11. Duty of Loyalty
    UW Community Development Education
    Exercise power in interest of board & not in own or another entity’s interest
    Carried out by:
    Adhering to conflict-of-interest policy
    Disclosing any conflicts of interest
    Avoiding board opportunities for personal gain or benefit
    Maintaining confidentiality of information
  • 12. Duty of Obedience
    UW Community Development Education
    Comply with federal, state, local laws
    Adhere to board’s bylaws
    Remain guardians of the mission
    Carried out by:
    Ensuring compliance with all regulatory & reporting requirements
    Examining all documents that govern the organization (i.e. bylaws)
    Making decisions that fall within the scope of the mission and governing documents
  • 13. PITFALL
    UW Community Development Education
    • When board members have difficulties attending meetings, it is tempting to lower the quorum requirements to be able to conduct meetings regularly. By accommodating the missing participants, however, not only does the board send the wrong message, fewer board members end up making important decisions. A better solution is to allow directors who cannot attend in person to join the meeting by telephone, which is allowed in every state (usually when authorized in the bylaws) and counts the same as presence in person.
  • TIP
    UW Community Development Education
    • It is not always possible to list all the potential conflicts on a disclosure form. Many conflicts of interest are tied to a specific transaction or a decision that could not be anticipated. Each situation should be evaluated on the basis of its facts and circumstances.
    • 14. (For county board members this only applies to financial conflicts when investing and/or expending funds.)
    UW Community Development Education
    Do we regularly have a quorum at board meetings?
    If the bylaws have a policy about missing meetings (such as termination of the member’s involvement), do we uniformly follow the policy?
    Do all board members regularly receive and read information in advance of board meetings?
    Do we refer to our mission statement as a guide when making decisions?
    Do individual board members periodically review and sign our board’s conflict-of-interest policy?
    Who in our organization is responsible for keeping the legal documents?
    Can we easily access legal documents if we need them?
  • 15. Governance & Management
    UW Community Development Education
    Board members are policymakers
    Develop plans for organization & oversee its affairs
    Day-to-day management is province of employees (if they exist)
    Board may delegate day-to-day management to CEO, who may hire additional staff if finances allow
    Board may delegate certain governance duties to officers
  • 16. Governance & Management (cont.)
    UW Community Development Education
    Other board structures
    Bylaws should specify permanent standing committees, provide for creation of other committees, describe how committees are appointed
    Non-board members may serve on committees – they do not hold personal liability for board action
    Common committees:
  • 17. Governance & Management (cont.)
    UW Community Development Education
    Board may create advisory council
    To avoid confusion, actions should be limited to:
    Making recommendations
    Providing background for board decisions
    Furnishing pros & cons for issues
    Listing questions that are appropriate to the situation
    Carrying out specific tasks
  • 18. PITFALL
    UW Community Development Education
    • Failing to clarify the expectations for all board members is like building a board without an action plan: You may have an impressive-looking board that seems to get along well but ends up accomplishing little.
  • TIPS
    UW Community Development Education
    It is crucial to keep the governance committee involved in defining the board’s needs and candidates’ qualifications. The objective is always to build the most competent and committed board possible.
    Consider having your board members fill out and sign personal commitment forms, thus encouraging them to individualize their participation. Board members tend to be more engaged when they have had a say in their own activities rather than having them dictated by someone else.
    UW Community Development Education
    Do we have a copy of our state laws, and are we operating in concordance with all the statutes?
    When did we last review our bylaws? Are there any provisions we should add or delete?
    Have we clearly defined the voting rights of any ex officio members of the board?
    Do we have job descriptions for our committees that also define the limits of their authority?
  • 20. Managing Legal Liability
    UW Community Development Education
    Issues most likely to arouse concern:
    Ethical behavior
    Money-related issues
  • 21. Most Common Reasons Boards are Sued
    UW Community Development Education
    Employment claims (hiring, firing, contracts, benefits)
    Contract claims (length of agreement, termination, work specification, payment terms)
    Discrimination claims (employment, volunteers, programs)
    Torts/negligence (injuries, theft)
    Release of records (availability of records)
    (County board members’ exposure here is minimal)
  • 22. Conduct of Employees
    UW Community Development Education
    Conduct of employee is considered conduct by board
    If action is outside scope of employment, individual can be personally liable
    If board has not carried out oversight duties, it may be implicated due to negligence of duty of care
  • 23. Protective Strategies
    UW Community Development Education
    Key – proactive positive action, being good board members
    Proactive governance:
    Recognize duties & responsibilities of board service
    Develop basic understanding of legal framework of organization & its structure
    Show good intentions by being accountable for board actions
    Draft policies, ensure policies are followed, refrain from delegating fiduciary duties, rely on expert advice when needed
  • 24. PITFALL
    UW Community Development Education
    • Asking questions about board business via e-mail can bring quick responses but also easily evolve into evidence used to attack someone or charge him with an offense – especially if the messages are carelessly worded. Just remember: Lawyers think of e-mail as “exhibit mail.”
  • TIPS
    UW Community Development Education
    Develop a policy requiring the organization’s lawyer (particularly outside counsel) to report to one or more board members if staff does not properly handle or resolve a legal matter.
    Use consent agendas to allow the board more time to deliberate on difficult issues. If time is not of the essence with a specific issue, it is wiser to table the discussion and make a more educated decision during the next board meeting after more research has been conducted. Airing all sides of an issue carefully is one way to protect board members later on.
    UW Community Development Education
    • Has the board ensured that the personnel policies include all the necessary clauses to help protect us from the most common legal issues?
    • 26. (Not an issue if the county has a Human Resources Department that provides uniformity.)
  • Principles for Good Governance
    UW Community Development Education
    Legal Compliance and Public Disclosure
    Comply with applicable federal, state, and local law.
    Have a formally adopted, written code of ethics with which all of the directors, staff, and volunteers are familiar and to which they adhere.
    Implement policies and procedures to ensure that all conflicts-of-interest, or appearance of them, within the organization and its board are appropriately managed though disclosure, recusal, or other means.
  • 27. Principles for Good Governance (cont.)
    UW Community Development Education
    Legal Compliance and Public Disclosure (cont.)
    Implement policies and procedures that enable individuals to come forward with information on illegal practices or violations of organizational policies. Specify that the organization will not retaliate against, and will protect the confidentiality of, individuals who make good-faith reports.
    Implement policies and procedures to preserve the organization's important documents and business records.
  • 28. Principles for Good Governance (cont.)
    UW Community Development Education
    Legal Compliance and Public Disclosure (cont.)
    Ensure that the organization has adequate plans to protect its assets - its property, financial and human resources, programmatic content and material, and integrity and reputation - against damage or loss. Regularly review the organization's need for insurance, as well as take other actions to mitigate risk.
    Make information about its operations, including its governance, finances, programs, and other activities, widely available to the public.
  • 29. Principles for Good Governance (cont.)
    UW Community Development Education
    Effective Governance
    Must have a governing body that is responsible for approving the organization's mission and strategic direction, annual budget, key financial transactions, compensation practices, and fiscal and governance policies.
    Meet regularly to conduct business and fulfill duties.
    Establish and periodically review size and structure. Have enough members to allow for full deliberation and diversity of thinking on organizational matters. This generally means that a board should have at least five members.
  • 30. Principles for Good Governance (cont.)
    UW Community Development Education
    Effective Governance (cont.)
    Include members with the diverse background (including ethnic, racial, and gender perspectives), experience, and organizational and financial skills necessary to advance the organization's mission.
    Hire, oversee, and annually evaluate the performance of the organization's CEO. Conduct an evaluation prior to any change in the CEO’s compensation, unless a multiyear contract is in force or the change consists solely of routine adjustments for inflation or cost of living.
    Ensure that separate individuals hold the positions of chief staff officer, board chair, and board treasurer. Organizations without paid staff should ensure that the positions of board chair and treasurer are separately held.
  • 31. Principles for Good Governance (cont.)
    UW Community Development Education
    Effective Governance (cont.)
    Establish an effective, systematic process for educating and communicating with board members to ensure that they are aware of their legal and ethical responsibilities, are knowledgeable about the programs and other activities of the organization, and can effectively carry out their oversight functions.
    Board members evaluate their performance as a group and as individuals at least every three years. Have clear procedures for removing members who are unable to fulfill their responsibilities.
    Review the organization’s governing instruments at least every five years. Regularly review the organization's mission and goals and evaluate at least every five years the organization's goals, programs, and other activities to be sure they advance its mission and make prudent use of its resources.
  • 32. Principles for Good Governance (cont.)
    UW Community Development Education
    Strong Financial Oversight
    Keep complete, current, and accurate financial records. Review timely reports of the organization's financial activities and have a qualified, independent financial expert audit or review these statements annually in a manner appropriate to the organization's size and scale of operations.
    Institute policies and procedures to ensure that the organization manages and invests its funds responsibly, in accordance with requirements of law. The full board should approve the organization's annual budget and monitor performance against the budget.
    Spend a significant portion of the annual budget on programs that pursue the mission. The budget should provide sufficient resources for effective administration of the organization.
  • 33. Principles for Good Governance (cont.)
    UW Community Development Education
    Strong Financial Oversight (cont.)
    Establish clear, written policies for paying or reimbursing expenses incurred by anyone conducting business or traveling on board’s behalf, including the types of expenses that can be paid or reimbursed and the documentation required. Require that travel on behalf of the organization is to be undertaken in a cost-effective manner.
    Neither pay for nor reimburse travel expenditures for spouses, dependents, or others who are accompanying someone conducting business for the organization unless they are also conducting the business.
  • 34. TIPS
    UW Community Development Education
    No law requires bylaws or policies to be written in “legalese.” Use clear language to make your statements understandable without ambiguity so they are not open to many different interpretations.
    Develop an annual evaluation process to ensure the board provides the chief executive with formal feedback regarding on-the-job performance. According to BoardSource’s ‘Governance Index 2007,’ chief executives who receive a written evaluation are more satisfied with their jobs than those who don’t – 88 percent versus 78 percent.
    UW Community Development Education
    How well does our organization perform against the governance principles listed above?
    Did we receive a clean audit? Have we addressed all the issues mentioned in the auditor’s management letter?
    Do we adhere to safe harbor processes (the rebuttable presumption under the intermediate sanctions rules), when we determine the chief executive’s compensation? Who on the board is responsible for that?
  • 36. Safe Harbor Processes
    UW Community Development Education
    IRS regulations include a "safeharbor" provision for nonprofits that meet three tests: (1) compensation must be based on data from comparable organizations, (2) an authorized body, whose members do not have any conflicts of interest, must approve the transaction in advance, and (3) the authorized body must document its decision.
  • 37. Guardian of the Mission
    UW Community Development Education
    Every organization needs to define its fundamental purpose, philosophy, values & find appropriate ways to tie them to meaningful activities
    Without purpose & mission there is no mandate
  • 38. Guardian of the Mission (cont.)
    UW Community Development Education
    Primary & most important duty of board – act as guardian of the mission
    Fully understand & be able to articulate the mission
    Understand overall operations
    Read & understand materials prepared & distributed by organization
  • 39. Ensure Compliance with Laws & Rules
    UW Community Development Education
    Must function within legal framework and own documents
    Periodically review bylaws & ensure organization is in compliance
    Understand relationship between & among organization’s related entities and assess their purpose
    Engage an auditor to attest to the reliability of board’s financial condition
  • 40. Promote Vigilance
    UW Community Development Education
    Collective & individual
    Up-to-date board book
    Minimum contents:
    Board roster & address list
    Organization’s articles
    Documents w/ legal overtones
    Latest financial statements
    Job descriptions for board members
    List of expectations for individual board members
  • 41. Promote Vigilance (cont.)
    UW Community Development Education
    Checklist (cont.)
    Keep up with issues affecting the board
    Consider retreats, educational seminars
    Continuous education is effective in providing incentive & needed tools
    Regularly attend board meetings
    Actively participate in the decision making process
    Ask questions
    Carefully consider board minutes
    Stay within bounds
    Stay with oversight – don’t meddle in the CEO’s duties
  • 42. Reference
    UW Community Development Education
    Source: Hopkins, Bruce R., JD, LLM. Legal Responsibilities of Nonprofit Boards, Second Edition. 2009. Book 2 in the Governance Series published by BoardSource, ISBN 1-58686-107-7.
    The author has attempted to extract those items that apply to appointed and elected boards, as well as nonprofit. However, it is important to check with your County Attorney to determine the specific requirements and liabilities for members of your particular appointed or elected board.
  • 43. Questions/Comments?
    UW Community Development Education