Legal Responsibilities of Board MembersPresentation Transcript
Bill Taylor UW Cooperative Extension Service Northeast Community Development Educator LEGAL RESPONSIBILITIES OF BOARD MEMBERS The University of Wyoming is an equal opportunity/affirmative action institution.
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 2 UW Community Development Education
Board Members as Fiduciaries Responsibility traces back to individual board member Can be liable for some actions undertaken in organization’s name Trustee 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 3 UW Community Development Education
Chief Responsibility UW Community Development Education 4 Maintain financial accountability & effective oversight of organization Due diligence: Organization is well managed Financial situation remains sound Requires: Objectivity Unselfishness Responsibility Honesty Trustworthiness Efficiency
Shared Responsibilities UW Community Development Education 5 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
Accountability UW Community Development Education 6 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.
General Board Responsibilities UW Community Development Education 7 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
The Three “D”s UW Community Development Education 8 Duty of Care Duty of Loyalty Duty of Obedience
Duty of Care UW Community Development Education 9 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
Duty of Care (cont.) UW Community Development Education 10 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
Duty of Loyalty UW Community Development Education 11 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
Duty of Obedience UW Community Development Education 12 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
PITFALL UW Community Development Education 13
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 14
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.
(For county board members this only applies to financial conflicts when investing and/or expending funds.)
QUESTIONS THE BOARD SHOULD ASK UW Community Development Education 15 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?
Governance & Management UW Community Development Education 16 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
Governance & Management (cont.) UW Community Development Education 17 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: Executive Finance Governance Development Audit
Governance & Management (cont.) UW Community Development Education 18 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
PITFALL UW Community Development Education 19
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 20 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.
QUESTIONS THE BOARD SHOULD ASK UW Community Development Education 21 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?
Managing Legal Liability UW Community Development Education 22 Issues most likely to arouse concern: Ethical behavior Transparency Money-related issues
Most Common Reasons Boards are Sued UW Community Development Education 23 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) Defamation (County board members’ exposure here is minimal)
Conduct of Employees UW Community Development Education 24 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
Protective Strategies UW Community Development Education 25 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
PITFALL UW Community Development Education 26
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 27 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.
QUESTION THE BOARD SHOULD ASK UW Community Development Education 28
Has the board ensured that the personnel policies include all the necessary clauses to help protect us from the most common legal issues?
(Not an issue if the county has a Human Resources Department that provides uniformity.)
Principles for Good Governance UW Community Development Education 29 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.
Principles for Good Governance (cont.) UW Community Development Education 30 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.
Principles for Good Governance (cont.) UW Community Development Education 31 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.
Principles for Good Governance (cont.) UW Community Development Education 32 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.
Principles for Good Governance (cont.) UW Community Development Education 33 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.
Principles for Good Governance (cont.) UW Community Development Education 34 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.
Principles for Good Governance (cont.) UW Community Development Education 35 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.
Principles for Good Governance (cont.) UW Community Development Education 36 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.
TIPS UW Community Development Education 37 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.
QUESTIONS THE BOARD SHOULD ASK UW Community Development Education 38 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?
Safe Harbor Processes UW Community Development Education 39 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.
Guardian of the Mission UW Community Development Education 40 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
Guardian of the Mission (cont.) UW Community Development Education 41 Primary & most important duty of board – act as guardian of the mission Checklist: Fully understand & be able to articulate the mission Understand overall operations Read & understand materials prepared & distributed by organization
Ensure Compliance with Laws & Rules UW Community Development Education 42 Must function within legal framework and own documents Checklist: 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
Promote Vigilance UW Community Development Education 43 Collective & individual Checklist: Up-to-date board book Minimum contents: Board roster & address list Organization’s articles Bylaws Documents w/ legal overtones Latest financial statements Job descriptions for board members List of expectations for individual board members
Promote Vigilance (cont.) UW Community Development Education 44 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
Reference UW Community Development Education 45 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.
Questions/Comments? UW Community Development Education 46