Business Essentials for Nonprofit
Leaders
2012-2013
Governance of Nonprofit
Organizations
Business Essentials for Nonprofit Leaders
Thursday August 22, 2013
Goals
Explore the meaning of “governance” in the nonprofit
context.
Give nonprofit leaders tools to impact the governance
of their organizations.
Today’s Agenda
-
1:00-1:15 Introduction to Business
Essentials for Nonprofit Leaders
1:15-2:20 Governance: Developing a
common understanding
2:40 – 3:45 Identifying Best Practices and
applying practices in hypothetical situations
I. Governance
Governance has both technical and operational
aspects.
- Technically – a legal relationship between a group of
people and a corporation or other entity
- Operationally – a functional relationship between an
organization and a group of people
Key to governance: The Board
"Board" or "board of
directors" means the
group of natural
persons vested by the
corporation with the
management of its
affairs whether or not
the group is designated
as directors in the
articles of incorporation
or bylaws.
The Board’s Role
The role of the Board of Directors is to direct and
manage the organization.
Board has ultimate obligation to manage the
organization’s assets and activities.
Board’s Responsibilities – By Statute
Except as otherwise
provided in the articles
of incorporation, all
corporate powers shall
be exercised under the
authority of, and the
affairs of the
corporation managed
under the direction of,
its Board of Directors.
See North Carolina Nonprofit
Corporation Act,
N.C.G.S. § 55A-8-01.
Board Delegates
As a general rule, unless prohibited by the articles
or bylaws, the Board of Directors may delegate the
management of activities of the corporation to
committees, provided the committee is comprised
of two or more members.
Limits on Power to Delegate
While the Board may appoint committees, such
committees may not exercise extraordinary powers.
Specifically, a committee of the board shall not:
-
-
Authorize distributions;
Recommend to members or approve dissolution, merger or the
sale, pledge, or transfer of all or substantially all of the corporation’s
assets;
Elect, appoint or remove directors, or fill vacancies on the board or
on any of its committees; or
Adopt, amend, or repeal the articles of incorporation or bylaws.
See North Carolina Nonprofit Corporation Act, N.C.G.S. § 55A-8-25.
Governance: Operational
Governance is the process of setting goals, defining
expectations, allocating resources, and verifying
performance.
Board Member Duties in the nonprofit sector
Directors of nonprofit
corporations have a
unique duty to manage
the affairs of the
organization so that its
property will be used for
the “public purposes” for
which it was entrusted.
II. Board Composition
Electing the Board:
Bylaws provide rules for board election
- Membership Organizations – Board is elected by
members at annual meeting
- Non-membership Organizations – Board
nominates and appoints board members directly.
Composition is a Question of Mission
Terms and Succession
Organizations benefit
from stability.
Terms should be defined
in the by-laws and
include:
-Staggered seats
-Some provision for
succession (e.g. limited
number of terms or years and
nominating committee for new
members).
A note on required elements in Bylaws
Conflicts of Interest Policy (IRS)
- Duty to disclose
- Duty not to vote on self-interested matters
- Annual statement from each board member
Document retention policy (Sarbanes-Oxley§802)
- Crime to knowingly destroy documents and records
- Policy defines how long records will be retained
Whistleblower (SOX)
III. What is Governed
The Nonprofit Corporation: A corporation formed
under state statute which:
- Does not distribute earnings in excess of expenses to
any individual or group.
- Maintains tax-exempt purpose through activities that are
consistent with IRC 501
Non-distribution Constraint
Once In…
Distribution Constraints – income in excess of
expenses may not be distributed.
Dissolution Constraints – on dissolution, property may
only be distributed to another nonprofit.
Assets
Property
Staff
Time
In Furtherance of Exempt
Purpose
Purposes
Every corporation
incorporated under this
Chapter has the purpose
of engaging in any lawful
activity unless a more
limited purpose is set
forth in its articles of
incorporation.
See North Carolina Nonprofit
Corporation Act,
N.C.G.S. § 55A-8-01
IV. The Board’s Responsibilities
The role of the Board of Directors is to direct and
manage the organization.
Board has ultimate obligation to manage organization’s
assets and activities.
• The board may use agents and employees to
carry out day to day activities and to run the
organization’s programs. See North Carolina Nonprofit
Corporation Act, N.C.G.S. § 55A-8-01.
Fiduciary Duties of Directors
Nonprofit directors and officers have two primary
duties;
- The Duty of Care
- The Duty of Loyalty
These are owed to the organization and in some
circumstances to third parties such as members.
Duty of Care
A director shall discharge his or her duties in good
faith with the care an ordinarily prudent person in a
like position would exercise under similar
circumstances and in a manner the director
reasonably believes to be in the best interests of the
corporation.
See North Carolina Nonprofit Corporation Act, N.C.G.S. § 55A-8-30.
Duty of Care: Informed & In Good Faith
The Duty of Care requires that a Director be
informed and act in good faith.
Duty of Care: Attend Meetings
To meet the Duty of Care, Directors must- Attend Board meetings,
- Have access to all organizational information,
and
- Make ‘informed’ decisions.
Duty of Care: Obtaining Needed Information
The Duty of Care requires board members to seek
out information they know they need in order to
make an informed decision. This includes
information that a board member should know
he/she needs in order to make an informed decision
based on a reasonable person standard.
Duty of Loyalty
Board members have a duty to pursue the
corporation’s best interests rather than those of
your own or others.
(e.g. avoiding conflicts of interest, whether over money
or politics)
Duty of Loyalty: Prohibits Self-Dealing
A director is prohibited from engaging in selfdealing unless there is full disclosure to the
board AND the transaction is clearly in the
corporation’s best financial interest AND a
majority of the board must authorize, approve,
or ratify the transaction.
Conflict of interest provisions may be found at
N.C.G.S. § 55A-8-31.
Duty of Loyalty: Requires Faithfulness
The Duty of Loyalty requires a director’s faithful
pursuit of the interests of the organization, rather
than the financial or other interests of the director
or another person or organization.
Note : Conflict of Interest Policy
The organization should adopt a clear conflict of
interest policy
- Define conflicts and provide for resolution
- Make sure every board member has a copy of the
policy
- Incorporate the policy into your bylaws and board
training materials
Board Member Duties When
Fulfilling Responsibilities
Directors of nonprofit corporations have a unique
duty to manage the affairs of the organization so
that its property will be used for the “public
purposes” for which it was entrusted.
V. To Whom is the Board Accountable?
Nonprofit and for-profit boards differ in who they
are accountable to:
- For profits – Shareholder
- Nonprofits are accountable to their members, to the
IRS, the Secretary of State and funders.
Standing to Sue
Potential plaintiffs include:
-
The Attorney General’s Office
Beneficiaries with a Special Interest
Fellow Directors
Members
The general public lacks standing.
Potential Liability
A member of a nonprofit board may be personally
liable for any distributions made by the nonprofit in
violation of the North Carolina Nonprofit
Corporation Act, when made in breach of the Duty
of Care.
See North Carolina Nonprofit Corporation Act, N.C.G.S. § 55A-8-33.
Standard of Liability
Nonprofit directors are required to discharge their
duties of Care and Loyalty:
1. In good faith
2. With the care an ordinary person would
exercise in a similar situation.
3. In a manner the officer reasonably believes to be in
the best interests of the corporation and its
members.
Acting with Care Protects the Board Member
A director is not liable to the corporation, any
member, or any other person for any action taken or
not taken as a director, if the director acted in
compliance with N.C.G.S. § 55A-8-30.
Impact on Tax Exemption
A board’s failure to govern an organization in a way
that is inconsistent with the “public purpose” can
lead to a loss of the organization’s tax-exempt
recognition.
Three “I’s”
Idemnity
Immunity
Insurance
VI. Internal Revenue Code 501 and
the Board
501(c)(3) – Charitable, educational or religious
organization
501(c)(4) – Social Welfare Organization
501(c)(6) – Business or Professional Association
Board Duties & The 4 Tests
1. Manage assets to comply with I.R.S.
regulations.
2. Maintain public purpose
3. Avoid private benefit
4. Monitor political activity and lobbying
Manage Assets to Comply with Tax Exemption
A nonprofit must be operated in a way that is
consistent with its tax status. For example:
- Not operated for the benefit of private interests or
designated individuals, the creator, or family members.
- Transactions between the 501(c)(3) and board members
that result in gain must be looked at carefully.
Maintain a Public Purpose
Activities must substantially serve the organization’s
nonprofit purpose.
- Avoid substantial unrelated activity
- Avoid primarily commercial purpose
Private Benefit and Lobbying
Nonprofit can not become a conduit for private benefit.
Nonprofit may not engage in substantial lobbying and
is prohibited from political activity.
VII. What does this mean for a board?
What is board service for many Board Members?
- Volunteer service
- “Advisory” and not “active”
What does this mean for the organization?
The board’s responsibilities are not aligned with the
expectations of the members.
Therefore:
- Support for decisions can be difficult to build.
- Division of work suffers.
- Funding and marketing are not efficient.
The Value of Board Training
By clearly communicating board member
responsibility and the role of board governance,
you can facilitate board involvement and create
additional resources to promote the organization’s
mission.
Training Topics
Board structure, role and composition
Board procedures
Nonprofit’s tax-exempt purpose and activities
Financial procedures
Organizational structure
Questions?