Many months ago I was hired to be an expert witness for a nonprofit legal case. My husband thought the whole thing sounded very glamorous (I’m not sure why – maybe he was imagining a juicy Law and Order episode?).
To me, it just seemed very sad.
The situation involved members of a nonprofit suing the board for not representing their interests. Ouch!
So how did they get into this mess?
And, how does a person get to the truth about who did what to whom and to the corporation?
I’ll answer both of these questions starting backward. You get to the truth by reading through the bylaws, the meeting minutes and any other documents that reveal the board’s decision-making/thought process.
For me, as a tried and true bylaws and meeting minute freak of the highest order (just ask my blog), I found the whole thing engrossing.
Rather than it being a complex morass of who said what when, it was more a matter of whether or not the board stuck to the core legal responsibilities of nonprofit boards – the duties of care, loyalty and obedience.
Now you may be scratching your head and saying “Huh? Duties of what?” And if so, you’d have plenty of company in the land of uninformed nonprofit staff and board members.
So let me take a minute to explain each of these really important LEGAL concepts that board members are bound to as fiduciaries of the corporation.
First, the duty of care means, in essence, that a board member must put the same level of thought, care and diligence into the decisions she makes on behalf of the nonprofit that she or any reasonable person would make in any other similar circumstance (for instance, when considering something that would affect her own life or business).
The idea is that the board member treats the decisions she makes seriously and that her actions reflect what she truly believes are in the best interest of the organization.
For example, since you live on planet earth, it is likely that you have a cell phone.
When you got your most recent phone, you had to figure out all kinds of stuff – whether you wanted an Apple or an Android, what kind of plan you wanted, whether you wanted to rent or own, and most important, what kind of really cool case you wanted to rock.
That same kind of preparation and thought needs to happen both prior to AND at board meetings!
What I’m about to say next might shock you: board members have a responsibility (tied to the Duty of Care) to come to meetings prepared!
How can you make decisions about important matters if you haven’t read the materials that were sent to you in advance of the meeting and given them some thought?
Board members need to read, think, and thoughtfully discuss the issues that are brought before them in order to carry out the Duty of Care. It’s that simple.
The Duty of Loyalty is even more straightforward: it simply means disclosing and avoiding conflicts of interest.
That’s pretty easy to do. Board members need to make sure that they don’t vote on any matter that might personally affect them or a family member or is in conflict with another corporation they represent (including, another nonprofit).
That doesn’t mean that a nonprofit can’t contract with a board member to provide services to the organization. They can as long as there is a clear process that shows that potential conflicts have been discussed openly.
Boards can avoid conflicts by getting multiple bids for goods and services and making sure that the board member who might provide those goods/services isn’t present when the vote concerning him is taken.
In fact, the board isn’t even legally obligated to take the lowest bid as long as the bid selected was based on reasonable criteria (it’s that “what’s in the best interest of the organization” principle).
The Duty of Obedience is as straightforward as it gets. It means that board members need to obey the laws of the land, the rules governing the nonprofit (including what’s written in the bylaws), and be faithful to the mission.
Boards fail the Duty of Obedience when they do things like approve the 990s without all members understanding the information that is contained within that document.
They also fail the test when they approve new grants or programs that are unrelated to the mission (unless, of course, they decide a change in mission is in order and make that happen).
The moral of the story is this: the best way to avoid a lawsuit is to ensure that your board understands its fiduciary duties and abides by them.
Please note: this is a blog, not a comprehensive list of everything that you’ll need to keep your nonprofit lawsuit free. I hope the information I’ve provided is helpful but keep in mind, that what I’ve written does not constitute legal advice.
Pat Libby is a nonprofit consultant. She has served as an academic, senior executive, board member, and consultant to innumerable nonprofit organizations and foundations since 1978.
Get in touch if you have any questions.