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The Non Profit Board of Directors A Legal Perspective.

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1 The Non Profit Board of Directors A Legal Perspective

2 An Introductory Quiz 1. Who owns your organization? 2. What is the difference between a "Not For Profit Organization" and a "Non Profit Organization”? 3. Which is your organization?

3 Why Are We Studying This?

4  Help us better understand our role as board members.  Help us better understand the standards to which we will be held accountable.

5 The Non Profit Board: A Legal Perspective The Corporation The Non Profit Corporation The Board of Directors The Director of the Non Profit Corporation Obligations of Directors Directors’ Rights Knowledge of Illegal Activities Directors’ Risk Taxation Director Orientation

6 The Corporation An artificial creation of a government  Usually by a state

7 The Corporation A legal construct that allows a group of people to act as one person  Own Property  Conduct Business Transactions  Assume Liability

8 The Corporation In much the same manner that marriage allows two people to:  Own Property  Conduct Business  Assume Liability

9 The Corporation Corporations are formed as a result of a specific act of government.  State Corporate Law  Articles of Incorporation or Charter  By Laws

10 The Corporation Corporations do not exist merely at the desire of their members...... rather they exist with the compliance with regulations of government.

11 The Non Profit Board: A Legal Perspective The Corporation The Non Profit Corporation The Board of Directors The Director of the Non Profit Corporation Obligations of Directors Directors’ Rights Knowledge of Illegal Activities Directors’ Risk Taxation Director Orientation

12 The Corporation A very special type of corporation  NY Not For Profit Corporation Law  Articles of Incorporation  By Laws

13 The Non Profit Corporation A very special type of corporation  Receives dispensations from state and federal governments  Governed by the state not for profit law

14 The Non Profit Corporation Dispensations from state and federal governments:  Exemption from state and federal corporate income tax  Exemption from state sales tax  Exemption from federal fuel tax

15 Types of Non Profit Corporations  Public benefit corporations  Mutual benefit corporations  Religious corporations

16 The Non Profit Board: A Legal Perspective The Corporation The Non Profit Corporation The Board of Directors The Director of the Non Profit Corporation Obligations of Directors Directors’ Rights Knowledge of Illegal Activities Directors’ Risk Taxation Director Orientation

17 The Board of Directors

18  The Board of Directors Acts as a Body  The Board of Directors Acts for the Benefit of Others

19 The Board of Directors The Board of Directors Acts as a Body  The power of the Board of Directors is instilled in the Board as a group  Individual members of the Board of Directors individually have no power, except where specified by the by laws of the corporation

20 The Board of Directors As a body the Board:  Makes decisions for and about the corporation  Specifies actions to be taken by the corporation  Engages in business transactions

21 The Board of Directors The Board of Directors Acts for the Benefit of Others... In a for-profit corporation  stockholders

22 The Board of Directors The Board of Directors Acts for the Benefit of Others... In a not for profit corporation  constituency which elects or appoints him/her  constituency of service  constituency of accountability

23 Governance Governance is the contemporary descriptor of the role of the Board of Directors.

24 Governance ~ Traditional Definition  Make and administer the policy and affairs of the corporation

25 Governance ~ Contemporary Definition  The framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in the firm's relationship with all its stakeholders.

26 Governance ~ Contemporary Definition This framework consists of:  Explicit and implicit contracts between the firm and the stakeholders for distribution of responsibilities, rights, and rewards

27 Governance ~ Contemporary Definition This framework consists of:  Procedures for reconciling the sometimes conflicting interests of stakeholders in accordance with their duties, privileges, and roles

28 Governance ~ Contemporary Definition This framework consists of:  Procedures for proper supervision, control, and information-flows to serve as a system of checks-and-balances Source: www.businessdictionary.com

29 Corporate Structure Officers, employees, and agents of the corporation carry out actions determined by the Board of Directors

30 Corporate Structure ~ Officers Individuals who hold positions of authority that are defined in the by laws Execute decisions of the board, in representation of the corporation:  Sign contracts  Sign loan agreements  Buy and sell property

31 Corporate Structure ~ Chief Executive Highest ranking manager or administrator  In charge of overall operation of corporation  Officer, board member, or employee

32 Corporate Structure ~ Employees Individuals who work for the corporation  Perform the corporation’s activities  Compensated or volunteer

33 Corporate Structure ~ Agents Individuals who represent the corporation  Usually through a contractual relationship  Corporation bears responsibility Some examples:  Accountant  Attorney  Billing company

34 Self Assessment What is our corporation supposed to do, and for whom?

35 The Non Profit Board: A Legal Perspective The Corporation The Non Profit Corporation The Board of Directors The Director of the Non Profit Corporation Obligations of Directors Directors’ Rights Knowledge of Illegal Activities Directors’ Risk Taxation Director Orientation

36 The Director of the Non Profit Corporation  A director acts as a part of a board  A director directs, but does not perform, the corporation’s activities  A director acts on behalf of one or more constituencies

37 Selecting a Director of a Non Profit Corporation  Election by the membership of a corporation  Self-perpetuating boards  Appointment by another organization  Ex officio

38 The Purpose of Service Maximizing something for somebody  Mission Statement identifies the something and the somebody

39 Parties to whom the Director is Accountable  Constituency that elected them  Beneficiaries ~ may not necessarily be the same group that elected the directors  State Attorney General

40 Parties to whom the Director is Accountable State Attorney General  Speaks for the beneficiaries of a charitable trust  Supervises the solicitation of funds for charitable purposes

41 Self Assessment 1. Does the corporation have a mission statement? 2. When was the statement last reviewed? 3. What parties or officials can question what we do as directors of the corporation?

42 Self Assessment 1. What group of members elected me? 2. How was I elected?

43 Self Assessment 1. If I was elected by a voting membership, how is that membership defined? 2. Where can I find out: in the by laws? the Articles of Incorporation? 3. Are the records of voting membership kept in good order? By whom?

44 Self Assessment 1. When does my term of office expire? 2. Can I be re-elected? 3. Does my term run until a specific date, or until my successor is chosen?

45 Self Assessment 1. Can I be removed from my position as director? 2. By whom? 3. On what basis?

46 The Non Profit Board: A Legal Perspective The Corporation The Non Profit Corporation The Board of Directors The Director of the Non Profit Corporation Obligations of Directors Directors’ Rights Knowledge of Illegal Activities Directors’ Risk Taxation Director Orientation

47 Obligations of Directors Directors are subject to three primary obligations  Duty of Care  Duty of Loyalty  Duty of Obedience

48 Obligations of Directors These standards are derived from a century of litigation  primarily involving business corporations  equally applicable to nonprofit corporations

49 Duty of Care The duty of care asks the director:  To be reasonably informed  To participate in decisions  To do so in good faith and with care

50 Duty of Care Practicality of Duty of Care  Attend meetings of the Board of Directors  Exercise independent judgment on all corporate decisions  Be informed of matters of the corporation

51 Duty of Care Corollaries to the Duty of Care  Delegation  Reliance

52 Duty of Care Delegation  Responsibility  Authority

53 Duty of Care Reliance  Fulfill responsibilities  Provide accurate information

54 Duty of Loyalty The duty of loyalty requires the director:  To exercise his powers in the interest of the corporation  Not to exercise his powers in his own interest  Not to exercise his powers in the interest of another person or corporation

55 Duty of Loyalty Conflicts of Interest  Directors must be aware of their own potential conflicts of interest  Directors must disclose their own potential conflicts of interest to the Board of Directors

56 Duty of Loyalty Corporate Opportunity A director that becomes aware of an opportunity that may be of interest to the corporation should inform the Board of Directors of that opportunity before undertaking it himself.

57 Duty of Loyalty Confidentiality

58 Duty of Loyalty Confidentiality A director should not disclose information about the corporation’s legitimate activities unless they are already known by the public or are of public record.

59 Duty of Obedience  Dedicates its financial and operational resources to its mission  Carries out its purposes and does not engage in unauthorized activities  Abides by all laws and regulations The duty of obedience requires the director to insure the organization:

60 Self-Assessment 1. How often does our Board meet? 2. Is this according to a regular schedule? 3. How frequently have I attended, or can I attend in the future, regular board meetings?

61 Self-Assessment 1. What information is given to me in advance of each board meeting? 2. Is it relevant to decisions to be reached at the meeting?

62 Self-Assessment 1. Am I satisfied with the information I have received? 2. As to quantity? As to reliability? It is too little? 3. Is it more than I can really analyze between my receipt of it and the board meeting?

63 Self-Assessment 1. Is there any information submitted to me which I feel is incomplete or untrustworthy? 2. How do I deal with this problem?

64 Self-Assessment 1. Who manages, in the day to day sense, the business of the corporation? 2. Do I have an interest, personal or business, that conflicts with the interests of the corporation?

65 Self-Assessment 1. Has an occasion arisen where I should disclose that interest? 2. Do I know of a conflict involving another director? 3. Did she or he disclose that problem?

66 Self-Assessment 1. Does our corporation have a policy on conflict disclosure? 2. Is it in writing?Is it in writing? 3. Do we sign a disclosure statement relating to this subject?

67 The Non Profit Board: A Legal Perspective The Corporation The Non Profit Corporation The Board of Directors The Director of the Non Profit Corporation Obligations of Directors Directors’ Rights Knowledge of Illegal Activities Directors’ Risk Taxation Director Orientation

68 Directors' Rights  Questions  Day to day matters  Philosophy and vision Management Access Board members should feel free to contact the chief executive.

69 Directors' Rights  Interfering with plans and instructions of chief executive  Creating confusion of “who is my boss?” for other managers  Creating mistrust with the chief executive Management Access Board members should be more restrained in contacting other members of management.

70 Directors' Rights  You need to understand how you are perceived in the organization.  You are probably only going to undercut him twice. Management Access Board members should be cognizant of management’s role, of not interfering with it, and of not undercutting the chief executive.

71 Directors' Rights Books and Records A member of the Board of Directors has a right to inspect, for reasonable purposes and at reasonable intervals, the corporation’s books and records.

72 Directors' Rights Books and Records Some special considerations for EMS:  Patient care records  Employee/membership records

73 Directors' Rights Notice of Meetings All directors should be given ample notice of meetings

74 Directors' Rights Right to Dissent Two circumstances in which a director may register dissent regarding actions to be taken at a board meeting.

75 Directors' Rights Right to Dissent 1. Holding of a board meeting for which proper notice has not been given. 2. Vote against any matter put forth for a vote at a board meeting 3.....

76 Directors' Rights Right to Dissent... and have the minutes of the meeting record that he dissented.

77 Directors' Rights Minutes All directors should be given a copy of minutes of all meetings of the Board of Directors.

78 The Non Profit Board: A Legal Perspective The Corporation The Non Profit Corporation The Board of Directors The Director of the Non Profit Corporation Obligations of Directors Directors’ Rights Knowledge of Illegal Activities Directors’ Risk Taxation Director Orientation

79 Knowledge of Illegal Activities A director may not ignore what he believes to be illegal activities.

80 Knowledge of Illegal Activities  Referral to chief executive  Report to board  Record dissent in minutes  Consult personal counsel Actions to take when a director believes that a corporate activity may be illegal:

81 Self-Assessment  What contact do I have with the chief executive of the corporation?  Is it solely at board meetings?  Should it be solely in that context?

82 Self-Assessment  What contact do I have with subordinate staff members?  Am I interfering too much?

83 Self-Assessment  What notice is given as to board meetings?  When?

84 Self-Assessment  When do I receive the agenda and materials for board meetings?  Do I have time to examine and consider them before voting thereon?  Do I, in fact, read them?

85 Self-Assessment  When do I receive minutes of prior board meetings?  Do I read them?  Do I see minutes or reports of committee meetings? When?

86 Self-Assessment  Do I know of illegitimate or illegal acts of the corporation or its officers?  What should I do about such acts?

87 The Non Profit Board: A Legal Perspective The Corporation The Non Profit Corporation The Board of Directors The Director of the Non Profit Corporation Obligations of Directors Directors’ Rights Knowledge of Illegal Activities Directors’ Risk Taxation Director Orientation

88 Directors’ Risk

89 The corporation can be held liable without risk to an individual director.

90 Directors’ Risk  New York In some states the liability of the corporation can be extended to the individual directors.

91 Directors’ Risk  Breach of duty owed to a specific party  The corporation may be that party An individual director can be held liable for issues pertaining to his role as a director:

92 Directors’ Risk Directors and Officers Insurance

93 Self-Assessment 1. What exposure do I have to claims or litigation brought against me? 2. Claims asserted by whom? 3. Claims asserted by what reason?

94 Self-Assessment 1. Have the directors of the corporation, past or present, been subject to such litigation or threats of it? 2. Why? 3. With what result?

95 Self-Assessment 1. Do I know of a similar corporation where the directors have been sued? 2. What provisions do the corporate articles and by laws have with regard to the directors’ risk and insurance?

96 Self-Assessment 1. Of those provisions, which ones are mandatory ones which I can insist upon, and which require some approval or ratification? 2. By whom? 3. According to what standard?

97 Self-Assessment 1. Do I know what our corporations D&O policy provides? 2. What is not covered by it?

98 The Non Profit Board: A Legal Perspective The Corporation The Non Profit Corporation The Board of Directors The Director of the Non Profit Corporation Obligations of Directors Directors’ Rights Knowledge of Illegal Activities Directors’ Risk Taxation Director Orientation

99 Taxation Most not for profit corporations are exempt from federal income taxes applicable to corporations.

100 Taxation Requirements of 501(c)3 Exemption  Organized and operated exclusively for exempt (charitable, religious, educational, literary, or scientific) purposes  Must not have any earnings inure to private individuals

101 Taxation Requirements of 501(c)3 Exemption  Must not carry on substantial activities to influence legislation  Must not participate, in any way, in any political campaign

102 Taxation Unrelated Business Income Tax  Corporation must pay tax on income derived from activities not related to its charitable purpose

103 Self-Assessment 1. Is the corporation, on whose board I serve, exempt from federal income taxation? 2. If it is, under what section of the IRS code is it exempt? 3. Who prepares our tax returns?

104 Self-Assessment 1. What were the corporation's activities and mission as described to the IRS in applying for an exemption ruling? 2. Is this description still an accurate portrayal of what we do?

105 Self-Assessment 1. Do I know how much legislative activity we have engaged in? 2. How much are we allowed under our particular exemption?

106 Self-Assessment 1. What activities, if any, or our corporation may result in Unrelated Business Taxable Income? 2. Who on our staff monitors this matter? 3. Do our independent accountants do so?

107 Self-Assessment 1. Do we make informational tax returns (IRS Form 990) available for public inspection? 2. Does our office staff know of this obligation?

108 The Non Profit Board: A Legal Perspective The Corporation The Non Profit Corporation The Board of Directors The Director of the Non Profit Corporation Obligations of Directors Directors’ Rights Knowledge of Illegal Activities Directors’ Risk Taxation Director Orientation

109  Calendar of dates  Articles of incorporation  By laws  Mission statement  Names, addresses, and phone numbers of directors  Names, addresses, and phone numbers of staff members

110 Self-Assessment 1. Who is the chief executive of my organization? 2. What is my position on the Board of Directors? 3. What are my responsibilities as a member of the Board of Directors?

111 Reviewing Our Quiz 1. Who owns your organization? Answer: No one

112 Reviewing Our Quiz 2. What is the difference between a "Not For Profit Organization" and a "Non Profit Organization”? Answer: They are the same thing.

113 Reviewing Our Quiz 3. Which is your organization? Answer: A moot question

114 We Are a Little Non-Profit What Does This All Mean to Us?

115 The Little Non-Profit Size doesn’t matter

116 The Little Non-Profit  Framework - a structure or system  Rules and practices  Accountability  Fairness  Transparency The framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in the firm’s relationship with all of its stakeholders.

117 The Little Non-Profit  Distribution of responsibilities, rights, & rewards among stakeholders This framework consists of explicit and implicit contracts between the firm and the stakeholders for distribution of responsibilities, rights, and rewards.

118 The Little Non-Profit  Reconciling conflicting interests of stakeholders This framework consists of procedures for reconciling the sometimes conflicting interests of stakeholders in accordance with their duties, privileges, and roles.

119 The Little Non-Profit  Supervision  Control  Information-flows  System of checks and balances This framework consists of procedures for proper supervision, control, and information flows to serve as a system of checks and balances.

120 The Little Non-Profit  Structure or system  Rules and practices  Accountability  Fairness  Transparency  Distribution of responsibilities, rights, & rewards among stakeholders Practical Application  Reconciling conflicting interests of stakeholders  Supervision  Control  Information-flows  System of checks and balances

121 The Little Non-Profit

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126 Resources Your agency’s  Attorney  Accountant

127 Resources The New York State Not For Profit Corporation Law http://public.leginfo.state.ny.us/

128 Resources www.charitiesnys.com A bureau of the New York State Attorney General The New York State Charities Bureau

129 Resources www.abanet.org The American Bar Association

130 A Copy of This Presentation is Available at: http://www.nysvara.org/pulsecheck


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