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Edward D. Diller - 2/1/07 888734 1 Avoid Legal Difficulties While Driving Performance Practical Suggestions for Boards.

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Presentation on theme: "Edward D. Diller - 2/1/07 888734 1 Avoid Legal Difficulties While Driving Performance Practical Suggestions for Boards."— Presentation transcript:

1 Edward D. Diller - 2/1/07 888734 1 Avoid Legal Difficulties While Driving Performance Practical Suggestions for Boards

2 Edward D. Diller - 2/1/07 888734 2 Upside-down Focus on Driving Success Please note that in many ways, this approach is upside down It starts with a “negative focus” but hopefully flows over to the positive

3 Edward D. Diller - 2/1/07 888734 3 Specific Areas of Legal Liability Contract Liability – Normally relatively nominal or predictable – Employment situations are often the most problematic – Need a clear policy on binding the institution Tort Liability (includes breach of fiduciary liability claim) – Potentially very significant – Normally insured; stay in touch with insurance company Regulatory Liability – Perhaps most difficult to control – Normally not insured against – Often counter-intuitive

4 Edward D. Diller - 2/1/07 888734 4 Types of legal liability and who is responsible Contract Liability – Almost always the institution – Be sure that institutional formalities are observed Corporately Contractually Tort Liability Often the threat is beyond the institution Main Actor Potentially supervisors, officers and Board (although usually not found liable) – Early notification of insurance company and lawyer – Maintain physical facilities and vehicles Regulatory Liability – Most often institution – Occasionally main actors – Possibility of Board members Companies normally indemnify employees, officers and directors

5 Edward D. Diller - 2/1/07 888734 5 Fundamental Board Practices to Minimize Exposure Board Members – Appoint Strong Board members – Educate Board Members to their tasks – emphasize mission and practical issues – Discuss expectations of Board Members – Encourage Board Members to be informed and to ask questions – Adopt and follow a Conflict of Interest policy – Be sure Board focuses on public trust – Exercise ordinary business care and prudence – Control = potential liability; Board has control by definition Formative Documents – Check periodically – Follow procedures or amend – Appoint a governance committee

6 Edward D. Diller - 2/1/07 888734 6 Focus on Board Responsibilities and Governance Issues Basically all Board members have the same duties: – Loyalty, Good Faith and Due Care As a practical matter, there are four responsibilities (which drive everything) – Hire and fire the CEO – Be informed – Exercise sound judgment – Insist on legal and ethical behavior within the Board and within the staff Why Governance? – Protect against liability – Shield – Promote institutional success – Sword

7 Edward D. Diller - 2/1/07 888734 7 CEO/Administrator Issues CEO – EXTREMELY CRITICAL – Appoint the best CEO possible – stretch to get the right person Board/CEO Relationship – Insist on a focus on the mission – Expect a strategic plan – Require goals and periodic assessment – Ensure that Board advises CEO what information Board requires – Be sure Board communicates clearly with CEO, and vice versa – each side shares good and bad news – Be sure Board does not undercut CEO through side-bar conversations and demands

8 Edward D. Diller - 2/1/07 888734 8 High Level Resources to Minimize Exposure Professional Advisors – Be sure the organization has strong professional advisors on which it can rely and which it does consult Organizations – Join organizations that provide updates on timely topics of interest

9 Edward D. Diller - 2/1/07 888734 9 General Good Practices Insurance – Be sure that institution has an annual insurance check up – Consider the purchase of Directors & Officers Insurance and Employers Liability Insurance (tell them you want to use your own attorney) – Consider operational and other recommendations of insurance company Financial Matters – In almost all cases, require an audit – Insist on periodic financial and key indicator reports and insist that the Board review – Do not accept a deficit budget – Understand donor requirements and follow them Insurance Checklist

10 Edward D. Diller - 2/1/07 888734 10 General Thoughts relating to Liability The perfect can be the enemy of the good Written documents do not disappear except when you need them The government is not your friend You are probably wrong, but wait just a bit to admit it Sarbanes-Oxley has meaning for non-profit organizations Regulation will increase

11 Edward D. Diller - 2/1/07 888734 11 Perfect vs. Good Institutions must act – “do things” (hopefully they are mission based) There can be a tendency to try to know it all – we can’t – we don’t need to be so smart – Doesn’t give a license to be sloppy, but we sometimes over-analyze and over-report Impossible to totally predict business, legal and regulatory results, impact and environment Exercising due care and reasonable business judgment is what is required

12 Edward D. Diller - 2/1/07 888734 12 Move On Non-profits are seen somewhat like public for-profits, you are operating on some else’s money – Approach issues with at least the seriousness you treat your own affairs – Non-profits have a “pass” that for- profit boards and other institutions don’t Don’t be paralyzed by fear of legal consequences (at the same time, do not be ignorant) – try to understand requirements Be sure the mission is worthy and then drive to it

13 Edward D. Diller - 2/1/07 888734 13 Written Documents Remain With Us The written word takes on an exaggerated importance – everyone assumes that the words are exactly correct, and that any implication is in fact intended Things in writing will not go away (except when you want to find them) – We forget the location of documents – We forget the content of documents – Consider writing fewer things down or writing down less about certain topics (including some Board discussions) – Stick to the facts – eliminate guesswork – Institute a periodic review of things that are written and retained

14 Edward D. Diller - 2/1/07 888734 14 Board Related Documents Organize basic documents – Governing documents, minutes, actions and policies, regulatory – review at least annually Board discussions can be hindered by inclusion of too much detail and reporting in minutes

15 Edward D. Diller - 2/1/07 888734 15 Administrative Related Documents Organize basic documents – Governing documents – Board minutes, actions and policies, – Regulatory – Contracts – Review periodically Develop a records retention policy Keep good employee records; be careful about evaluations – Words have meanings; remember that in evaluations – Be accurate and candid

16 Edward D. Diller - 2/1/07 888734 16 Institutional Related Documents Contracts have meanings – People get incredibly careless about contracts – Be sure you know who has the power to sign contracts and who in fact is signing contracts for you – and the limits for which they can sign – Be sure to save the contracts you have signed and know how to access them – Always understand how long contracts last and how to get out – may be most important People are incredibly insensitive about Emails and what is retained on hard drives – People should believe that every Email and everything item which is stored on a computer may in fact see the light of day – Emails can be exhibits at trial

17 Edward D. Diller - 2/1/07 888734 17 The Government is not your friend Whenever you receive a request from a governmental agency for information, treat it seriously Provide only required information, and keep a detailed listing of what you provided – if possible, consult counsel before providing The most serious issues normally relate to “employee issues” (which includes EEOC and ERISA issues) – The War on Terror will also affect our institutions Assume that what you say could be used against you More Regulation is around the corner – maybe even including government power to remove Directors/Trustees – 70,000 to 80,000 new non-profits per year – how are they governed and what are they doing

18 Edward D. Diller - 2/1/07 888734 18 Carelessness can be expensive Failure to act properly can result in confusion and very expensive corrective actions – Push come to shove, your institution will be viewed in a court of law as just that - an institution that may have hurt an individual in some ways – that tips the scales

19 Edward D. Diller - 2/1/07 888734 19 We love to confess When the unexpected happens, talk about facts rather than responsibility or liability – First impressions of situations are often inaccurate and certainly incomplete – “Fixing” things too quickly may lead to unfortunate results – Accepting blame can also be harmful, because it often cannot be undone People’s instincts are often not correct with respect to employee matters – “Beneficence” is often treated as an indication of wrongdoing – You will be viewed as an impersonal institution and the plaintiff as an injured individual – scales tipped against you – seen as having deep pockets Be sure to consult your professional advisors and communications consultants very early in the process – Try to develop contingencies plans

20 Edward D. Diller - 2/1/07 888734 20 Employment issues (also can apply to students) Discrimination (age/race/sex/disability/religion) Harassment (same characteristics as above) Breach of contract, promissory estoppel and wrongful termination Retaliation claims – whistleblower matters Many states allow claimants to hold managers and supervisors personally liable in employment discrimination matters

21 Edward D. Diller - 2/1/07 888734 21 Practical pointers on Employment issues Have good, up-to-date policies – Distribute and train regularly – Follow Consistency is a key – We like to think we can be “flexible” based on individual circumstances – recognize that that can lead to trouble Document and date – If employee issues arise, document them contemporaneously and date the documents – record the facts and circumstances in a clear, concise manner – destroy drafts Create an evaluation system that works

22 Edward D. Diller - 2/1/07 888734 22 Sarbanes Oxley has meaning for Non- Profit Organizations Designed mainly for public companies, but …. – Has created “standards of care and best practices” that affects everyone (“trickle down” effect) – Has had a significant effect on accountants and lawyers, regardless of whether they are dealing with GM or non-profits Basically states that there is no reason for the Board not to know and understand what is going on with the entity, and holds them (and maybe administration) responsible Forms of Governance which rely heavily on delegation may be effective, but will not shift ultimate responsibility – Board of Trustees/Directors are more responsible for the actions of the institution than ever – Delegation is not likely to have a material influence on that focus or ultimate liability (“we did not know” no longer works) – in fact, it may be a hindrance

23 Edward D. Diller - 2/1/07 888734 23 Sarbanes Oxley – NACUBO National Association of College and University Business Officers (11/03) – Focus on overall financial risks, not simply on accountability structures from business that are fundamentally different – Three primary areas Independent Auditors: Board’s audit committee should assume responsibility for engaging and overseeing; do not obtain nonaudit services; rotate audit partner at least every seven years with a two year time out. (Current GAO standards for institutions receiving federal funding may be more restrictive.) Senior Management: Adopt a code of ethics (including conflict of interest policy) and enforce compliance; create a confidential complaint mechanism relating to financial issues; consider implementing financial certification requirement; document and evaluate internal controls Audit Committees: Create one; give it power and authority; make it independent; create a charter and authority language; have at least one financial expert

24 Edward D. Diller - 2/1/07 888734 24 Regulation Will Increase Non-profits are more like for-profit entities – The drive for resources will result in responsibility – Non-profits sometimes do not act in ways which people on the street believe are appropriate for entities supposedly focused on societal benefits Non-profits are accumulating significant assets – These will be used for political and other purposes – Significance is not lost on the public or policy makers Non-profits are increasingly large employers and drivers of economies (a rule of thumb I have heard is that the economic impact of a college is roughly 2.5 times its annual operating budget) – Senior managers are collecting increasingly large salaries Non-profits have important international relationships which are typically outside government control – The government is suspicious of those relationships Non-profits will need to justify social investment We need to learn to play in the political sandbox

25 Edward D. Diller - 2/1/07 888734 25 Conclusion Boards must understand mission and accept responsibility its achievement Institutions must act and show measurable progress toward goals Careful action is required to minimize potential liability and public relations problems More regulation is on the way Lack of expertise will not be a defense to anything – Boards/administration must be strong Non-profits must justify the tax and societal advantages given them

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