Business Essentials for Nonprofit Leaders

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.

In Furtherance of Exempt Purpose Staff Time PropertyAssets

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 self- dealing 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?