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What does it mean to be a director on a nonprofit board?

Is it a simple matter of lending your name? Opening your wallet? Going to a few meetings a year? Or does it have a hidden liability that you want to avoid? Can you be sued if something goes wrong, even if it’s not your fault and you may not have even known about it? What if the organization runs into financial problems? Might the Board or others look to you for a bail out? What should you do or not do if you think the organization is going in the wrong direction? And what if a director becomes nasty or antagonistic to everyone else on the board. Finally, what if the executive director forgets there is a board…

The word “Governance” has become ubiquitous today… It is used everywhere for everything. But what really should it mean to you as a director? The rules are quite clear – in fact, they serve as guardrails to prevent bad behavior and protect the director who takes the “job” seriously.

Three fiduciary duties are demanded of a director: (1) Duty of Care; (2) Duty of Loyalty; (3) Duty of Obedience. How do those legal terms translate into real life?

  • The Duty of Care requires attention – to meetings; minutes; reports (yes, even financial reports); day to day operations of programs and initiatives.
  • The Duty of Loyalty requires that you put aside your own personal interests and be faithful to the organization you serve. Matters discussed at meetings are confidential. You may not promote your own business or financial interests instead of that of your organization.
  • The Duty of Obedience simply means that you must respect the legal rules which guide a nonprofit organization. In Pennsylvania our guide is The PA Nonprofit Corporation Law which spells everything out in detail – and two regulating bodies: The Office of Attorney General and the Internal Revenue Service. In the event you serve on a religious board, there may well be faith-specific rules to respect and if you serve on a professional board there are rules of licensure and practice.

Everything hinges on an organization having an effective and committed board. A well-run organization will make every effort to build a LEADERSHIP TEAM that looks to the future. Does a director have an obligation to investigate if he or she suspects something is amiss? Must that director become a detective? Pennsylvania has a realistic standard of good faith -a director should act in good faith – as a reasonable man would under similar circumstances. That may mean calling the Board’s attention to a problem or objecting on the record to an act the director simply cannot endorse.

Unfortunately, there are numerous instances where directors simply do not perform admirably. It may be that the organization’s environment does not empower the director or that the director blanches in the face of a hijacked board. To prevent such occurrences, many organizations have created policies to guide the board and individual directors, as well as an audit committee to carefully monitor the internal controls of an organization. An organization’s future depends on getting it right.

By Penina Lieber

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Realities of Nonprofit Fundamental Change

Nonprofit organizations are particularly “people centric”. Their volunteers, members and directors carry with them intense emotional involvement and passion for the organization’s mission.  In fact, they frequently experience extreme sensitivity and even trauma when facing a fundamental change.  These changes often arise during key moments in a nonprofit’s life cycle, whether the organization is growing, restructuring, merging, acquiring or even dissolving.  Pennsylvania law is explicit about the statutory procedures to be followed during a fundamental change.  It lays out the signposts: corporate action; development of a plan; notice to stakeholders; and regulatory approvals.  But these roadmaps do not tell the whole story.

Articles of Amendment: This change can be utilized for a variety of reasons from simply a name change, to a membership change or to enlargement of a purpose.  Besides those rather simple acts, there are also opportunities for restructuring in terms of relationships and overall identity.  This is often evident when a local chapter seeks independence from its national parent. In such cases, the emotional toll can include a sense of disloyalty or even sadness at leaving its nest.

Merger: In today’s world, there are many nonprofit organizations serving similar causes.  The competition can be difficult for organizations without a strong core of support.  Although the prospect of merging with another compatible organization appears initially to be attractive, it often leads to mixed feelings when the reality hits that one partner to the merger will survive while the other will be extinguished.

Division: This change initially seems like a win-win – but ultimately, there comes an inevitable concern of additional administrative burdens, i.e. another board; another set of books; additional paperwork/meetings and even more filings.

Sale of Assets: This change can be rigorous, depending on the size of the sale and the nature of the assets being sold.   If it is a health care entity, there are special rules regarding fair market value and appraisals and approval by the attorney general; if it is a sale of real property, there are requirements for detailed due diligence in every aspect of the transaction. And if it is a charitable entity, the statute specifically provides that assets given for a charitable purpose may not be diverted from that object for which it was given. A resulting foundation may be created to hold those special assets and keep them sacrosanct for their intended purposes.

Dissolution:  It is generally a sad time, whether caused by financial worries, diminution of members or lost funding. There are often wrenching decisions to be made regarding potential liability, remaining property and adequate notice to creditors.

Although the statute is clearly written with how-to processes, anyone contemplating fundamental change must factor in the human element that is sure to pose last minute complications.