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Executive Director
With more than 1.5 million registered, tax-exempt organizations in the U.S., it’s likely that many times that number of Americans currently serve on nonprofit boards. Board service involves a commitment of time, attention, enthusiasm, and in many cases, a personal financial contribution. When you serve on a board you’re likely to make new friends and professional connections, and gain an insider’s view of the organization’s programs and services. With so many positive aspects of board service, what are the downside risks?
Some of the downside risks of volunteer board service include:
The risk of unmanaged conflict should be addressed without delay. Techniques to reduce the likelihood of conflict include conducting an annual, thorough board orientation; resolving to keep the communications channels open between the board and CEO; and choosing how the governing team will deal with conflict before it occurs. For example, one technique is to designate a leader, such as the Board Development Committee Chair, as the point person for addressing occasional bad board behavior. Another technique is to adopt a code of conduct describing the board’s aspirations for the way it will work. For example, the code might indicate that board members should never agree how they will vote on an issue prior to a board meeting. Doing so compromises the ability of the board to hear all sides of an issue and collaboratively reach the best possible decision.
The risk of inadequate financing for the nonprofit’s mission can be managed by thoughtful deliberations about potential sources of funding, proposed strategies for exploiting those opportunities, and hard decisions about what programs and activities should be continued, bolstered, or shuttered.
This article focuses on the final two risks: legal claims against the board for which the organization is responsible, and the risk of personal liability facing individual board members.
Nonprofit governing teams make countless decisions throughout the fiscal year, from deciding how to allocate financial resources, to determining which programs must be cut to make way for new initiatives. These decisions potentially affect—in positive as well as negative ways—a wide array of stakeholders, from clients and service recipients, to members, neighbors, and vendors, as well as individual and institutional donors. Each of these stakeholders is a potentially aggrieved plaintiff in a lawsuit alleging wrongful decisions by the board. For example:
In each of these cases a court will first determine whether the individual or group bringing the lawsuit has standing to sue in the court where the case has been filed. Standing refers to a legal “Whether a nonprofit is liable for harm connected to the decisions of a board depends on a number of considerations. These include: whether a duty was owed by the nonprofit to the plaintiff, whether that duty was breached, and whether members of the board acted in good faith and with ordinary diligence.”standard requiring that the plaintiff in litigation has a sufficient connection to the actions that are the focus of the suit, such as alleged violations of law, tort damages or the consequences of a contract breach. In most cases this means that the plaintiff has suffered harm directly attributable to the alleged action or inaction of the nonprofit (the defendant). In many cases brought against nonprofits and nonprofit boards, the plaintiff will be deemed to have standing to sue. The next issue for consideration is whether the nonprofit is responsible for the plaintiff’s harm or loss.
Whether a nonprofit is liable for harm connected to the decisions of a board depends on a number of considerations. These include: whether a duty was owed by the nonprofit to the plaintiff, whether that duty was breached, and whether members of the board acted in good faith and with ordinary diligence.
For example, the board owes the institutional and individual donors of the organization a duty to ensure that donated funds are spent in accordance with the wishes of a donor. To adequately discharge that duty the board may approve a gift acceptance policy; delegate to the CEO (and her team) responsibility for tracking pledges and grant-supported expenses; and review and accept the budget of the entity, quarterly financial statements and the annual tax filings of the organization. This level of care and due diligence makes it likely that the organization, and not its individual board members, will be held responsible if a court of law finds that the organization breached its duty to the plaintiff.
With rare exceptions, members of a nonprofit board are protected against personal liability due to the following:
The risk of personal criminal or civil liability on the part of individual nonprofit board members is small but difficult to quantify. It is important to note that exercising poor judgment, relying on an expert whose advice is later determined to be faulty, or making a decision based on incomplete information rarely lead to personal liability on the part of individual board members. This means that board members who act in good faith and with diligence and care, are unlikely to be held personally responsible for their actions on the nonprofit’s behalf. However, there are a number of specific situations that create or increase the exposure to personal liability, such as:
Follow the tips below to manage the risk of board liability and reduce the exposure of board members to legal claims and judgments:
If it not unusual for some members of a nonprofit board to express concern about the risk of personal liability arising from their volunteer service on the governing body. And although the risk of personal liability being imposed on volunteers is low, there are steps every board member can take to reduce the risk from low to negligible. To minimize exposure to personal liability, every current and prospective board member should:
The potential for an organization to be held legally responsible for its acts or omissions is a constant companion of every nonprofit mission. And as guardians of a nonprofit’s mission as well as its assets, the board has a special responsibility to deliberate and act with care. Doing so not only increases the quality of the decisions made by the board, it also reduces the organization’s exposure to legal claims. Armed with the resolve to be adequately prepared for committee and board meetings and the courage to speak up, every member of the board can also reduce the less likely, but still present risk of personal liability.
Melanie Lockwood Herman is Executive Director of the Nonprofit Risk Management Center and the principal author of the Center’s new book: Exposed: A Legal Field Guide for Nonprofit Executives-2nd Edition. To inquire about bulk orders of Exposed or inquire about Melanie’s availability for a speaking engagement, contact Kay Nakamura at 703.777.3504 or Kay@nonprofitrisk.org.
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