Estimated Reading Time: 7 minutes
By the NRMC Team
While it’s human nature to want to look away or think “this couldn’t happen to me” when you witness or read about another nonprofit’s misfortune, dedicated leaders should commit to adopting a “culture of reflection” that embraces the lessons in unfortunate events. At the Center we’ve been asked numerous times over the past weeks whether any one of the many organizations we work with around the country have been affected by the Madoff scandal. The answer is that every nonprofit has been affected to some degree.
In this week’s eNews we explore two questions that so many nonprofits and their boards are asking: “If this happened to us, could I be held responsible?” and “How can we protect our nonprofit from a similar fate?”
Generally the standard for a public charity (as opposed to a private foundation) is the ‘reasonable person’ standard—what would a reasonable person do under the circumstances? Consequently, board members who make good faith decisions about investments are generally not liable when those investments go south. In contrast, investment experts, whether in-house staff or experts hired for that purpose, may be held to a standard of care consistent with their status as experts in financial management.
While it is true that in many states uncompensated board members serving nonprofit organizations are protected by liability shields (state volunteer protection laws and the federal Volunteer Protection Act) for negligent conduct, board members must discharge the legal duty of care which encompasses protecting the assets of the nonprofit. Violations of that duty can result in either a lawsuit against the board and the organization or an investigation and action by the state attorney general that can result in the removal and replacement of board members. Nevertheless, board members are generally not liable when investments perform poorly in the absence of gross negligence, willful misconduct or self-dealing.
Attorney Generals in New York and Connecticut have started to investigate the boards of foundations and other nonprofits that invested in the Madoff Ponzi scheme. The Attorney General for the State of Connecticut recently told Forbes, “If they failed recklessly to do the necessary due diligence, we would certainly investigate and take action.” Whether or not a board has failed in its fiduciary responsibilities, our society is now super-sensitized to the devastating losses and that one investment manager can cause. Consequently, the days of board members ignoring poor investment performance or failing to conduct due diligence on who is investing the nonprofit’s funds should be behind us. Whether and how board members will be “punished” remains to be seen, since the law currently does not allow for personal liability in the face of investment losses on otherwise imprudent investments.
“First let me congratulate you on a conference well done. I had a great time at the Nonprofit Employee Benefits Conference and walked away with some valuable tools and questions that we’ll need to be addressing in both the short and long term. Thanks to you and your staff for all you do to provide us with quality resources in support of our missions.”
“BBYO’s engagement of the Center to conduct a risk assessment was one of the most valuable processes undertaken over the past five years. Numerous programmatic and procedural changes were recommended and have since been implemented. Additionally, dozens (literally) of insurance coverage gaps were identified that would never have been without the work of the Center. This assessment led to a broker bidding process that resulted in BBYO’s selection of a new broker that we have been extremely satisfied with. I unconditionally recommend the Center for their consultative services.
“Melanie Herman has provided expert, insightful, timely and well resourced information to our Executive Team and Board of Directors. Our corporation recently experienced massive growth through merger and the Board has been working to better integrate their expanded set of roles and responsibilities. Melanie presented at our Annual Board of Director’s Retreat and captured the interest of our Board members. As a result of her excellent presentation the Board has engaged in focused review which is having immediate effects on governance.”
“The Nonprofit Risk Management Center has been an outstanding partner for us. They are attentive to our needs, and work hard to successfully meet our requests for information. Being an Affiliate member gave us access to so many time- and money-saving resources that it easily paid for itself! Nonprofit Risk Management Center is truly a valued partner of The Community Foundation of Elkhart County and we are continuously able to optimize staff time with the support given by their team.”
“The board and staff of the Prince George’s Child Resource Center are extremely pleased with the results of the risk assessment conducted by the Nonprofit Risk Management Center. A thorough scan revealed that while we are a well run organization, we had risks that we never imagined. We are grateful to know that we have now minimized our organizational risks and we recommend the Center to other nonprofits.”
Great American Insurance Group’s Specialty Human Services is committed to protecting those who improve your communities. The Center team has committed to delivering dynamic risk management solutions tailored to nonprofit organizations. These organizations have many and varied risk issues, hence the need for specialized coverage and expert knowledge for their protection. We’ve had Melanie speak on several occasions to employees and our agents. She is always on point and delivers such great value. Thank you for the terrific partnership and allowing our nonprofits to focus on their mission!