There is a long-standing tradition of corporate leaders doubling as community leaders by serving on the boards of nonprofit organizations.
While sitting on the board of directors of a well-known organization may at one time have been all about the prestige or an attempt to fill a philanthropic agenda, anyone sitting on a board today knows it’s all about responsibility.
“A lot of people that get on nonprofit boards think they are doing a good thing, and they are,” says Brian FitzSimons, a partner in the Corporate & Securities Group at Arter & Hadden.
However, the increased scrutiny of the boards of directors of public companies applies to nonprofit boards as well.
“You know what they say — No good deed goes unpunished,” says FitzSimons.
That’s not to say that serving on the board of an organization you believe in is not prudent, but the days of sleeping through meeting and rubber-stamping decisions are long gone.
“It is not merely a position in which you are just a volunteer doing a good thing for the community,” says FitzSimons. “You are in control of funds … and responsible for maintaining the mission of the organization.”
Board members must also keep in mind the organization’s potential sources of liability. For example, something as simple as hiring and firing decisions can have a huge potential for liability.
“A board has to recognize potential sources of liability,” says FitzSimons. “Especially if you have a lot of employees or a lot of clientele … then you really have to keep your eyes and ears open.”
And don’t assume that even basic decisions are being handled properly by someone else within the organization.
“Those kind of assumptions are dangerous,” he says, because if anything happens, “the ultimate responsibility and liability lies with the board.”
Preventing liability is optimal, but it is also imperative to have the proper kind and amount of directors’ and officers’ insurance.
“You don’t have to be an accountant or lawyer to sit on a board.,” FitzSimons says. “But you have to ask fundamental questions. You can’t assume things you don’t understand.”
It’s also important to avoid anything that could be construed as favoritism regarding contracts, consulting and bidding. The IRS has strict laws to prohibit individuals from abusing tax-exempt organizations for personal gain.
The laws cover anyone who receives “excess benefit” from a transaction involving a nonprofit. All compensation, property transactions and so on have to be within the realm of fair market value, especially if the person receiving the benefit has any relationship with a board member.
The only way to protect yourself from being on a board involved in an excess benefit transaction is to read the financials, ask question and ensure that the board meets in a timely manner.
“If you don’t meet regularly, you ought to,” says FitzSimons. “You should be meeting regularly — quarterly or even monthly depending on how big the organizations is.”
But regardless of what you do to prevent or reverse improprieties, there may come a time when there is no choice but to resign.
“If the other board members are voting for something you don’t like, don’t go with the flow,” says FitzSimons. “Your job is to convince your other board members … (but) there may come a time to seek outside independent counsel or eventually resign.”
It’s also important to document any questions or dissent with a board’s decision, because even resigning does not completely insulate you from civil and criminal liability.
“Don’t be a lemming or a wallflower,” says FitzSimons. “It is a job, not an honorarium.” How to reach: Arter & Hadden, (216) 696-1100
Excessive influence
The IRS has a specific set of regulations for payments and contracts made by nonprofit organizations.
“Ohio nonprofits and charitable organizations are held in a trust … and you can be prosecuted by the Ohio attorney general for squandering assets,” says Brian FitzSimons, a partner in the Corporate & Securities Group at Arter & Hadden.
Any payment or agreement that does not fit a “fair market” standard may be subject to IRS scrutiny, especially if it is with a “disqualified person.” The IRS classifies individuals and companies that are believed to have “influence” over a nonprofit as a disqualified person. This includes voting members of the governing body and presidents, CEOs, COOs, treasurers and chief financial officers.
A disqualified person can also be certain family members of a disqualified person, and any company in which a disqualified person has an interest of 35 percent or more.
A person is also disqualified if he or she:
* Founded the organization
* Is a substantial contributor to the organization
* Receives compensation based on revenue derived from activities of the organization that the person controls
* Owns a controlling interest (measured by either vote or value) in a corporation, partnership or trust that is disqualified. Source: www.irs.gov
