Becoming a member of a not-for-profit governing board is a prestigious opportunity accompanied by both respect and accountability. The responsibilities of this honor, however, must not be underestimated. Board members are liable for their actions as well as their apathy. Accordingly, effective fraud prevention and risk management processes should be implemented.
The federal Volunteer Protection Act of 1997 does provide some protection to volunteers — defined as individuals who are compensated less than $500 per year or rewarded with nonmonetary value in lieu of compensation — provided the volunteers are acting within the capacity of their responsibilities and are properly licensed, if necessary, to perform these duties. The act establishes safeguards for directors for actions associated with liability caused to third parties, but does not prevent the organization from taking legal action against a director for his or her misconduct.
Nevertheless, negligence or carelessness can potentially result in personal liability, especially if it is intentional. Employee fraud or misappropriation, outstanding payroll taxes and personal injuries on the organization’s property are among the perils not-for-profit directors can be liable for. Directors should use caution when managing their not-for-profit’s affairs and implement risk-management measures to help prevent fraud.
Minimizing your organization’s exposure to risk can reduce potential liabilities. Understanding your organization and how it operates is a vital step. You should question the current system of checks and balances. Segregation of responsibilities and strong internal controls —including standard policies like never signing blank checks or requiring all contracts in writing — are key fraud-prevention measures that should be implemented at every organization.
You should also examine the organization’s human resource procedures. The way the organization handles firing, hiring, disciplining and whistle-blower policies is important. Ensure compliance with federal and state law, and alignment with best practices. Research proves fraud hotlines and similar policies can help detect and reduce loss associated with fraud.
Directors and officers (D&O) insurance is a wise investment that should not be overlooked. Confirm that your organization carries this protection for its board and executive management. Verify the dollar value and form of coverage and make sure you are knowledgeable about all exceptions and clauses in the policy. Your homeowner’s insurance may also provide coverage. Analyze your policy — if it does not cover not-for-profit board liability, a rider may be available that does.
Understand your state’s volunteer protection laws and verify that indemnification stipulations are included in the organization’s bylaws. Your state law may permit not-for-profits to cover and defend a director against claims if he or she was acting in the organization’s best interest. Fully comprehend the fiduciary responsibilities tied to your position and the consequences of not performing them.
The common thread required by any governing board director is commitment. You should take your position seriously and act in a manner that is consistent with your performance at any occupation. Perform with the organization’s best interest in mind, avoid disputes and discourage unethical behavior. Additionally, make sure you can document everything, especially the board’s voting history, and are aware of any action that may have occurred in your absence.
Following these basic guidelines can help minimize exposure to risk, both for you and for the organization as a whole. Recent scandals publicized in the media have generated increased public awareness, along with regulatory scrutiny, of corporate governance in public companies as well as in the private arena. Consequently, not-for-profit directors need to be keenly aware of this ever-changing regulatory environment as they act to serve their communities.
Emlyn Neuman-Javornik can be reached at (312) 899.5315 or [email protected].
