United States: Risks And Rewards Of Serving On A Nonprofit Board: Things To Think About Before You Say "Yes"

Studies have found adding women to corporate Boards of Directors improves corporate governance. Although still a minority on public company Boards, women are well represented on nonprofit Boards, where they build strong relationships and business and leadership skills. Nonprofit Boards especially seek out women with legal and financial backgrounds. But a word of caution before you say "yes": Understand your responsibilities and risks as well as the rewards.

Know Your Responsibilities

In many respects, service on a nonprofit Board parallels service on a corporate Board. A director is required to act as a prudent person (duty of care), to faithfully pursue the interests of the organization rather than any personal or other interests (duty of loyalty) and to further the organization's mission (duty of obedience). Specific responsibilities may include supervision and compensation of senior management (and succession planning), monitoring finances, approval of the budget, strategic planning, and formulating short-term and long-term goals that further the mission. The smaller the nonprofit, the greater the likelihood that the Board members will be expected to "roll up their sleeves" and take a hands-on role. Service on the Board's audit and executive compensation committees requires specialized skills and oversight.

Understand the Challenges

Just as a corporate Board must reassess budgets during times of financial uncertainty, a nonprofit Board has comparable challenges as charitable giving declines during these times while the need for services increases. Ancillary legal issues arise. For example, any reduction in staff requires compliance with employment laws. Although rare, nonprofit corporations may file bankruptcy. In at least one case, when a nonprofit failed to qualify for tax exempt status, donors who were denied a tax deduction for donations formed a class of creditors in the organization's bankruptcy. In that case, the judge was unsympathetic to the requests of Board members for releases from liability under the organization's plan of reorganization.

Do Your Due Diligence

Due diligence is always recommended. Ensure that you support (or better yet are passionate about) the mission. Insurance protecting the organization, as well as indemnification and insurance to protect the Board members, should be sufficient to cover foreseeable risks. Review the financial statements, understand any litigation or potential claims against the organization or its Board, and ask about any financial, managerial or legal difficulties, both current and historical. Most importantly, inquire specifically about expected levels of personal financial support of the nonprofit and its fundraising expectations of you. Nonprofit Boards depend on financial and fundraising commitments from Board members, with approximately 68% requiring personal contributions and 40% providing a "suggested" minimum donation.

Involve Your Employer

Individuals should disclose to their employer their interest in joining a nonprofit Board to keep open lines of communication and check for any conflicts of interest, and also because the information may be required by the employer's D&O insurance carrier.

Fortunately, many employers encourage employees to take leadership roles within nonprofit organizations, and may provide matching donations and other forms of support.

Watch for Conflicts of Interest

Know the organization's conflict of interest policies, watch for potential conflicts of interest, and disclose conflicts or abstain from Board decisions when appropriate. Conflicts can arise if the Board member, a family member or an employer has business dealings with the organization or receives other benefits. Professional conduct rules can also apply. For example, a Texas attorney serving on a nonprofit Board should not participate in a decision that would violate obligations to her client, or have a material adverse effect on the representation of any client of the nonprofit organization whose interests are adverse to her client. An attorney Board member should provide legal advice only in areas of professional competence.

In the boardroom, preserving legal privilege may depend upon whether a communication was offered in the capacity of board member or as legal counsel to the nonprofit—and whether the meeting minutes clarify the difference.

Understand Risks Created by Volunteers

As a result of increased litigation, many nonprofits have stringent screening for prospective volunteers and supervision for volunteers to protect the volunteer as well as the nonprofit. Volunteer policies include screening (i.e., criminal, credit, motor vehicle and child protective services records), written procedures (such as a volunteer handbook), training and, if necessary, dismissal of volunteers who exceed authority or act improperly. Nonprofit Board members have been targets in lawsuits alleging negligent screening and supervision of volunteers.

Monitor Legal Risks and Protections

Nonprofits face their share of compliance requirements in such areas as fundraising, internet use, tax exemptions and employment. On a positive note, the federal Volunteer Protection Act of 1997 protects volunteers from liability for unintentional harm they cause while volunteering, although certain types of claims are excluded, such as claims against the volunteer by the nonprofit, sexual harassment, or the volunteer's operation of a motor vehicle. Coupled with a suitable D&O policy, volunteer laws provide some comfort.

Rewards of Service

Studies show that helping others makes us happy, a fundamental reward of nonprofit service. Service on a nonprofit Board offers other benefits. "Giving back" through board service provides a common ground for strong friendships and broader community involvement, as well as business relationships. Leadership skills developed on nonprofit Boards translate well into business settings.

Broader Impact

A final statistic and comment: Women comprise 45% of nonprofit Boards but only 17% of corporate Boards. This gap suggests that nonprofit organizations can serve a valuable role in identifying and training women Board members. The experience and impact of women who serve on nonprofit Boards steadily increases the pool of business and professional women well qualified to join corporate Boards.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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