Are you thinking of starting a non-profit organization? Maybe you have already set one up, are a director of a non-profit board, or serve as a volunteer on the weekends. Whatever your affiliation, it is important to understand governance beyond the buzzword and its impact on the non-profit you are involved with. By reading this blog post, you will have a clearer understanding of what exactly governance is, what is often required by law, and some best practices for implementing and improving non-profit governance.
What even is governance?
While governance has no
agreed-upon definition, it’s definition can be summed up as the process by which an
organization’s actions, norms, and rules are structured, sustained, regulated,
and how the people involved in the organization are held accountable. In
the context of a non-profit corporation formed under state law, governance can
be broadly defined as how the board of directors who sit atop the corporation are
ultimately governed themselves, both individually and as a collective
body.
While governance plays a role in both for-profit and non-profit entities, governance of a non-profit entity differs from that of a for-profit corporation due to their inherent goals. While board members at for-profit entities serve to increase shareholder return and value, non-profit board members serve in the furtherance of the non-profit’s mission. Though some for-profit social enterprises have adopted a more non-profit like governance model, non-profit governance is unique in that is has a dual focus. The first focus is being to achieve the organization’s mission, and the second focus is ensuring the longevity of the organization. Though various stakeholders play a role in each focus, the ultimate responsibility of achieving the organization’s mission and ensuring the organization’s going concern rests on the non-profit’s board of directors. To help accomplish these duties, it is imperative to understand the function of the law in regulating the board of directors.
What’s required by the law and other ethical
considerations?
This
section will cover basic legal duties as well as other ethical considerations
in non-profit governance. The
information provided herein is for general informational purposes only, does
not, and is not intended to, constitute legal advice. Before getting into the
specifics, legal duties, while an incredibly useful tool to consider for
implementing governance practices and in aiding decision making, are not to be
the sole consideration for non-profit governance matters. Issues such as board
composition and whether there is adequate board diversity, while not always
regulated by the law, are critical for accomplishing the dual purpose of
non-profit governance.
Directors
of non-profit boards owe the organization special duties known as fiduciary duties.
When a director violates their fiduciary duties, personal liability may result.[1]
These duties apply to individual directors as well as the collective board.[2]
While each state has its
own laws about exactly what kinds of fiduciary duties are required, there are
the three general areas of duty that are included. These three essential duties
a board of directors owes a non-profit organization are (1) the duty of care,
(2) the duty of loyalty, and (3) the duty of obedience.[3]
The duty of care requires a
director to be “reasonably informed about the organization’s activities,
participate in decision-making, and act in good faith and with the care of an
ordinarily prudent person in comparable circumstances.”[4]
Not to be taken as a conclusive list, to discharge this duty, a board member
should adequately prepare for and not miss board meetings, exercise appropriate
judgment in decision making, and comply with legal filing requirements, such as
annual reports.[5]
A director in exercising their responsibilities should act in “good faith, and
with a certain degree of diligence, attention, care, and skill.”[6]
The
duty of loyalty is discharged by directors making decisions that are in the
best interest of the organization. Board members should not derive a personal
benefit at the expense of the organization, nor should they divulge
confidential information without lawful order. An example of a breach of this
duty is a board member using confidential information for their own personal
dealings. In the interest of good governance, a non-profit organization should
have a policy regarding conflicts of interest that requires disclosure of such conflicts.
A best practice that many organizations require is that annually each director complete a disclosure form
identifying any relationships, positions or circumstances that may contribute
to a conflict of interest.
“The duty of obedience requires that
a board member comply with applicable federal, state, and local laws, follow
the organization’s governing documents, and guard the organization’s mission.”[7]
While the language for the duties is
dense, the concepts are simple. Perhaps easier ways of thinking about these
duties are, treat your non-profit organization like you would a loved one, don’t
violate the trust by enriching oneself over the organization, put effort in to
understand the 5 Ws (who, what, where, when, why) for major events, fill out
the paperwork required, and above all, act in good faith.
By: Humza Chohan
[1] Alicia Alvarez &
Paul R. Tremblay, Introduction to Transactional Lawyering Practice 373-374
(2013)
[2] Alvarez, supra note 1.
[3] Id.
[4] Hopkins,
The law of tax-exempt organizations 121 (2011)
[5] Hopkins, supra note 4.
[6] Alvarez, supra note 1.
[7] Id.