Pacific Business News

February 25, 2005

Do your homework before joining a nonprofit board

by Sally Little

Volunteering as a member of a board of directors of a tax-exempt nonprofit corporation is a great opportunity to serve your community.

Nonprofits rely on board members to set the organization’s strategic direction and evaluate its progress. The board of directors hires, mentors and evaluates the Chief Executive Officer. They provide oversight that insures compliance with state and federal regulations. In addition, it safeguards the assets and assure the financial viability of the organization.

Becoming a board member should not be taken lightly. Accepting a position as director on a nonprofit board requires the same due diligence as accepting a job offer. The following tips will help in deciding whether to become a member of a nonprofit board.

* Determine your availability. In addition to regularly scheduled board meetings, a director can expect to be assigned to one or two board committees. Keep in mind that Hawaii’s Nonprofit Corporations Act has set general standards for directors on nonprofit boards. Directors must serve “with the care an ordinarily prudent person in a like position would exercise under similar circumstances.” This means the director should attend board and committee meetings, be informed on the issues and make independent decisions.

* Understand the nonprofit’s mission and operations. This will help the potential director determine any possible conflicts of interest. Directors are held to a standard that requires them to act in the best interests of the organization. Ask to see the organization’s conflict of interest policy. Make sure proper procedures are in place should a conflict of interest arise.

* Inquire about training opportunities. At the very least, board members should receive an orientation at the outset of their term. Ask to see a sample agenda for a meeting. Dynamic boards include speakers from the community who apprise the board members of emerging trends in governance and issues regarding their mission.

* Consider your exposure to personal liability. Hawaii’s Nonprofit Corporation Law does limit the liability of a board member in certain circumstances. If the director is serving without remuneration, he/she is not liable for breaches in the standards of conduct unless gross negligence has occurred. For those directors serving with remuneration, a breach in standards of conduct is reduced to negligence.

The statutes further allow the director “to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented” by legal counsel, public accountants and other competent professionals. Further, the director may rely on reports by committees, officers and employees, if the director feels that they were acting reliably and competently in the matters presented.

* Read the nonprofits’ Directors and Officers Liability Insurance policy. Be very clear about the extent of the coverage. A policy may cover only court proceedings and not administrative procedures. An action may never go to court and the directors may incur considerable financial cost preparing to prove themselves right. Make sure the policy covers labor-related issues. The number of employment lawsuits against nonprofits exceeds all other forms of litigation. (July 16, 2004, PBN article by Sally Little, How nonprofits can reduce risk of employee lawsuits)

* Request a copy of the organizing documents. Under the statutes a director “who was successful in the defense of any proceeding to which the director was a party” must be indemnified by the nonprofit. The Articles of Incorporation may further limit the liability of a director. Generally, the bylaws contain an indemnification clause. Make sure you understand it. A potential di rector may wish to ask the nonprofit’s legal counsel for a complete understanding of his/her liabil i ty.

The bylaws also will clarify the length of a term of office, resignation procedures and other obligations of the director. If the bylaws do not contain term limits, then by statute the term of office is one year.

* Examine the nonprofit’s financial statements carefully. Ask for a copy of the nonprofit’s most recent financial audit and the past three years’ Form 990s. Because these documents may be nearly a year old when you are considering a board position, ask for the current financial statements. As a board member you have a responsibility to manage the assets of the organization in a prudent manner and insure its sustainability. Determine your comfort level in serving on a board with declining net assets or beginning a major expansion.

* Ascertain if a level of financial giving is required. All boards of directors have an expectation that their members will contribute financially to the nonprofit. Some of them expect a personal cash donation at a specified level. Others allow their directors to seek external sources to meet this goal. Clarification at the outset will save unneeded future anxiety.

While the term of a board member may be challenging, with these preparations he/she will find serving on a nonprofit board enjoyable, interesting and an opportunity to meet and work with new people. The director will learn about governing a tax-exempt nonprofit corporation and know that his/her energy is helping address important community concerns.

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