Nonprofit Law and Governance Hazards to Avoid

• Introduction (Golf and Governance)
• Hazard #1: Ignoring Basic Fiduciary Duties

Hazard #2: Ignoring the Distinction between Governance and Management

Understanding the General Legal Structure of a Nonprofit Organization

Unlike a privately-owned (‘for-profit’) business, a nonprofit organization typically does not have owners. In a privately-owned business, net earnings may be distributed to shareholders, employees, or other persons who have a legal right to participate in the profits of the company. For a nonprofit organization, though, there is no ownership; that is, no individual has the legal ability to profit personally from the organization’s activities (hence, “nonprofit”).

Rather, nonprofit organizations are formed for a specified purpose, other than generating income. Its purpose may be advancing the mutual interests of the organization’s members (a mutual benefit organization) or advancing a religious, educational, charitable, scientific, civic, social, or other recognized “public” purpose (religious and public benefit organizations).

Nonprofit organizations are permitted to earn net revenues (as the saying goes, “nonprofit is a legal structure, not a business plan”), but net revenues must be used for the organization’s programs or otherwise reinvested in the organization; they cannot be distributed to individual persons.

No ownership does not mean no control or no accountability. Control of a nonprofit organization is divided into two areas: Governance, which is the responsibility of the board of directors (or trustees), and Management, which is the responsibility of the senior executives, acting under the authority of the board. Nonprofit organizations are accountable to their members (if the organization has members); its donors, funders, constituents, and the communities it serves; state agencies; the Internal Revenue Service and state taxing authorities; other oversight or regulatory authorities (depending on the organization); and the general public.

Distinguishing between Governance and Management

Corporate governance deals with the big-picture concerns of the organization: defining the organization’s mission, approving the annual budget, ensuring adequate internal controls, adopting governance-related policies and procedures, hiring and overseeing the chief executive, approving major decisions, and the like. Governance is the purview of the board of directors. A corporation’s management relates to the day-to-day administration of the organization’s programs and activities.

Organizations that run into trouble often suffer from one of two extremes. One extreme is the disempowered, disengaged, derelict, or absent board of directors. These are the boards that never hold meetings, or simply “rubber stamp” the desires and decisions of the chief executive. On the opposite end of the spectrum is the micro-managing board, where the directors insist on getting involved in the minutiae of day-to-day management or frequently interfere with the decisions and actions of the chief executive. While boards must be vigilant in fulfilling their governance and oversight roles, they must also be careful not to step over the line and begin managing the day-to-day activities of the organization.

In between those two extremes are a variety of models of effective board governance. Part of the board’s role in fulfilling its duties and responsibilities is to work with the organization’s chief executive to determine the appropriate boundaries dividing governance—the purview of the board—and management, which is the responsibility and realm of the chief executive and senior management, acting under the authority, direction, and oversight of the board.

Just as there is no “one-size-fits-all” model of nonprofit corporate governance, there is no “perfect” balance between governance and management. Each organization must arrive at a workable understanding of the role of the board versus the role of the chief executive and senior management team, taking into consideration the organization’s particular needs and circumstances, and remaining mindful of the legal standards and duties of the board which generally may not be delegated to others.

This should be viewed as an ongoing dynamic process, a dialogue. In a symphony orchestra, everyone works together to pursue a shared goal: interpreting and bringing to life the composer’s artistic expression. The conductor has a very different role than the performers, but they work in concert to make music. In American football, the specific role that a player takes on the field is determined by the player’s position. The quarterback has a very different role than a wide receiver. How the various positions interact with each other will vary from play-to-play, though. It is a dynamic mediated engagement toward a common goal.

Basic Responsibilities of Nonprofit Boards

With this understanding in mind, what are the general roles and responsibilities of nonprofit boards? In his book, Ten Basic Responsibilities of Nonprofit Boards, 3nd Ed. (BoardSource 2015), Richard T. Ingram, president emeritus of the Association of Governing Boards of Universities and Colleges, outlines ten basic responsibilities of nonprofit boards:

1. Determine mission and purpose. The board is responsible for establishing and reviewing the statement of mission and purpose that clearly articulates the organization’s goals, means, and constituents served.
2. Select the chief executive. The board is responsible for delineating the chief executive’s responsibilities, and for searching for and employing the most qualified individual for the position.
3. Support and evaluate the chief executive. The board also must support the chief executive as he or she administers the organization’s programs, both directly and by ensuring that the executive has adequate resources and professional support.
4. Ensure effective planning. Boards have a duty to actively participate in the organization’s overall planning process, and to assist in implementing and monitoring the plan’s goals.
5. Monitor, and strengthen programs and services. The board is responsible for determining which programs are consistent with the organization’s mission and for monitoring their effectiveness.
6. Ensure adequate financial resources. One of the board’s foremost responsibilities is to secure adequate resources for the organization to fulfill its mission.
7. Protect assets and provide proper financial oversight. The board must assist in developing the annual budget and ensuring that proper financial controls are in place.
8. Build a competent board. The board also has a responsibility to articulate prerequisites for candidates, help train and guide new directors, and periodically and comprehensively evaluate their own performance.
9. Ensure legal and ethical integrity. The board is ultimately responsible for the organization’s adherence to legal standards and ethical norms.
10. Enhance the organization’s public standing. The board should clearly articulate the organization’s mission, accomplishments, and goals to the public and garner support from the community.

Ingram points out that while “…there is no one-size fits all model to governance, [these] are fundamental responsibilities that hold true for almost every board”