So you’ve been asked by a nonprofit organization to join their Board of Directors. There are numerous things you need to consider before accepting the position. Being a board member is a big commitment so you need to fully understand what your role will be and what will be expected of you by the organization. Two of the many considerations are:
- How the board operates, and;
- What are the risks associated with joining the board and what does the organization do to mitigate these.
Before agreeing to join a nonprofit board, you should do your due diligence to fully understand how that board operates. At a minimum, you should comprehend the following:
- Does the full board make all the decisions or are there smaller groups within the board (committees) that make the decisions and then inform the other Board members after the fact?
- The organization’s legal documents, (e.g. bylaws, certificate of incorporation, etc.)
- The key issues facing the organization now and in the near future
- How the board conducts its business, including its operating rules and policies
These are only a few of the many aspects of the organization and its governance that you should be looking into before making the big decision to join that board. You don’t want to assume the legal obligations of a Board member if you are in the dark about what is really happening within the organization.
Being a Board member comes with certain risks. Each Board member, in accepting a position on the Board, agrees to certain duties. These include the duty of care, the duty of loyalty, and the duty of obedience. The actions of the Board members should always reflect adherence to applicable laws and regulations as well as faithfulness towards the organization. Ultimately, Board members can be held personally responsible if the organization doesn’t comply with the applicable laws and regulations.
Therefore, it is imperative that before you agree to join the Board of a nonprofit organization, you gain comfort that the organization provides adequate protection for its Board members. The American Bar Association’s Guidebook for Directors of Nonprofit Corporations states: “In recent years, litigation against directors of many varieties of nonprofits has increased in frequency….All directors need to understand the action that may be taken to protect them against liability related to their service on [a] nonprofit corporation’s Board.” In particular, two areas that should be closely examined are indemnification and insurance. Indemnification is a term describing what the nonprofit might repay a director for expenses arising from a lawsuit against the director. This indemnification is controlled by the laws of the state in which the corporation operates as well as by the bylaws of the organization. You should clearly understand what the rules are for the organization you are potentially becoming a Board member of, before committing to the organization. In addition, you should inquire as to whether the organization has directors and officers (D&O) insurance. The coverage under the D&O policy can depend on the laws of the state involved and the terms of the individual policy offered and may not necessarily cover every instance of noncompliance. Prospective Board members should understand what the terms of their policy are and should ideally be provided with a memorandum by the organization that outlines the D&O coverage being offered prior to accepting their spot on the Board of Directors.
Joining a nonprofit Board is both satisfying and rewarding and a great way to give back to the community. However, you need to make sure that you have done your due diligence to cover yourself from a legal perspective before making the commitment to serve.
Kenneth R. Cerini, CPA, CFP, FABFA
Ken is the Managing Partner of Cerini & Associates, LLP and is the executive responsible for the administration of our not-for-profit and educational provider practice groups. In addition to his extensive audit experience, Ken has been directly involved in providing consulting services for nonprofits and educational facilities of all sizes throughout New York State in such areas as cost reporting, financial analysis, Medicaid compliance, government audit representation, rate maximization, board training, budgeting and forecasting, and more.