Copyright 2011 Fennemore Craig, P.C. 1 STANDARDS OF CONDUCT FOR NONPROFIT LEADERS Laura A. Lo Bianco Fennemore Craig, P.C. May 17, 2011

Copyright 2011 Fennemore Craig, P.C.

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STANDARDS OF CONDUCTFOR NONPROFIT LEADERS

Laura A. Lo BiancoFennemore Craig, P.C.

May 17, 2011


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FIDUCIARY DUTIES

A director’s and officer’s duties

are to be discharged:

• In Good Faith

• With a Duty of Care

• With a Duty of Loyalty


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GOOD FAITH

Honesty of purpose and honesty in fact.


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DUTY OF CAREWith the care an

ordinarily prudent person

in a

like position

would exercise

under similar circumstances.


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DUTY OF LOYALTY

In a manner the director/officer

reasonably believes

to be in

the best interests

of the

organization.


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Reliance on Others

In discharging duties, a director or officer may rely on information, opinions, or

reports, including financial statements and financial data, prepared/presented

by others in certain circumstances.

However…


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A director/officer is not acting in good faith

if he/she has knowledge

concerning the matter in

question that makes reliance

otherwise permitted unwarranted.

Reliance on Others


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Watch Out For• Conflicts of Interest

• Private Inurement

• Excess Benefit Transactions

• What are the Penalties?

– Conflicting transaction voided (state law)

– Revocation of exempt status (federal law)


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Conflict of Interest DefinedA “conflicting interest” is:

The interest an interested person affiliated with the nonprofit

has respecting a transaction effected or proposed to be effected by the nonprofit,

if at the time of the transaction or decision to enter into the transaction, the person has some

financial interest or is related to someone with a financial interest.


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Private Inurement

Prohibition found in many subsections of Code Section 501(c)

“…no part of the net earnings of which inures to the benefit of any private shareholder or individual…”


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Excess Benefit TransactionThe prohibition against excess benefit

transactions and the intermediate sanctions rules apply only to

excess benefit transactions between

“disqualified persons” and a public charity

or a social welfare entity.


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Step 1 Make the “required disclosure”

of the conflict of interest.

Step 2 Disinterested or “qualified” directors or

committee members should evaluate the transaction.

What should the Board do?


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Step 3

Decision should be made by the “qualified” directors –

without influence of the interested director.

Step 4

Basis for the transaction should be adequately documented.


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The Board should adopt a policy regarding transactions between the organization and

interested persons.May not be required under state law, BUTA GOOD IDEA FOR ALL ORGANIZATIONS• Provide structure under which to address potential

conflicts • Create rebuttable presumption against excess

benefit • Answer Form 1023 and Form 990 questions

positively

Conflicts of Interest Policy


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TOP TEN “BEST PRACTICES”

For Effective Board Governance


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TENIdentify the array of skills needed

for effective board oversight; assess whether board composition is appropriate; adjust board composition as needed.


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NINEClearly delineate and communicate the respective roles of the board, its committees and senior management.


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EIGHTEstablish a system of internal controls that require senior management to inform the board of significant transactions and create a means or employees to report

compliance concerns.


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SEVENEmpower the board to ask the “hard questions” by educating the directors about their fiduciary duty to be fully informed and make necessary inquiry.


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SIX Establish and implement an effective

annual self-evaluation mechanism (including the opportunity for anonymous input) for the board to review its performance and the performance of its committees.


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FIVEEstablish a board audit committee comprised of independent directors to oversee financial reporting, risk assessment and management practices; select an “independent” auditor.


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FOURAdopt a substantive conflict of interest policy, which will establish a rebuttable presumption of reasonableness for all transactions with interested parties.


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THREEKeep appropriate corporate and

financial records.


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TWOKnow and follow your governing

documents, policies, procedures and audit recommendations.


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ONE

WHEN IN DOUBT,

SEEK, OBTAIN AND FOLLOW

THE ADVICE OF AN EXPERT.


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Questions?

Laura A. Lo Bianco, Director

Fennemore Craig, P.C.

(602) 916-5000 | [email protected]

Documents

Copyright 2011 Fennemore Craig, P.C. 1 STANDARDS OF CONDUCT FOR NONPROFIT LEADERS Laura A. Lo Bianco Fennemore Craig, P.C. May 17, 2011