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BILL TAYLORUW COOPERATIVE EXTENSION SERVICE
NORTHEAST COMMUNITY DEVELOPMENT EDUCATOR
LEGAL RESPONSIBILITIES OF BOARD MEMBERS
The University of Wyoming is an equal opportunity/affirmative action institution.
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Reasonableness & Prudence
Fulfilling fiduciary responsibilities Board members – fiduciaries Held to standard of “reasonableness and prudence”
Must treat organization’s assets and other resources with same care as their own
Guilt by omission Passive or inactive in overseeing activities of
organization Fail to meet standard of fiduciary responsibility
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Board Members as Fiduciaries
Responsibility traces back to individual board member Can be liable for some actions undertaken in
organization’s nameTrustee
Resources of organization held in trust Same obligation toward trust’s assets as to own assets
Individual members are fiduciaries Law imposes same standards for conduct & management
as for board as a wholeLiability exposure for county board members -
minimal
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Chief Responsibility
Maintain financial accountability & effective oversight of organization Due diligence:
Organization is well managed Financial situation remains sound
Requires: Objectivity Unselfishness Responsibility Honesty Trustworthiness Efficiency
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Shared Responsibilities
Proper organizational managementPresence of quorumLegal action often traced to inattention,
passiveness, or captive board members (someone else makes their decisions) Members should:
Attend meetings regularly Make independent & justified decisions (not just vote w/
majority) Review minutes carefully before approval
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Accountability
Since all board members are liable for their own acts and deeds they need to hold each other accountable.
Since county-appointed board members’ liability is minimal, this is not as much of a legal issue as just a good governance practice.
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General Board Responsibilities
Review & approve mission statementApprove & oversee strategic plan & maintain
strategic oversight of operationSelect, evaluate, determine compensation of CEOEvaluate performance & establish compensation of
senior leadership teamProvide for management successionOversee financial reporting & audit process,
internal controls, legal complianceHold management accountable for performanceEnsure inclusiveness & diversity
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The Three “D”s
Duty of CareDuty of LoyaltyDuty of Obedience
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Duty of Care
Directors must: Be reasonably informed of organizational activities Participate in decisions Do so in good faith & with care of ordinarily prudent
person in similar circumstancesRequires members pay attention
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Duty of Care (cont.)
Carried out by: Attending board & committee meetings Preparing in advance by reviewing reports, minutes,
agenda, etc. Obtaining information before voting Exercising independent judgment Periodically examining credentials and performance of
staff & volunteers Frequently reviewing finances and financial policies Ensuring compliance with state & federal
requirements, especially annual reports
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Duty of Loyalty
Exercise power in interest of board & not in own or another entity’s interest
Carried out by: Adhering to conflict-of-interest policy Disclosing any conflicts of interest Avoiding board opportunities for personal gain or
benefit Maintaining confidentiality of information
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Duty of Obedience
Comply with federal, state, local lawsAdhere to board’s bylawsRemain guardians of the missionCarried out by:
Ensuring compliance with all regulatory & reporting requirements
Examining all documents that govern the organization (i.e. bylaws)
Making decisions that fall within the scope of the mission and governing documents
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PITFALL
When board members have difficulties attending meetings, it is tempting to lower the quorum requirements to be able to conduct meetings regularly. By accommodating the missing participants, however, not only does the board send the wrong message, fewer board members end up making important decisions. A better solution is to allow directors who cannot attend in person to join the meeting by telephone, which is allowed in every state (usually when authorized in the bylaws) and counts the same as presence in person.
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TIP
It is not always possible to list all the potential conflicts on a disclosure form. Many conflicts of interest are tied to a specific transaction or a decision that could not be anticipated. Each situation should be evaluated on the basis of its facts and circumstances. (For county board members this only
applies to financial conflicts when investing and/or expending funds.)
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QUESTIONS THE BOARD SHOULD ASK
Do we regularly have a quorum at board meetings? If the bylaws have a policy about missing meetings (such
as termination of the member’s involvement), do we uniformly follow the policy?
Do all board members regularly receive and read information in advance of board meetings?
Do we refer to our mission statement as a guide when making decisions?
Do individual board members periodically review and sign our board’s conflict-of-interest policy?
Who in our organization is responsible for keeping the legal documents?
Can we easily access legal documents if we need them?
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Governance & Management
Board members are policymakers Develop plans for organization & oversee its affairs
Day-to-day management is province of employees (if they exist) Board may delegate day-to-day management to CEO,
who may hire additional staff if finances allowBoard may delegate certain governance
duties to officers
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Governance & Management (cont.)
Other board structures Bylaws should specify permanent standing
committees, provide for creation of other committees, describe how committees are appointed
Non-board members may serve on committees – they do not hold personal liability for board action
Common committees: Executive Finance Governance Development Audit
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Governance & Management (cont.)
Board may create advisory council To avoid confusion, actions should be limited to:
Making recommendations Providing background for board decisions Furnishing pros & cons for issues Listing questions that are appropriate to the situation Carrying out specific tasks
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PITFALL
Failing to clarify the expectations for all board members is like building a board without an action plan: You may have an impressive-looking board that seems to get along well but ends up accomplishing little.
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TIPS
It is crucial to keep the governance committee involved in defining the board’s needs and candidates’ qualifications. The objective is always to build the most competent and committed board possible.
Consider having your board members fill out and sign personal commitment forms, thus encouraging them to individualize their participation. Board members tend to be more engaged when they have had a say in their own activities rather than having them dictated by someone else.
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QUESTIONS THE BOARD SHOULD ASK
Do we have a copy of our state laws, and are we operating in concordance with all the statutes?
When did we last review our bylaws? Are there any provisions we should add or delete?
Have we clearly defined the voting rights of any ex officio members of the board?
Do we have job descriptions for our committees that also define the limits of their authority?
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Managing Legal Liability
Issues most likely to arouse concern: Ethical behavior Transparency Money-related issues
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Most Common Reasons Boards are Sued
Employment claims (hiring, firing, contracts, benefits)
Contract claims (length of agreement, termination, work specification, payment terms)
Discrimination claims (employment, volunteers, programs)
Torts/negligence (injuries, theft)Release of records (availability of records)Defamation(County board members’ exposure here is
minimal)
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Conduct of Employees
Conduct of employee is considered conduct by board
If action is outside scope of employment, individual can be personally liable
If board has not carried out oversight duties, it may be implicated due to negligence of duty of care
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Protective Strategies
Key – proactive positive action, being good board members
Proactive governance: Recognize duties & responsibilities of board service Develop basic understanding of legal framework of
organization & its structure Show good intentions by being accountable for board
actions Draft policies, ensure policies are followed, refrain
from delegating fiduciary duties, rely on expert advice when needed
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PITFALL
Asking questions about board business via e-mail can bring quick responses but also easily evolve into evidence used to attack someone or charge him with an offense – especially if the messages are carelessly worded. Just remember: Lawyers think of e-mail as “exhibit mail.”
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TIPS
Develop a policy requiring the organization’s lawyer (particularly outside counsel) to report to one or more board members if staff does not properly handle or resolve a legal matter.
Use consent agendas to allow the board more time to deliberate on difficult issues. If time is not of the essence with a specific issue, it is wiser to table the discussion and make a more educated decision during the next board meeting after more research has been conducted. Airing all sides of an issue carefully is one way to protect board members later on.
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QUESTION THE BOARD SHOULD ASK
Has the board ensured that the personnel policies include all the necessary clauses to help protect us from the most common legal issues? (Not an issue if the county has a Human Resources Department that provides uniformity.)
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Principles for Good Governance
Legal Compliance and Public Disclosure Comply with applicable federal, state, and local law. Have a formally adopted, written code of ethics with
which all of the directors, staff, and volunteers are familiar and to which they adhere.
Implement policies and procedures to ensure that all conflicts-of-interest, or appearance of them, within the organization and its board are appropriately managed though disclosure, recusal, or other means.
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Principles for Good Governance (cont.)
Legal Compliance and Public Disclosure (cont.) Implement policies and procedures that enable
individuals to come forward with information on illegal practices or violations of organizational policies. Specify that the organization will not retaliate against, and will protect the confidentiality of, individuals who make good-faith reports.
Implement policies and procedures to preserve the organization's important documents and business records.
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Principles for Good Governance (cont.)
Legal Compliance and Public Disclosure (cont.) Ensure that the organization has adequate plans to
protect its assets - its property, financial and human resources, programmatic content and material, and integrity and reputation - against damage or loss. Regularly review the organization's need for insurance, as well as take other actions to mitigate risk.
Make information about its operations, including its governance, finances, programs, and other activities, widely available to the public.
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Principles for Good Governance (cont.)
Effective Governance Must have a governing body that is responsible for
approving the organization's mission and strategic direction, annual budget, key financial transactions, compensation practices, and fiscal and governance policies.
Meet regularly to conduct business and fulfill duties. Establish and periodically review size and structure.
Have enough members to allow for full deliberation and diversity of thinking on organizational matters. This generally means that a board should have at least five members.
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Principles for Good Governance (cont.)
Effective Governance (cont.) Include members with the diverse background (including
ethnic, racial, and gender perspectives), experience, and organizational and financial skills necessary to advance the organization's mission.
Hire, oversee, and annually evaluate the performance of the organization's CEO. Conduct an evaluation prior to any change in the CEO’s compensation, unless a multiyear contract is in force or the change consists solely of routine adjustments for inflation or cost of living.
Ensure that separate individuals hold the positions of chief staff officer, board chair, and board treasurer. Organizations without paid staff should ensure that the positions of board chair and treasurer are separately held.
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Principles for Good Governance (cont.)
Effective Governance (cont.) Establish an effective, systematic process for educating and
communicating with board members to ensure that they are aware of their legal and ethical responsibilities, are knowledgeable about the programs and other activities of the organization, and can effectively carry out their oversight functions.
Board members evaluate their performance as a group and as individuals at least every three years. Have clear procedures for removing members who are unable to fulfill their responsibilities.
Review the organization’s governing instruments at least every five years. Regularly review the organization's mission and goals and evaluate at least every five years the organization's goals, programs, and other activities to be sure they advance its mission and make prudent use of its resources.
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Principles for Good Governance (cont.)
Strong Financial Oversight Keep complete, current, and accurate financial records.
Review timely reports of the organization's financial activities and have a qualified, independent financial expert audit or review these statements annually in a manner appropriate to the organization's size and scale of operations.
Institute policies and procedures to ensure that the organization manages and invests its funds responsibly, in accordance with requirements of law. The full board should approve the organization's annual budget and monitor performance against the budget.
Spend a significant portion of the annual budget on programs that pursue the mission. The budget should provide sufficient resources for effective administration of the organization.
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Principles for Good Governance (cont.)
Strong Financial Oversight (cont.) Establish clear, written policies for paying or
reimbursing expenses incurred by anyone conducting business or traveling on board’s behalf, including the types of expenses that can be paid or reimbursed and the documentation required. Require that travel on behalf of the organization is to be undertaken in a cost-effective manner.
Neither pay for nor reimburse travel expenditures for spouses, dependents, or others who are accompanying someone conducting business for the organization unless they are also conducting the business.
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TIPS
No law requires bylaws or policies to be written in “legalese.” Use clear language to make your statements understandable without ambiguity so they are not open to many different interpretations.
Develop an annual evaluation process to ensure the board provides the chief executive with formal feedback regarding on-the-job performance. According to BoardSource’s ‘Governance Index 2007,’ chief executives who receive a written evaluation are more satisfied with their jobs than those who don’t – 88 percent versus 78 percent.
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QUESTIONS THE BOARD SHOULD ASK
How well does our organization perform against the governance principles listed above?
Did we receive a clean audit? Have we addressed all the issues mentioned in the auditor’s management letter?
Do we adhere to safe harbor processes (the rebuttable presumption under the intermediate sanctions rules), when we determine the chief executive’s compensation? Who on the board is responsible for that?
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Safe Harbor Processes
IRS regulations include a "safe harbor" provision for nonprofits that meet three tests: (1) compensation must be based on data from comparable organizations, (2) an authorized body, whose members do not have any conflicts of interest, must approve the transaction in advance, and (3) the authorized body must document its decision.
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Guardian of the Mission
Every organization needs to define its fundamental purpose, philosophy, values & find appropriate ways to tie them to meaningful activities
Without purpose & mission there is no mandate
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Guardian of the Mission (cont.)
Primary & most important duty of board – act as guardian of the mission Checklist:
Fully understand & be able to articulate the mission Understand overall operations Read & understand materials prepared & distributed by
organization
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Ensure Compliance with Laws & Rules
Must function within legal framework and own documents Checklist:
Periodically review bylaws & ensure organization is in compliance
Understand relationship between & among organization’s related entities and assess their purpose
Engage an auditor to attest to the reliability of board’s financial condition
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Promote Vigilance
Collective & individualChecklist:
Up-to-date board book Minimum contents:
Board roster & address list Organization’s articles Bylaws Documents w/ legal overtones Latest financial statements Job descriptions for board members List of expectations for individual board members
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Promote Vigilance (cont.)
Checklist (cont.) Keep up with issues affecting the board
Consider retreats, educational seminars Continuous education is effective in providing incentive
& needed tools Regularly attend board meetings Actively participate in the decision making process Ask questions Carefully consider board minutes Stay within bounds
Stay with oversight – don’t meddle in the CEO’s duties
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Reference
Source: Hopkins, Bruce R., JD, LLM. Legal Responsibilities of Nonprofit Boards, Second Edition. 2009. Book 2 in the Governance Series published by BoardSource, ISBN 1-58686-107-7.
The author has attempted to extract those items that apply to appointed and elected boards, as well as nonprofit. However, it is important to check with your County Attorney to determine the specific requirements and liabilities for members of your particular appointed or elected board.
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Questions/Comments?