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Archive for September 2009

What is the legal obligation known as the “duty of care”?

In line with the “duty of care”, the board member understands that he is a trustee, a fiduciary.  As a result, he or she:

  • must be active in the charity’s affairs by attending board meetings and appropriate committee meetings;
  • must keep informed in order to determine if the board-established policies are being followed;
  • must keep informed about how the charity is functioning day-to-do, at least at some level;

The duty of care must be executed with diligence and in good faith.  This means that a board member should act in keeping with the charitable mission after adequate deliberation. This includes establishing organizational policy and overseeing the enforcement of the policy by professional staff.

Here is where the duty of care often breaks down.  Professional staff are — just that — staff!  But many board members simply default to staff and staff recommendations.  No matter how wonderful, how competent, how educated, how experienced, how engaging, and how “on top of it” the charitable staff may be, the board member has a duty of oversight.  Defaulting to staff is a failure of oversight.  And a failure of oversight can lead to personal responsibility if things go south!



Posted on: September 29, 2009

Keep it simple, sailor!

Before you accept a position on any board, charitable or otherwise, and, if charitable, whether or not it is formally incorporated as a non-profit, understand that board members owe specific legal duties to the organization.  These are:

  • the duty of care;
  • the duty of loyalty;
  • the duty to maintain accounts;
  • the duty of compliance.

This list of legal duties seems quite general and almost innocuous.  It’s not.  During the remainder of the week, we’ll discuss each of them on an initial basis.  Further discussion will be required.

Being a member of a charitable, non-profit board is not an “honorary title” although many people approach it as such.  Being a member of a charitable board is a huge undertaking.  Charities depend on volunteer for governance, and a decision to serve on a board is not a decision that should be made lightly.

So, assume that you have been asked to serve on a charitable board:  Are you interested in the charity’s mission?  That’s a plus.  Who makes up the board?  Sometimes boards seek “prominent” community members.  Are you interested in networking with the board members?  That can definitely be a plus.  Let’s face it:  it’s an honor.  Somebody “wants” you!

Just say NO!

Say no until you have investigated what such a commitment will entail with that particular charity — charitable institutions come  in a variety of shapes, colors and complexities.  Do not depend on your experience with a prior charity.  Find out about THIS one.  Make sure you understand the mission fully.  An “animal friendly” charity may have a policy to euthanize animals at some point.  Can you live with that?

More important than your understanding of the complete mission and policies of the charity is your understanding of your role, function, and responsibility within the governing body.  Until you know the part you play and the impact you can have on the charity — and the impact the charity can have on you, just say NO!

Please do not misunderstand me.  I am all about charitable work.  I serve on several boards and am totally committed to my positions there.  But unless you understand what you’re getting into, and assume those responsibilities fully, you will be of no particular service to the charity, and you place yourself and your family in a position of liability in the event of poor board decision-making or overlooking regulatory and legal requirements established by statutory oversight.

It may be an honor, but it’s not supposed to be honorary!  A board member is supposed to commit and work.  Make sure you are willing to work and understand the personal commitment before saying YES!

One of the fundamental responsibilities of a non-profit board is to seek funds from others in order to ensure adequate responses to carry out the mission.  How does a board do that?

Thinking about our rocket scientist again — do you have one on your board?  Well, you don’t need one, or a brain surgeon either, to figure out that you will secure more funds if you can show that your board holds itself to the gold standard.

Consider this illustration:  I am a donor and I have a million dollars that I want to give, but I want to make sure that you have your house in order.  I might love your mission, but how do I know, for example, that you are not overpaying our CEO?  Philanthropy is declining.  Lots of organizations — just as good as yours — with missions I love almost as much — are clamoring for my money.  How do you assure me that you are “above the pack” — that you hold yourself to the gold standard?

Ensuring ethical behavior should be a board commitment — a board commitment to establish and maintain the public trust.  This requires commitment, dedication, persistence and the courage to make the hard decisions.

And if your non-profit has already lost the public trust, been subject to investigation, taken some irresponsible actions?  How do you restore that trust?

Read on…

If you serve on a non-profit board and haven’t really considered any obligations that may affect you in the wake of Sarbanes-Oxley, let me be the first to tell you that there are two criminal provisions which may extend to members of a non-profit board.  Those are penal provisions for document destruction and penal provisions for retaliation against those who inform on the board or board information (whistleblowers).

The very least that a non-profit board should do in response to Sarbanes-Oxley is to adopt a records retention policy and develop and adopt a procedure to accept whistleblower complaints, particularly about improper financial practices.

You would think that it wouldn’t take the brains of a rocket scientist to realize that self-dealing is improper, but non-profit boards that I know are still self-dealing.  Isn’t that the way the “good ole boy” system works?  So why not deal with someone you know?  Why not invest funds in the bank that employs a board member?  Why not purchase needed items from the company that a board member owns?

Because it’s wrong!  And because, frankly, one does not need Sarbanes-Oxley to tell us that.  It simply does not pass the smell test.

In the wake of Enron, citizens began to clamor for accountability.  One of the most publicized responses was the Sarbanes-Oxley Act.  Sarbanes-Oxley was drafted to regulate publicly traded companies; it had few applications to non-profits.  But here’s the catch….it set the bar.  Why should those handling non-profit funds behave any less ethically than those handling funds of publicly traded companies?  No reason!

So, awake not-for-profits began analyzing their practices and methods of operation and attempting to make them conform to what Sarbanes-Oxley requires.  Others waited for “accountability to come knocking” (to paraphrase Berit Lakey, a consultant to non-profit organizations).

Awake board members serving on a non-profit board should consider how Congress suggested that publicly traded corporations should implement good practices.  Analysis of  Sarbanes-Oxley brings to bear these key points:

  • make up of audit committees (they must be individuals with financial expertise who are also familiar with the organization’s activities)
  • audit committee responsibility (hands-on for hiring and overseeing the performance of external auditors)
  • audit committee members must be independent (no compensation for service on the committee)
  • external auditor’s responsibility (cannot provide other business services to the organization; rotation of auditors every 5 years — just the external auditor, not necessarily the company)
  • chief executive officers and financial officers must certify to the audit committee and external auditor that the financial reports are accurate
  • policies to protect whistleblowers must be developed, implemented and followed
  • document management policies must be developed, implemented and followed (Destruction and alteration of relevant documents are a crime.)

Have the boards that you serve on taken a look at this list?

    A fiduciary is something or someone who is responsible for holding something in trust for another; holding a trust and therefore being a trustee.  In application, a fiduciary is an agent of a principal or a director of an organization who stands in a special relationship of trust, confidence or responsibility in certain obligations of others (namely the principal or the organization).

    That doesn’t sound very demanding does it?  Well, then consider that fiduciary duty is a legal duty — a requirement of loyalty and care that applies to any person or organization with a fiduciary relationship to another person or organization.  The fiduciary has agreed to accept legal ownership or control and management of an asset or group of assets belonging to someone else.  This is quite a standard.  It is the standard that applies in the attorney’s relationship to his/her clients, a partner’s relationship to other partners in the partnership, a banker to bank customers.

    Fiduciaries take legal title to assets that do not belong to them — that they administer and manage for a temporary period of time and for a specific purpose.

    What is expected?  A good examination of responsibilities and expectations can be found in The Uniform Fiduciary Act and the Uniform Trustees’ Powers Act.

    Fiduciaries owe two main duties to their clients: a duty of loyalty and a duty of care. The duty of loyalty requires that fiduciaries act solely in the interest of their clients, rather than in their own interest. Thus fiduciaries must not derive any direct or indirect profit from their position, and must avoid potential conflicts of interest. The duty of care requires that fiduciaries perform their functions with a high level of competence and thoroughness, in accordance with industry standards.

    September 2009
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