Bar association and foundation boards and executive directors who aren’t thinking about issues such as liability in-surance, conflict-of-interest policies, and a host of other governance, finance, and management issues might want to think again—regardless of their size, legal history, or audit record.
“Governance is typically a matter of state law,” says Gene Takagi, a San Francisco lawyer who specializes in ad-vising bars and other small nonprofits, “[but] the IRS has made clear that it will focus heavily on governance prac-tices. In the near future, filers that do not have certain policies may find themselves part of a small minority targeted for examinations or audits.”
Adds Takagi, “Attorneys on the board may prick their ears up when discussing liability and the IRS.”
Takagi, other experts, and bar executives say that it is not just the specter of an unwelcome IRS audit that should make associations and foundations more keenly aware of their governance and liability. The recent plunge in stock funds, the exposure of prominent investor fraud cases, and closer member scrutiny of an organization’s board activi-ties should give bars plenty of reasons to review policies and procedures. Solid governing documents and adequate insurance policies can help ensure that a bar’s employees, governing board, members—the organization as a whole—are protected from any potential financial and legal pitfalls.
Thorough internal reviews, meetings with outside insurance and governance experts, and a willingness to seek advice are all likely to help association and foundation leaders tackle some of the thorniest parts of their duties. While dealing with such issues might not be the sexiest aspect of bar leadership, experts say, it is a vital part of mak-ing sure bar organizations remain intact and active in their communities.
Begin with a review
Determining what sorts of governance and liability issues confront bar associations and foundations and how they should be addressed can be challenging, particularly for smaller groups, says Paula Cozzi Goedert, a partner and chair of the Foundations and Associations Practice Group at the Chicago office of law firm Barnes & Thornburg.
A frequent speaker at the ABA Bar Leadership Institute, Goedert says there are five issues that nonprofit boards face most: antitrust regulations, tax and finance, human resources, intellectual property, and governance. “The cur-rent trend is all about good governance,” she says.
For many associations and foundations, determining board procedures, insurance policy coverage, and risk as-sessment starts with a thorough review of what’s in place. One of the best ways to do that, Goedert and others say, is to go outside the organization for professional assistance. While current board directors or other bar members are likely able to offer their insight and expertise, she says, an outside review removes any potential for conflict of inter-est.
“In an ideal world, bar associations and bar foundations would have an audit of their policies every five years,” Goe- dert says. “They need to make it a habit.”
What should they look for in such a review?
Most prominently, Takagi says, an audit should examine: governing documents; policies and procedures; em-ployment practices; internal controls; registration and reporting compliance; investments; governance practices; con-flicts of interest; membership practices; Web site and intellectual property issues; significant contracts; record keep-ing; insurance; and compliance with 501(c)(6) regulations—or 501(c)(3) regulations for foundations—particularly those related to revenue sources and activities unrelated to the organization’s tax-exempt purposes.
Such regular reviews—and any subsequent adjustments—can make association and foundation directors feel more comfortable about the organization’s governance policies and can also assist in helping them face up to ever-increasing public scrutiny.
What’s on the horizon?
Changes made last year to the IRS Form 990 filed by tax-exempt organizations, says Takagi, mean the form now includes questions about whether or not organizations have several good-governance practices, such as: a conflict of interest policy, whistleblower policy, document retention and destruction policy, compensation policy, joint venture policy, expense reimbursement policy, and gift acceptance policy.
Those questions, combined with efforts led by Sen. Charles Grassley (R-Iowa), seeking more accountability from nonprofits, may indicate that associations and foundations will face more requirements in the years ahead. “You’d better have a conflict of interest policy,” Goedert says, “because you know that saying, ‘No’ will get you an audit.”
As fallout continues from prominent financial failures such as the collapse of Enron, she adds, the IRS will look closely at potential board conflicts, particularly at bar foundations, which often have overlapping members with bar associations. “The IRS could limit how many people you have on your board,” she notes.
More recent crises in the financial markets over the last two years, particularly fraudulent activities such as inves-tor Bernard Madoff’s massive Ponzi scheme, are also giving rise to closer scrutiny of a nonprofit board’s handling of finances. Many defrauded investors—or in the case of associations and foundations, members—who lost invest-ment funds have turned their ire to directors, charging that they failed in their oversight duties.
Bar foundations, many of which lost money in the recent investment downturn, could be more susceptible to claims of mismanagement from members, Goedert says. While she believes the widespread downturn of 2008-09 could make proving mismanagement difficult, “there is an increase in nervousness [among directors] about their actions,” she says. “I had dozens of board members call me about this, especially during the first half [of last year].”
Gaps can be expensive
For bar associations and foundations faced with the issues of potential mismanagement and liability, Goedert and other experts mostly agree that nonprofits are rarely subject to lawsuits and similar claims. Holding directors per-sonally liable is extremely rare, Takagi says.
“But that doesn’t mean that directors are not exposed to potential liability,” he adds, “nor does it mean that direc-tors never get sued, investigated, or dragged through the mud by the media when something goes wrong under their watch.”
Angela Elbert leads the Directors and Officers Insurance Practice Group at the Chicago law firm Neal, Gerber & Eisenberg. She has been advising nonprofits on insurance issues for more than 15 years, and she agrees wholeheart-edly with Takagi.
“Not-for-profits do get sued,” she says.
With that in mind, a bar’s liability insurance—particularly its directors and officers (or D&O) policies—becomes critical, many say. But at many associations and foundations that have had no experience with claims, insurance needs are often overlooked.
Elbert can tell plenty of stories of bars and other nonprofits caught unaware of insurance shortcomings. She re-calls one instance where a nonprofit society and its affiliated charitable foundation had separate, unrelated D&O policies that left the door open for the society to be named in a lawsuit caused by donations the foundation accepted.
“They thought they were covered, but they weren’t. They didn’t look at the fine print,” says Elbert, who is also chair of the Chicago Bar Association’s Insurance Law Committee. “It’s unfortunate, but the only thing that seems to get [association leaders’] attention are these scary stories.”
Some of those “scary stories,” she adds, involve lawsuits with little or no merit—and inadequate insurance that doesn’t include legal defense coverage. “Defense costs can eat up a lot of money,” Goedert adds. “Trials can cost a lot of money.” She advises bars to make sure that they obtain separate insurance policies to cover defense costs, as well as any potential damages for liability.
One of the best measures an association or foundation can take is to incorporate, Goedert says. “That puts a hard shell of liability protection on the association,” she says. But even that move requires vigilance, she says; she has seen many associations and foundations let their corporate statuses lapse.
When reviewing insurance coverage, bars also need to carefully review what’s in their policies—and what isn’t, Elbert says. Many nonprofits have a habit of just renewing policies and accepting what a broker says, she explains, without realizing that virtually any policy is negotiable just as any contract is, in order to suit the needs of individual organizations.
“Not all insurance policies are created equal,” she says. “There is a lot of room for improving policies. Just buy-ing [a policy] off the rack is just not acceptable.”
One area where nonprofits such as bars are most susceptible to lawsuits is in their employment practices, accord-ing to Elbert. Not only must an association’s hiring, firing, compensation, and discrimination policies be carefully documented, she says, there must also be adequate liability and defense coverage to fully protect the association from legal action. That is why bars need to make sure they have an employment practices law (EPL) liability policy, which is often packaged with D&O policies, she adds.
Again, she cautions, boards should check with the organization’s broker on coverage and then have the policy re-viewed a final time. “Beware of ‘friends of friends,’ ” who provide insurance for a living, she adds. “If you’re not involved in this market every day, you just don’t know everything that’s happening. Lawyers are sometimes their own worst clients.”
Bars also need to be sure that they adopt antitrust avoidance statements and that liability coverage extends to anti-trust, says Elizabeth Derrico, associate director of the ABA Division for Bar Services.
“It is a risk management thing. What you don’t want is members talking fees on your Listservs or at your meet-ings. That is why bars should monitor such discussions,” she says. “Plus, there are implications when you provide insurance services, credentials, or any type of guidelines for the purchase of products.”
Despite the lengthy list of dos and don’ts on an association or foundation’s liability protection checklist, Elbert and Goedert say that such policies are readily available and probably won’t break the bank. Elbert recently reviewed a thorough policy for a small, new nonprofit organization that included $1 million in protection in most areas, in-cluding coverage for legal defense costs.
The annual premium, she says: $615. “We’re not talking a lot of money here for peace of mind,” she notes.
Making protection a priority
For many bar associations and foundations, failing to review governance and insurance policies probably stems more from forgetfulness than willful avoidance, Derrico and others in the field say. Quite often, it’s an issue that struggles to get off the “to do” list.
That was the case for the San Joaquin County Bar Association in Stockton, Calif., where reviewing existing in-surance policies and adjusting where necessary was more than two years in the making, says Rebekah Burr-Siegel, the bar’s executive director.
Spurred on by members of the bar’s board of governors, bar members who are fluent in insurance law reviewed documents and made a somewhat surprising discovery: “We had a general liability policy, but we couldn’t find a record of D&O [coverage] anywhere over the last decade,” Burr-Siegel says.
New in her position and new to the world of bar associations, Burr-Siegel began calling other nonprofit organiza-tions in town to explain her predicament and to get ideas on where to obtain up-to-date insurance coverage. The di-rector of the local YMCA, now retired, was “off his chair,” she recalls. “It was the funniest thing he had heard all day.”
The bar’s board met with brokers and secured a complete policy that not only covers the bar association, but the affiliated bar foundation as well—all for less than $2,000 a year. The association and foundation have the same gov-erning board, Burr-Siegel says, which the board will need to look at carefully in coming years as the IRS fine-tunes its view of potential for conflict of interest.
At the Hawaii State Bar Association, policy review has become ingrained, with D&O review falling under the purview of the bar’s Insurance Law Section, says bar President Hugh Jones. Executive Director Lyn Flanigan also makes sure that review procedures are spelled out in the handbook for the bar’s board of directors.
“We review our investment policy on an annual basis,” she says. “We spend a significant amount of time at each [board] meeting going through our annual reports.” While the process can sometimes be tedious and can seemingly slow down action, she adds, she and the bar’s leaders believe it is cautious time well spent.
That routine was helpful recently when the bar moved its operations from a rented location to a new, bar-owned office complex. “We looked at property owner coverage and did the things that we needed to do,” Jones says. Be-fore closing on the purchase, he adds, “we reached outside, and we drew in the best lawyers we could rely on for our due diligence.”
Flanigan also helps the board stay up to date on IRS procedures and trends. The bar has had a long-standing con-flict of interest policy, she notes, and is prepared to implement other changes as they become necessary. “We weren’t surprised about the things that are now creeping into the nonprofit area,” she says.
One of the ways Flanigan stays up to date is by talking to other bar execs through the National Association of Bar Executives’ Listservs, and by attending ABA and NABE conferences and seminars focusing on governance—an information-gathering approach Goedert, Elbert, and Takagi heartily endorse.
“It’s part of the executive director’s responsibilities to convince the board to focus on important legal and finan-cial issues and invest in compliance and improved practices,” Takagi says. “When the board is dismissive of such initiatives, it can help to bring in an expert consultant or an exempt organization’s attorney to give a presentation to the board on governance and answer specific questions about the association’s governance practices and policies.”
At the Hawaii State Bar Association, the board’s homework on governance and insurance has allowed time for the bar’s other critical issues, such as the traditional Hawaiian blessing of its new headquarters last December.
“That’s important,” Flanigan says. “It’s a necessity in Hawaii.”
Low-cost—and free—help is available
A Web site run by—what else?—a nonprofit corporation is one place where bar associations and foundations can turn to gauge how much and what kind of insurance they need.
The site, www.insuranceformynonprofit.org, provides general insurance information and resources geared to-ward smaller nonprofits. It is operated by the Public Entity Risk Institute, a research organization that assists public boards, nonprofits, and similar organizations with insurance risk management issues.
One feature of the site is a free interactive tool that provides users with an assessment of their insurance needs. “It lets the user answer questions about their exposures and then offers suggestions on the type of insurance designed to cover the risks listed in the assessment,” says Mary Stewart, director of research and development for PERI.
The site also contains a mix of free and low-cost information and resources, including links to insurance agents willing and able to write D&O policies, Stewart adds.
There are also other online and in-person resources available as organizations look for reasonably priced ways to learn more about governance and liability issues and how to address them. Among the resources:
The ABA Division for Bar Services has a wealth of information—most of it free—on the topics covered in this article. Among the tools you’ll find on its Good Governance Resource Page are links to: BoardLink, the division’s new e-newsletter on best practices in governance; related articles from Bar Leader and from nonprofit experts such as BoardSource and CompassPoint; samples of bar board orientation materials; and a library of reasonably priced guidebooks avail-able through the ABA Web store.
The ABA Business Law Section’s Committee on Nonprofit Organizations offers information and links on nonprofit governance and fiduciary responsibility. This information can be found here.
The American Society of Association Executives provides templates, models, and other information at www.asaecenter.org. Membership may be required.
The Nonprofit Risk Management Center, www.nonprofitrisk.org, also provides a clearinghouse of information, including questions to ask insurance brokers about coverage, as well as online risk assessment similar to the PERI program.
Gene Takagi talks about general issues facing nonprofits, as well as the latest news affecting them, on his blog, www.nonprofitlawblog.com.