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Vol. 30, No. 6

Bar association D&Os in a post-SOX world

by Wendy J. Smith

Paula Cozzi Goedert thinks directors and officers (D&Os) of bar associations should operate under what she calls the Washington Post rule. When contemplating any action on behalf of their organizations, they should consider how the facts of the situation would look on the front page of the Washington Post or, even worse, their own local newspapers.

The most important asset of a nonprofit organization is its reputation, and the primary duty of its staff, leaders, and legal counsel is to protect and enhance that asset, added Goedert, a partner in the office of Barnes & Thornburg LLP. In a sweeping, 45-minute presentation at the ABA Bar Leadership Institute this past March, Goedert—whose clients include the American College of Surgeons, the national PTA, and numerous other nonprofit associations and foundations—covered the basics of what D&Os need to know.

The ultimate authority for managing an organization is vested in its board of directors, pursuant to state law and an organization’s articles of incorporation, bylaws, and policies. Goedert said that directors, as a starting point, should conduct due diligence on their own and find out what is required by law and the bar’s bylaws and operating rules.

At a minimum, Goedert said, D&Os must demonstrate the following:

Duty of care

Violation of the duty of care is the primary cause of legal woes for D&Os, Goedert said. It involves several elements, including:

The duty of "showing up." Courts have little sympathy for D&Os who consistently miss meetings for relatively trivial reasons.

The duty of "finding out." If a D&O was not present at a board meeting for a legitimate reason, he or she must find out what happened. D&Os are bound by the board’s actions, even if they were not at the meeting.

The duty of "delegating." The most difficult dilemma for D&Os is to find the right level of delegation to staff. If they err on the side of micromanagement, they risk setting up an unnecessarily adversarial relationship. On the other hand, haphazard oversight may result in abdicating their own responsibilities to the bar association’s members.

Duty of loyalty

By taking office, D&Os acknowledge that the best interests of the organization must trump any personal interest, including those of their employers, families, and associates. The D&O’s actions while in office must promote the organization’s purpose rather than any personal interest, Goedert cautioned. Conflict of interest is not illegal, she said, but acting on it is. If a D&O may be influenced by a private interest, he or she must disclose the conflict and refrain from discussing and voting on the matter.

Duty of obedience

D&Os have an obligation to follow their own organizational bylaws and operating policies. Goedert told the group about one of her clients who wanted to "waive the bylaws" and fire the association’s executive director without the requisite notice. Such a move, she warned, will lead to the embarrassing revelation in the local media that an organization cannot even follow its own rules.

Dollars and sense

Goedert delivered on her promise to explain—within five minutes—the importance of liability insurance, the tax consequences of association management, and the relationship between bars and their affiliated foundations. She even had time left over for a brief discussion of copyright law. Highlights of her no-nonsense comments include:

Ensure that your bar’s articles of incorporation are current, and check to see if your state has a corporate protection statute. Both will protect individual D&Os from personal liability if the organization is sued.

Buy D&O liability insurance. Even if the corporate statutes provide a hard shell of protection, liability insurance will pay for your lawyers if you are sued. As far as Goedert is concerned, you cannot buy too much.

Remember that, as the IRS sees it, there are two types of revenue—taxable and nontaxable. If the primary purpose of the revenue-generating activity is to further the nonprofit’s organizational objective, the money is not taxable. But 40 pages of the IRS Code are devoted to the differences between taxable and nontaxable revenue, making it necessary to scrutinize every source of nondues revenue. Logic has nothing to do with the decision of "to tax or not to tax," Goedert said. For example, income from corporate sponsorship is not taxable, but advertising revenue is.

Foundations are not piggy banks. Goedert likened the relationship between 501(c)(6)s and their foundations, which are 501(c)(3) charitable organizations, to that of parents and their children. Funds from the 501(c)(6) can flow into the foundation, but the parent organization cannot raid the 501(c)(3)’s assets. That would be tantamount to breaking open a child’s piggy bank.

Nothing in the tax code is simple, and the regulations covering the relationship between the two types of organizations are no exception. Bars can recoup the expenses of sharing services and facilities with their foundations as long as the charges reflect fair market value and both organizations keep scrupulous "contemporaneous business records," such as time sheets. The IRS looks with favor at overlapping board of directors, Goedert said, on the assumption that, like concerned parents everywhere, the 501(c)(6) will keep its foundation from running amok.

The Internet, Goedert cautioned, has wreaked havoc with enforcement of copyright laws. She recounted a call from one of her clients, who had "copied" a chair’s message from the Internet under the mistaken impression that material on the Web was not copyrighted. Unfortunately, she noted, this view is widely held, even by some lawyers who should know better. She strongly recommended that bar associations obtain copyright assignment from all authors to their publications to avoid problems if they want to repackage the material in a different format or post it on their organization’s Web site.