April 25, 2019

Dive Warning : Look before You Leap into a Nonprofit Board Position

By Akira Heshiki

“Why don’t sharks attack lawyers? Professional courtesy.”

Despite being unpopular in the current zeitgeist, lawyers are sought-after commodities when it comes to serving on nonprofit boards of directors. Known for attention to detail, persuasive abilities, professionalism, and strong reasoning skills, lawyers are seen as a valuable asset to any nonprofit organization. Lawyers may be sought for other reasons, too, such as expertise in a certain legal area or the potential for financial contributions.

Flattering? Sure. But before diving into a board position, lawyers should educate themselves. This article outlines both practical and legal considerations for lawyers contemplating service on a nonprofit board of directors. Note that this article only touches briefly on some of the issues raised with nonprofit board service and is intended only to raise awareness. For further study, examination of the local law in your jurisdiction is highly recommended. Many state attorneys general also publish guidance for those considering nonprofit service.

Choice of a Pool

Service on a nonprofit board in many respects mirrors that of a paying job for a for-profit firm or corporation. Thus, the culture, purpose, and governance style of an organization all should be considered before agreeing to serve. Remember, serving on an organization’s board is donation of a valuable resource: time. A passion for the mission of the organization and its work should be an important consideration.

Researching the organization is critical. Consider reviewing the organization as though preparing to make a large financial contribution. To start, simple actions such as speaking to colleagues about the organization or looking at social media posts may provide insight about the reputation and goals of the organization. At a minimum, try to meet with one or two of the board members and gauge their experiences serving on the board.

Some questions to ask yourself include the following:

  • Does the organization have a good reputation in the community?
  • What are the known complaints about it, and how valid are those concerns?
  • Are you comfortable attaching your name to this organization and what it stands for?
  • What is the annual budget, and where does the organization get its money?
  • Is there an expectation that you will financially support the organization or participate in direct fundraising?

In recent years, the well-known breast cancer organization, the Susan G. Komen Foundation, has come under fire for a variety of reasons. It has been criticized for marginalizing and ignoring certain types of breast cancer. The organization also has been criticized because its CEO received a sizable raise in her six-figure income. A few years ago, social media lit up with discussion about how only 20 percent of the organization’s money went to cancer research, leading people to criticize and question the effectiveness of the organization and where their donation dollars were going.1 More recent criticism has focused on the foundation’s decision to hold a fundraising event at President Trump’s Mar-a-Lago Club after accusations of his alleged sexual assault of women were covered in the news.2

Careful consideration should be given to these types of allegations associated with an organization. Consider not only whether you have all the answers you need to address the concerns raised but also whether, as a potential board member, you feel comfortable with those answers.

Pool rules: Proper organization and management. Just as with every other corporation, state law requires organizations seeking nonprofit status to register properly with the state’s corporations division and often with the state’s department of justice. These registrations must be renewed on a regular basis, usually annually.

Checking with the secretary of state is an easy way to discover quickly whether an organization is following the annual reporting requirements, and it may provide a glimpse into whether the organization is well managed. Sometimes smaller, less sophisticated organizations may overlook these simple formalities.3

In addition to filing with the secretary of state, a properly organized nonprofit will have bylaws and a mission statement. Review of these key documents along with minutes of past board meetings and tax filings for the organization can provide a good sense of how well the organization is managed.

The IRS 1023 application and a determination letter will confirm that the IRS has reviewed the application and concluded that the entity is a charitable organization with tax-exempt status. The current charitable status of an organization also can be confirmed by using the IRS Exempt Organizations Select Check.4

You also will want to ask about any directors and officers (D&O) insurance, board manuals, and board policies to familiarize yourself with the parameters in which the organization operates.

Note that some of the best nonprofits operate without many of these formalities, and perhaps you would find it valuable to support the organization at these early stages by helping develop such policies to ensure that the organization can grow and be sustainable. However, it is best to know about these shortcomings up front before joining a board of directors.

Overhead: Drowning in administrative costs. As part of your research (and perhaps in your own history as a donor to a nonprofit), you might have run across discussions about nonprofit overhead overtaking the actual charitable work that the organization purports to support.

Charitable organizations are required to make their annual 990 tax filings public. These forms can easily be reviewed online through popular websites such as GuideStar and Charity Navigator. These websites also allow potential donors to review the ratio of expenses versus administrative and fundraising costs.

With so much media attention on the overhead discussion, it may be an overly simplistic analysis to dismiss an organization based on this factor alone. Consider attending some of the programs and meetings that the organization sponsors so that you understand how staff resources of time and financial resources are being spent. A more nuanced review of an organization’s financials will lead to an understanding of the true costs associated with accomplishing the goals of the organization.5

In the Swim of Things: Purpose of the Board

In addition to knowing the mission of the organization, a less obvious but important piece of information should inform your decision before joining any nonprofit board—the purpose of the board.

The term board of directors may not mean what you think it means. Is the purpose of the board to help govern the organization, or does it exist to support the work of the organization by providing advice to staff or volunteers to execute programs? Does it do both?

A board that exists to govern the organization will be charged with making big-picture decisions such as determining the mission of the organization, overseeing staff to make sure that the organization is in compliance with its stated mission, and ensuring adherence to regulatory obligations. Board members may be called upon to vote on investment decisions and the hiring and annual review of the executive director.

On the other hand, some boards may function in an advisory capacity to the executive director, supporting the organization with fundraising and revenue generation, volunteering by staffing programs, and serving as the face of the organization in the community. Fundraising also may be considered an expectation of board members. In this model, the board member works to help run the day-to-day operations and services that the organization provides rather than simply voting on issues coming before it.

In many cases, serving on a board may require a director to work in both of these roles—but having clarity about the actual work expected of each board member is key to understanding how the work of the organization will be executed. For example, an understanding of how decisions are made (e.g., generally by consensus or by majority vote) and who has authority to make certain types of decisions (e.g., the treasurer can authorize expenses of $500, but anything above that will need to be approved by the entire board) may help you gain insight into how the organization is governed on a day-to-day basis and what types of decisions you will be called upon to weigh in on as a director.

Speaking with current and past board members will help you gain a clear understanding of the expectations and time commitments that will be required when participating on a board. For example, the board may meet only once a month for an hour, but if board members are also expected to participate and serve as liaisons on subcommittees, then the anticipated time spent with the organization may easily double. Knowing this information up front will help keep surprises to a minimum after you commit to serving.

Sink or Swim: Your Obligations on a Board

Serving on a board may seem straightforward, but board members take on several fiduciary obligations once they agree to serve. These obligations may not be obvious to a board newbie because they are often not expressly written into board bylaws but instead are statutorily imposed.6

Most states impose three main duties: duty of care, duty of loyalty, and duty of obedience.

Duty of care. Generally, this rule requires that directors actively participate in and make informed decisions. At a very basic level, this includes attending meetings, reading the minutes, and evaluating the reports submitted to the board and making reasonable inquiries about circumstances that require clarification. It is not enough to simply show up; the duty of care extends to ensuring that other board members and staff are held accountable for achieving the mission. Your service on a board cannot simply serve as a rubber stamp for decisions.

In Oregon, for example, the duty of care requires that directors exercise their duties (1) in good faith, (2) with ordinary care, and (3) in the best interests of the organization.7

Complying with this duty should not be a tall order after three years of law school. It means doing your homework and being ready to be “called upon in class” should the need arise.

Duty of loyalty. The duty of loyalty requires board members to consider the interests of the organization before their own interests. This requirement is often the one violated by individual board members, who sometimes ignore conflicts of interest where they (or their family members) stand to benefit personally from board actions. Some organizations have policies requiring board members to disclose their involvement with other organizations.

Duty of obedience. States like Oregon also add a duty of obedience to the organization’s mission, bylaws, and policies as well as a requirement that the directors comply with state and federal laws that implicate the affairs of the organization, including income tax filings and financial reports to be filed with the IRS and state.

Breaching the duties. A failure to abide by the duties imposed upon a director can result in both civil and criminal personal liability.

A 2012 case, for example, involved a $5.5 million settlement between New York Attorney General Eric Schneiderman and Educational Housing Services (EHS), a nonprofit corporation that provided housing for college students.8 The president of EHS had set up a shell company that provided cable and internet services to EHS’s dorm rooms at a substantial markup. The shell company made millions in profits and provided no services that EHS could not have negotiated on its own.

Schneiderman found that the president, as well as the directors, had breached the duty of loyalty owed to EHS. The attorney general ruled that the EHS directors had breached their fiduciary duties because they had approved of the president’s transactions without any meaningful evaluation and without independently investigating facts. Although the president had a conflict of interest, the board had delegated to him the responsibility of looking for competitive bids and obtaining legal advice.

As a result of the settlement, the directors were required to pay damages, make restitution, disgorge unreasonable payments, and pay the costs of the attorney general—for a total sum of $5.5 million. In addition, the directors were permanently barred from serving as officers, directors, trustees, or fiduciaries for any New York nonprofit operating or soliciting contributions in New York.

Similarly, in In re Lemington Home for the Aged,9 the U.S. Court of Appeals for the Third Circuit held that directors who have actual knowledge of mismanagement and choose to ignore it can be held financially accountable for their breach of the duty of care. In that case, the board of a nursing home failed to replace the nursing home administrator and the CFO even after their mismanagement of the organization became apparent.

Staying out of Deep Water: Ethical Considerations

In addition to fiduciary obligations that are owed by all directors, your status as a lawyer also presents ethical rules that may be implicated when you serve on a board.

In particular, your role as a lawyer may cause confusion unless everyone is clear about your status. For example, when you give an opinion, are you providing legal advice? Although in some jurisdictions an attorney-client relationship cannot be established without an engagement letter, in many others the formation of an attorney-client relationship can be inferred by conduct10 or through the reasonable reliance of the client.11

As an attorney, you must ensure that your actions and words do not inadvertently create an attorney-client relationship where you did not intend for one to be created.12 As with all aspects of your practice, eliminating ambiguity is advised. You may consider writing a nonengagement letter or some document memorializing your role on the board and with its directors. Furthermore, you should make it clear that communications are not protected under an attorney-client privilege simply because you are in the room. If communications regarding board work are often done via email, consider using a disclaimer noting that you are not providing legal advice. Remember, it is your responsibility to avoid a misunderstanding about the nature of your relationship and to establish that no attorney-client relationship exists.

If a legal issue arises during your service on the board, quickly recommend that the board seek formal advice, outside the confines of a discussion held in a regular board meeting, so that there is a clear understanding about who the lawyer is.

Furthermore, it is imperative to recognize when a conflict of interest arises. Throughout an association with a nonprofit, lawyers need to remain vigilant about areas where the nonprofit may intersect with one of their clients or prospective clients.

A final note about ethical considerations: early steps can prevent many ethical issues from arising. If you are going to serve as a director and not a lawyer to the board, you should make sure before accepting a board position that there is a firm representing the organization and providing it with legal advice. In addition, you should enter the nonprofit into your firm’s conflicts checklist to ensure that the organization has not previously been adverse to a current client in litigation or a current transaction.

Preventing a Nosedive: Insurance

Knowing that you have liability insurance can ease some of the potential discomfort that comes with the risks of serving on a board.

Consider looking into the following sources to see if your work as a director may be covered: (1) your employer; (2) the nonprofit, which may have a D&O insurance policy; and (3) your personal umbrella policy.

As with all types of liability insurance, you will want to know exactly who is covered. Assuming the D&O policy covers both the organization as well as the directors, pay attention to whether the policy has a clause that prioritizes coverage for the directors and officers prior to covering any liability owed by the nonprofit entity. If coverage under the D&O policy does not get triggered until the organization has a legal obligation to defend a case, you need to know whether the bylaws ensure that you will be indemnified, too.

In addition, as with all policies, be aware of the activities or types of actions that are covered as well as those that are not covered. Familiarize yourself with the limitations on coverage. Do not forget to check whether the D&O policy covers punitive as well as actual damages and if it addresses criminal activity performed by another director where you are not engaged in any illegal activity. Also, make sure that you understand the notice requirements.

If coverage is unavailable through the nonprofit, your firm, or your personal umbrella policy, you should consider purchasing your own D&O policy. A knowledgeable broker will be able to help educate you on the amount and types of coverage that you should consider having based on the organization and the risks of other comparable organizations.

Swim Lessons: What Is in It for Me?

Warm fuzzies from donating your time to causes that you care about may not be the only benefit from serving on a nonprofit. Being intentional about what you are hoping to get out of your experience also should be a critical component of joining a nonprofit board. There are many potential benefits to consider.

Tax write-offs. Your direct service as a lawyer is not tax deductible.13 However, certain expenses may be. Consider car and transportation expenses incurred in getting to meetings. Parking fees and tolls also may be included.

Experience. Service on a nonprofit may allow you to gain leadership opportunities, as well as opportunities to gain exposure to and to develop expertise in areas where you lack knowledge. For example, serving on a finance committee may provide you with an opportunity to learn about accounting, budgeting, and auditing principles with which you might not otherwise be familiar. Serving as the chair of a subcommittee may help hone your skills in running meetings and developing team members. Nonprofits also offer opportunities to develop much-sought-after experience in grant writing and fundraising.

CLE credit. Some states allow CLE credit to be earned for pro bono service. While your role as a board member likely will not qualify for CLE credit, your provision of legal services to a charitable organization as the entity’s attorney may be eligible for credit.14

Professional networking. Another potential advantage of serving on a nonprofit board is your exposure to members of the community with whom you hope to network and build relationships. For example, a lawyer’s work with a legal nonprofit will create exposure to a larger legal network, while working with a nonprofit that benefits a dog shelter may potentially increase referrals for a lawyer’s animal law practice.

Marketing opportunities. Your firm may support your board service by purchasing tables at a charity auction or by underwriting the cost of a scholarship. In this way, events that benefit a cause you care about can also serve as marketing opportunities for your firm.

Conclusion

Despite the warnings above, flotation devices exist. A small number of states have adopted a version of the Model Nonprofit Corporation Act (MNCA), and many others have case law that closely follows. Section 2.02 (b) of the third edition of the Act recommends that a nonprofit’s articles of incorporation include a provision eliminating or limiting the liability of a director to the corporation or its shareholders for monetary damages for any action taken (or for any failure to take an action) as a director except under certain circumstances (such as an intentional infliction of harm or violation of criminal law). Lawyers should ensure that the nonprofit boards in which they are interested have similar provisions in their articles of incorporation as a welcome safety buoy.

The role of a director may be risky, but it also is potentially rewarding. Lawyers who pay attention to the dive warnings and make use of the available life preservers can swim safely, confident that they have the requisite skills. Happy swimming! n

Notes

. Michael Hiltzik, Susan G. Komen Foundation Discovers the Price of Playing Politics, L.A. Times (Jan. 8, 2014), www.latimes.com/business/hiltzik/la-fi-mh-susan-g-komen-20140108-story.html.

. Jill Disis, Susan G. Komen Foundation Faces Backlash over Mar-a-Lago Fundraiser, CNN Money (Oct. 26, 2016), money.cnn.com/2016/10/26/news/susan-g-komen-foundation-trump-fundraiser.

. Associated Press, AG: Ohio Charity Ordered to Close Due to Misuse of Funds, Wash. Times (Mar. 12, 2017), www.washingtontimes.com/news/2017/mar/12/ag-ohio-charity-ordered-to-close-due-to-misuse-of-.

. IRS, EO Select Check, www.irs.gov/charities-non-profits/exempt-organizations-select-check (last updated Mar. 20, 2018).

. Art Taylor, Jacob Harold & Ken Berger, The Overhead Myth, mediad.publicbroadcasting.net/p/wlrn/files/gs-overheard-myth.pdf (last visited Mar. 23, 2018).

. See Cal. Corp. Code § 5231 (West 2018); N.Y. Not-for-Profit Corp. Law § 717 (McKinney 2018). Many states have adopted language that is modeled after the Revised Model Nonprofit Corporation Act. See Am. Bar Ass’n, Model Nonprofit Corporation Act § 8.30(a) (3d ed. Aug. 2008).

. Or. Rev. Stat. § 65.357 (West 2017).

. In re Investigation by Eric T. Schneiderman, Attorney Gen. of the State of N.Y., of Educ. Hous. Servs., Assurance No. 12-121 (Dec. 5, 2012), ag.ny.gov/pdfs/EHS_AOD.pdf.

. 777 F.3d 620 (3d Cir. 2015).

. Prof’l Servs. Indus., Inc. v. Kimbrell, 758 F. Supp. 676, 681–82 (D. Kan. 1991).

. See Admiral Merchs. Motor Freight, Inc. v. O’Connor & Hanna, 494 N.W.2d 261, 265–66 (Minn. 1992) (finding that tort theory could recognize an attorney-client relationship when an individual seeks and receives legal advice from an attorney in circumstances in which a reasonable person would rely on such advice).

. Although this article is limited to a discussion of attorneys serving as directors, attorneys might wish to take on a nonprofit as a corporate client. If so, they need to be aware of ethical rules that concern representation of the organization, potential conflicts, attorney-client privilege issues, and concerns about self-dealing. See Model Rules of Prof’l Conduct R. 1.6., 1.7, 1.13, 2.1 (1983) (amended 2002), www.americanbar.org/groups/professional_responsibility/publications/model_rules_of_professional_conduct/model_rules_of_professional_conduct_table_of_contents.html.

. See IRS Publication 526: Charitable Contributions (2017), www.irs.gov/pub/irs-pdf/p526.pdf.

. Am Bar Ass’n, CLE Rules, www.americanbar.org/groups/probono_public_service/policy/cle_rules.html (last updated Oct. 2017).

By Akira Heshiki

Akira Heshiki is a senior attorney who manages bad faith and ERISA litigation for Standard Insurance Company in Portland, Oregon. She has served on nonprofit boards for the majority of her legal career, first with the Oregon Minority Lawyers Association (OMLA) and most recently with the Multnomah Bar Association, where she served as its treasurer. She is currently a member of the TIPS Council and chairs the Section’s Committee on Diversity and Inclusion. She can be reached at akira.heshiki@standard.com.