While I frequently speak to nonprofit boards about their fiduciary responsibility and occasionally refer to the possible penalties for failing this responsibility I've rarely reviewed the "risks" as seriously and deeply as Michael Gossie does in the following Arizona paper. But perhaps I should think differently. Here goes.....
As business leaders rise through the ranks, the increase in prestige comes with an increasing call for them to serve their communities.
“Most business leaders want to give back in some way,” says Matthew H. Mason, an associate atGallagher & Kennedy. “They feel a sense of duty.”
But what many of them don’t know, Mason says, is that there are risks involved when they join nonprofit boards. The U.S. Court of Appeals, Third Circuit, recently ruled that officers and board members were personally liable for the debts of a nonprofit.
“When business leaders are brought onto a nonprofit board, they often take off their business hat and think, ‘I’m here to raise money,’” Mason says. “While that is part of their job, their role is also to manage the nonprofit, just as they manage their own business. When they don’t do that, that’s a big danger.”
To help board members navigate those dangers, Mason and Gallagher & Kennedy Shareholder Robert Erven Brown outlined what they call “The seven deadly sins of nonprofit board members.” They are:
- Breach of fiduciary duty because of a private inurement
- Failing to observe corporate formalities
- Are not properly indemnified
- Committing gross negligence
- Violating the good business judgement rule
- Failing to properly manage officers
- Causing deepening insolvency
“People go into board service wanting to help, but they don’t realize the liability they take on,” Mason says.
Before joining a nonprofit board, Mason says to ask if there is director and officer liability coverage, look at bylaws and make sure there are proper indemnification sections and make sure the organization is following bylaws.
“The biggest thing is to make sure it’s something you’re passionate about,” Mason says. “If you’re not, you’re not going to pay close attention and that becomes a pitfall for the unwary.”