Nonprofit Board Crisis

Going Out Of Business - Still a Board Matter #NonprofitBoards

Lexology.com has produced a helpful instructional for boards whose nonprofit is facing insolvency (aka going out of business).  Here's some important takeaways:

Creditors may not be the first if only consideration in terms of asset distribution:

Under well-established New York law, for example, the board of an insolvent corporation owes a fiduciary duty to preserve corporate assets for the benefit of its creditors.[7] However, unlike for-profit corporations, even when insolvent, officers and directors of a nonprofit must balance the interests of the corporation’s creditors against the interest of preserving and observing the organization’s charitable purpose.[8]

For example, if an insolvent nonprofit corporation seeks to sell all of its assets, it must consider all of its constituencies, including the beneficiaries of the charitable mission and creditors. Rather than simply aiming to maximize the value of the nonprofit’s assets, the directors must balance the objectives of “paying creditors as much as possible and serving the mission of the corporation…with no other requirement or particular weight to be applied” when determining who to sell the assets to if bidders have opposing objectives.[9]

Like most matters applying to board liability and fiduciary duty:

 Even when a company approaches insolvency, the business judgment rule may insulate a board in its decision-making processes.[15] To enjoy the benefits of this rule, however, directors are required, among other things, to inform themselves fully and in a deliberate manner with respect to a transaction or other business decision that the directors will make on behalf of the corporation.[16]

In conclusion:

         A nonprofit corporation’s directors and officers should be mindful of their fiduciary duties while navigating financial hardships and potential insolvency. If a nonprofit corporation is approaching insolvency, becomes insolvent, or elects to file for bankruptcy, particular scrutiny will be given to the officers’ and directors’ actions. Involving legal counsel and financial advisors in the decision-making process and relying on their advice can further protect individual board members from personal liability. Nonprofit board members and officers should consider the following while assessing corporate action as the non-profit corporation navigates potential or actual insolvency:

1. Whether the action serves the goal of maximizing the corporation’s stated purpose and mission;
2. Whether the action is predicated upon a fair assessment the debtor’s financial condition;
3. Whether the action favors certain creditors or constituencies over others in the absence of business considerations or contractual rights that dictate otherwise;
4. Whether the action is based on a well-informed decision; and
5. Whether the action benefits the officers and directors of the nonprofit corporation at the expense of the corporation’s mission or other constituencies.

By engaging in such due diligence, the nonprofit board should be better positioned to demonstrate the requisite good faith exercise of its duties, as a defense to any challenge.

Less skilled Nonprofit Boards Can Make a Difference #NonprofitBoards

From the Southern Illinoisan: "the fiscal challenges started after the city passed the building to the nonprofit group. They described former members on the center’s board as ambitious, but not versed enough in the nonprofit and business sectors to successfully bring in more tenants and further develop the endeavor."

Board recruitment is difficult these days - actually, it always has been.  In the beginning, founders turn to their network and as we learn from the diversity-equity- and inclusion world, this seeking rarely ends and a board with different faces often looks like it did when first pulled together 25 or 50 or even 100 years later.

Can a start-up board be constructed more thoughtfully and strategically with the long-range in mind?  Why not?  Well, in a board's infancy stage, much of the focus, like many entrepreneurs, is on getting the doors open and getting the money for the immediate.  Boards in their infancy stage don't tend to pay attention to governing but operating.  Now, if nonprofit founders were strategic, they might recruit folks who know their mission world - the ins and outs and risks and opportunities - just like private entrepreneurs - and maybe they would have short terms to get through the start-up bumps and then it would be time to recruit the types of folks who could guide and focus on governance for the next stage of development.  Maybe?

 

 

 

Nonprofit Board/CEO Conflict #NonprofitBoards

There is a common story that there are nonprofit boards and their CEOs who don't get along.  Not getting along is a real possibility although the reality of this tension is frequently not anywhere near what goes on in the workplace or family.  The primary reason: "boards" as an entity don't tend to have anywhere near the frequency of contact with the CEO as do family or workplace members.  Based on conversations, aside from the board chair, many nonprofit board members spend as little as 15 hours a year doing their job.  Yes - that's nine meetings a year with an average of one-and-a-half hours a meeting.  

So, how on earth do boards even have time to have a conflict?  Well, stuff happens - sometimes there are reports that don't make sense; financial irregularities or just plain trouble; sometimes employee complaints; sometimes community members; sometimes a board meeting (well 2-3-4 board meetings) are so unsatisfactory in terms of substance and even pleasantness, that board members get irritated and turn their irritation back onto the CEO - justifiably so in my opinion.  

And yes there are longer term solutions like a post board meeting exec session where the chair is tasked to go chat with the CEO or an annual goal setting and subsequent performance review and a governance committee that structures with the chair a positive engagement where the board does get to exercise it's fiduciary duty.

For sure, nonprofit boards don't HAVE to have a negative relationship with their CEO.  CEOs in-turn might want to value their board members and help them do their job.  But sometimes, it's just not going to work for either party.  Action will be necessary and in that case, yes, it's up to the board to resolve - they are after all the surrogate (for the public) "owner" of the nonprofit - and let's not forget this.