Board Basics Primer

Shelly Alcorn, CAE, Principal www.alcornassociates.com [email protected]

Board Basics Primer

Disclaimer

Although we discuss legal matters in this orientation, NOTHING that is said should be construed as legal advice in any way, shape or form. These are legal concepts that are generally known to association professionals and executives and are being used for instruction only. If, after reviewing, you have any concerns or need clarification you are urged to contact qualified legal counsel with expertise in the association and non-profit community and obtain a legal opinion specific to your unique circumstances.

Applicability of Corporate Law

There is a large body of corporate law behind the non-profit sector and boards of directors are subject to it. Sometimes boards labor under the mistaken impression that if a provision “already exists” in their articles of incorporation or their bylaws, these provisions are automatically lawful. This is not the case. When in doubt, look it up or ask qualified legal counsel for input. Don’t rely on polls of your non-lawyer friends about corporate laws. Also, laws do change from time to time and a periodic legal audit of your organization by qualified counsel is a good idea.

Volunteer Protections

Volunteers enjoy a certain, but not absolute, veil of protection from personal liability for their actions as Board members, provided they act in good faith and in conformance with the fiduciary duties which we talk about in detail later in this presentation. However, even then they are often named as individuals in lawsuits filed against the organization. For this and other reasons, the purchase of Directors and Officers insurance is a must for any association or non-profit.

Rule of Limited Authority

Basically, decisions should be made by the entire board or delegated to certain individuals, such as the Executive Director, in board policy. If there is no written delegation of authority, there is no authority, and the acting party may be risking personal liability for having acted without it.

Ultra Vires Acts

Going along with apparent authority, ultra vires acts are simply those acts that Board members are unauthorized to take. Individuals or groups of individuals who exceed their authority in such a manner can not only put the organization at risk but also expose themselves to personal liability for such acts.

Apparent Authority

Board members should refrain from making promises, verbal or written agreements or otherwise appearing to officially represent the Board or the association without explicit permission to do so. The association can be held liable for agreements signed, etc., by directors even if the board had no knowledge of it, if the other signing entity simply has the belief the person who signed or made the promise had the right to do so. For this reason, we advise against allowing board members to have official association business cards or letterhead for their personal use.

Alter-Ego Doctrine

This refers to a legal doctrine used by the courts to determine if directors were acting outside of their scope or using the association to further their own personal interests. Namely, if an individual treats the corporation as an extension of his or her own ego, the court may decide to “pierce the corporate veil” and hold the director personally liable for their actions.

Powers of a Director

By virtue of their position on the Board, directors do have certain powers. Those powers include getting advance notice of any meetings that are held in accordance with the bylaws or policies regarding meetings, having the right to attend, participate in and speak at those meetings, and to advocate for their position. However, directors do not have the right to convene their own meetings, hold “unofficial” meetings (there is no such thing), or to violate confidentiality. Conflict of interest policies should be in place and directors should declare if they, or anyone close to them, has a stake in any topic the board may be discussing.

Antitrust

Antitrust law is a collection of federal and state government laws that regulates the conduct and organization of business corporations, generally to promote fair competition for the benefit of consumers. The main statutes are the Sherman Act 1890, the Clayton Act 1914 and the Federal Trade Commission Act 1914. These Acts, first, restrict the formation of cartels and prohibit other collusive practices regarded as being in restraint of trade. Second, they restrict the mergers and acquisitions of organizations that could substantially lessen competition. Third, they prohibit the creation of a monopoly and the abuse of monopoly power.

Private Inurement

IRS regulations prohibit associations from allowing their financial assets to personally benefit any directors or members. Should it be found that an association is over-compensating directors, or giving ‘rebates’ or similar things back to members when doing so is not primarily for the benefit of the association, the association may be putting its tax status at risk, and risking severe penalties and adverse publicity.

Minutes and Recordings

Official minutes of all board, executive committee, council or committee meetings, etc. should be permanently kept. Once minutes are approved, all notes taken during the meeting by individual directors should be shredded. Board meetings should never be recorded using any electronic devices. It is wise to adopt a policy prohibiting the use of recording devices during association meetings.

Fiduciary Duty of Care

The Fiduciary Duty of Care simply means the Board acts in the same degree of care and judgment as a ordinary business person would in similar circumstances. This is vague, but as good as we can get as all legal cases hinge on the individual circumstances unique to each case. In order to exercise their duties of care, board members should act in good faith, regularly attend meetings, carefully review agendas and supporting materials and come prepared for discussion and debate. Minutes should also be carefully reviewed. If a board becomes aware of a director who is not acting within their fiduciary duties of care, i.e., regularly missing meetings, badgering the executive director, or otherwise acting in an ‘unreasonable’ manner, the board as a whole should take action to sanction or remove those directors if necessary.

Fiduciary Duty of Inquiry

Members of the Board of Directors have the right to ask questions and ensure they are properly informed regarding the business of the association. This includes financials, as well as major program proposals. Executives should strive to provide the board with appropriate information and respond to inquiries in a timely manner. However, the duty of inquiry does not give board members the right to conduct their own audits, or other such action and inquiries should be subject to the “reasonable person” standard. Board members also have the right to rely on the opinions of appropriately licensed professionals such as CPA’s or attorneys. It is risky to disregard an expert opinion once it has been obtained, as doing so is strong evidence of careless behavior.

Fiduciary Duty of Loyalty

According to California courts, a director owes an “undivided duty of loyalty” to the corporation on which he or she serves. A director should not divulge matters that he or she knows or should know are confidential. Directors should save their discussions for the Board room and not disparage or otherwise issue public statements regarding actions taken by the board that are negative or derogatory in tone. The First Amendment of the US Constitution does not extend to cover speech that runs counter to the interests of the corporation because these are private groups. Directors should also refrain from gossiping or giving the impression that matters are being mishandled at the Board level, as such acts are inherently harmful to the association. Directors may be elected or appointed to represent a certain constituency within the association but that is where the relationship ends. The Director’s first duty is to the Board as a whole, so proxy voting or voting “how your constituency wants you to” is a violation of the duty of loyalty. You must vote in the interests of the association as a whole.

Role of the Board

Set Vision – The Board is primarily responsible for setting the vision for the organization. While advisable to ensure current programs are meeting members’ needs, the board’s real charge is keeping an eye on the future and ensuring the association is properly positioned to adapt and thrive in the coming years.

Set Strategy – The Board sets the overall strategy for the organization, while staff is responsible for tactical implementation. Every board needs to have a strategic plan at the center of their activities to ensure everyone continues to pursue desired objectives and not leave organization direction up to the whims of an incoming president or overly powerful executive.

Hire Evaluate and Support the Chief Staff Executive – High functioning boards develop a close partnership with their CEO. Periodic performance evaluations are recommended for not only the executive, but the board as well. The Executives relationship is with the Board as a whole, not to any one individual or group of individuals upon the board. Decisions regarding the executives hiring, pay or other matters should be deliberated as a body.

Oversee Leadership Operations and Culture – Boards should maintain a 30,000 foot level view of not only activities but also the culture of the organization. Boards should at all times model positive behaviors and remember they have a role to play in how the organization is perceived by members, non-members and the industries and professions they represent.

Establish Policy – Boards establish policy, the “rules of the road,” if you will that give staff and volunteers the power to act. Boards should establish policies that are required by law, or are designed to handle matters within the association and how it conducts its operations. Boards should set policies that are simple, clear and transparent. They should also ensure policy is actually necessary and avoid setting policy to attempt to deal with every single contingency that might arise.

Approve budget and significant programs – This may be self-explanatory but fiduciary duties are clear in this respect. The budget is the responsibility of the board and although preparation may be delegated to staff or other volunteers, the entire board is responsible for it once it is officially adopted.

Recruit and Nurture future leaders – the minute you get on the board you should begin to search for your replacement. The lifeblood of any association is the continued arrival and inclusion of new people and new ideas. Future leaders are the key to your association’s survival. Ignore them at your peril.

Promote the organization and its programs to the entire community – Your association should be doing such awesome stuff that you find yourself talking about it at PTA meetings, or other social gatherings. You are representing your profession and the general public should be more aware of what your members do and how you help them.

Role of the President

The President or chief volunteer officer on the board is not a dictator. This is not their association. This is the members association. Accordingly the role of the president is to be a facilitator, to ensure each and every voice is heard and that meetings are cordial and run effectively. Although each volunteer should have a desire to serve and make an impact, they should be reminded there is no such thing as the “year of the president” and that strategy and culture reign supreme.

Role of the Executive Committee

Similarly, the executive committee should also not be run as a “pseudo-board.” The powers of the Executive Committee to act as sounding boards for the Executive Director and as a “first stop” for issues of a divisive or inflammatory nature, they should not be making decisions on their own except as delegated by the Board or in emergency situations. In all cases, decisions made by an Executive Committee should be presented to the full board for discussion and ratification to ensure the Board as a whole is exercising its fiduciary duties appropriately.

Role of Staff

The relationship between the board and the executive is mediated by the policy set by the board. The Board interfaces with the Chief Staff Executive, not the entire staff. High functioning organizations hold the executive accountable for the actions of staff, but the hiring, evaluation and termination decisions on staff are held by the executive. Board members can work on projects with staff in a cooperative and collaborative manner, but any issues regarding staff performance, workload distribution, etc. are the purview of the executive and should be discussed with them alone.

Board Practices to Avoid

Power Struggles - If you as a board member see power struggles developing particularly between volunteer groups such as the board vs chapters, committees., etc. you need to take a step back. Ensure you are being open, transparent and using consensus processes. Also, review your governance structure to ensure you aren’t throwing up unnecessary barriers.

Vote Counting - Directors should not come to meetings already being sure of how they are going to vote on an issue, and they also shouldn’t canvass other board members ahead of time to see how they are leaning. You must come into every meeting with an open mind ready to hear other perspectives. If you don’t, this could be considered a violation of the duty of care.

Lack of Civility and Respect - a common problem that can lead to unnecessary conflict or disruption. In some egregious cases it can be the root of lawsuits or have other adverse consequences in terms of membership confidence or public perception.

Board micromanagement is self-explanatory. The board is in charge of overall strategy, not napkin colors at the annual conference. You know what I’m talkin’ about.

Preoccupation with Bylaws or Parliamentary procedure can be a warning sign. Of course bylaws and procedures should be adhered to, but sometimes boards begin to use governing documents or obscure parliamentary rules in order to control or obstruct the business of the board. If this behavior manifests it is a symptom of a deeper dysfunction that should not be allowed to fester.

Focus of negative attention on the executive is a real problem. There are times when individual board members will go on the proverbial “witch hunt” and develop a personal vendetta against an executive. Boards as a whole can sometimes do this when they are seeking a scapegoat. Remember, the executive is responsible to the board as a whole. If an individual director has an issue with an executive, it should be brought to the board and resolved. Once resolved, the matter should be considered closed.

Last minute proposals should be discouraged. Often power plays are disguised as “sudden inspirations”. Of course, sometimes ideas hit and need to be adopted sooner than later, but in all cases should be adopted after ensuring there is enough time for research, discussion and principled deliberation.

Overly Powerful Executives can become a problem. Executives, particularly those with a long tenure can develop a power base that rivals the board itself. This is an issue for many reasons not the least of which that a board who is afraid of their executive, or who allows the executive to wield that kind of power unchecked risks not fulfilling their own fiduciary duties and placing the organization at risk.

Conclusion

In conclusion, I hope you have enjoyed this quick, high level orientation. As a board member you have some important duties, but board service should also be fun and personally satisfying. Knowing that you have the chance to make a difference in the lives of not only your members, but your industry or profession as a whole is inspiring and I hope you make the most of your time.