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. 1 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. 2 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. 3 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.