WHAT EVERY BOARD MEMBER SHOULD KNOW A Guidebook for Tennessee Nonprots 2016 Edition WHAT EVERY BOARD MEMBER SHOULD KNOW A Guidebook for Tennessee Nonprots 2016 Edition Dear Tennessee nonprot board members, Your service in nonprot organizations continues Tennessee’s great volunteer tradition. Tennessee nonprots are vital to our citizens, providing important services and opportunities in communities throughout the state. By donating your time and talents to Tennessee’s diverse nonprots, you play an essential role in shaping a brighter future for Tennessee. Six years ago, we released a guidebook to help you be knowledgeable and successful board members. Since then, Tennessee’s nonprot statutes have been rewritten through legislative action, technology has changed the way non- prots manage assets and raise money, and the sector has increased in numbers. It was therefore time to release a new edition of the book. We believe the principles and practices in this updated guidebook can enrich your nonprot experience and strengthen your organization. It includes new information about protecting your nonprot’s brand, an expanded description of board member responsibilities, and an added appendix with additional resources. Please share this guidebook with your fellow board members and sta, and give us your feedback about changes or additions we can make in the future. Sincerely, Herbert Slatery III Tennessee Attorney General and Reporter Tre Hargett Tennessee Secretary of State Lewis Lavine President, Center for Nonprot Management WHAT EVERY BOARD MEMBER SHOULD KNOW A Guidebook for Tennessee Nonprots 2016 Edition Introduction and Table of Contents is Guidebook has been prepared as a reference tool for you, the board members of Tennessee non- prot organizations. It describes some of your rights and duties as well as issues which you may encounter. Your service should be a rewarding experience. is Guidebook attempts to help you prepare for this service. It is not intended to be a complete summary of the laws governing nonprots in Tennessee or a substitute for legal advice. Nonprots in Tennessee can be divided into two general categories: public benet nonprot corpora- tions – commonly referred to as charities – which exist to serve public causes, and mutual benet nonprot corporations, which exist to serve their members (such as homeowner associations). is Guidebook is directed primarily to board members of public benet nonprot corporations. While many of these principles do apply to both types of organizations, some laws may be dierent. Board Member Duties .................................................................................... 3 Fullling Your Fiduciary Duties ..................................................................... 4 Required Board Members and Ocers ......................................................... 5 Board Engagement ......................................................................................... 6 Board Judgment ............................................................................................ 8 Selection, Hiring, and Firing the Chief Executive Ocer ............................ 9 Reviewing Executive Compensation ........................................................... 10 Board Conict of Interest ............................................................................ 11 Charitable Solicitations and Consumer Protection .................................... 12 Charitable Trusts and Private Foundations ............................................... 14 Protecting Charitable Assets ....................................................................... 15 Dissolving and Terminating a Nonprot Organization.............................. 17 Public Benet Hospitals .............................................................................. 18 For-Prot Benet Corporations .................................................................. 19 e Oce of the Attorney General ............................................................. 20 e Tennessee Department of State ............................................................ 21 Center for Nonprot Management ............................................................. 22 Other Resources .......................................................................................... 23 Appendix ...................................................................................................... 25 KEY: = Best Practices = Examples = Glossary Word WHAT EVERY BOARD MEMBER SHOULD KNOW A Guidebook for Tennessee Nonprots 2016 Edition Board Member Duties Although as a board member you may not mine its charitable mission. Furthermore, under manage the day-to-day activities of your non- Tennessee law, you may be personally liable to prot, you do act as a steward and have certain the nonprot for the harm it suers if you breach duciary responsibilities under Tennessee law. your duciary duties. Specically, Tennessee law imposes upon you the duties of good faith, loyalty and care. Board members also have a duty to disclose material information to the rest of the board. If e duty of good faith means that you must act you are aware of information that you believe in good faith, and be fair in your dealings with could aect or require a board decision, you must your nonprot. You must not take advantage of share it with your fellow board members, unless your organization and its resources. You must be you cannot legally do so (e.g., disclosure will upfront and honest in your dealings with the violate ethical or condentiality laws). nonprot, and in fullling your other duciary obligations. e duty of loyalty means that you must act Examples: with undivided loyalty in the best interests of your nonprot organization and that you not seek to benet personally from the activities or resources of the nonprot you serve. In the event being honest with the that you have a conict of interest between the Duty of nonprot in seeking best interests of the nonprot and your own good faith travel or expense reim- interests, you must comply with Tennessee law in bursement resolving this conict. Actions that benet you at the expense of your nonprot are a breach of your duciary duty. oering printing Duty of services to the non- e duty of care means that you must act loyalty prot at market or reasonably, as a prudent person in similar below market rates circumstances would, that you are familiar with the nonprot’s activities and nancial condition, and that you participate regularly in board meet- voting against, or ings. It is the job of the governing board to over- tabling, a fundraising see the work of the chief executive ocer of the Duty of contract for which you nonprot and to make sure that the organization care don’t believe the board is faithfully carrying out its charitable purpose has been provided without extravagance or waste. information, and then actively seeking more Failing to honor these obligations can seriously information harm your nonprot organization and under- 3 WHAT EVERY BOARD MEMBER SHOULD KNOW A Guidebook for Tennessee Nonprots 2016 Edition Fullling Your Fiduciary Duties • Attending board meetings and meetings of committees on which you serve. Make certain Nonprot board members that you receive detailed information beforehand about matters that are going to be discussed and vs. nonprot ocers voted on at a meeting, especially the financial Under Tennessee law, nonprofit corpora- reports and financial statements of the non- tions are required to have both board mem- profit. bers and board ocers. Generally speak- ing, board members are responsible for • Carefully reading all the material you receive, directing the overall vision and mission of asking questions, and being active in board discussions. It is important to know how the the nonprofit corporation. Officers, on the organization is functioning and understand the other hand, are responsible for the day-to- specific purposes and mission of the nonprofit. day management of the nonprofit. In addi- Be informed about every major action that the tion, officers are responsible for reporting to nonprofit takes, and be proactive about review- the board. We recommend that when officers ing materials in a timely manner. are selected from the agency’s management, that they not also serve as voting members • Using your own judgment in voting and not of the board. In this way, board members can simply following the lead of the chief executive focus on organizational oversight, and officer, chairperson of the board, or fellow board officers can focus on organizational opera- members. A responsible board member will ask tions and management. about the reasons for recommending a particular action and the consequences, good and bad, such Nonprot ocers have similar fiduciary action will bring. duties to board members. As with board members, officers must act in good faith and • Participating in strategic planning activities in the best interests of the nonprofit organi- that assess and plan for the nonprofit zation. Officers must also be loyal to the non- organization’s future. Ask about the status of the profit and exercise care in managing its nonprofit’s internal controls and about written affairs. Like board members, nonprofit policies and procedures that protect the non- officers can be held personally liable for harm profit from error, fraud and embezzlement. to the nonprofit caused by breaching the fiduciary duties of good faith, loyalty, and • Inquiring whether the nonprofit has a direc- care. In addition, officers must inform a