The bylaws of a nonprofit corporation are the board’s internal rules and instruction manual for how the nonprofit is governed. It may be the nonprofit’s single most important document. Here are 7 reasons why you should review your bylaws for legal and internal compliance:
1. To ensure legal compliance with applicable state and federal laws.
The bylaws must be drafted with provisions consistent with applicable law. Directors who approve or observe bylaws that provide for unlawful actions or practices may be breaching their legal duties and creating exposure to the organization and themselves. Some common areas of noncompliance: voting on board actions by email; actions by written consent that fail to meet statutory requirements (e.g., California requires unanimous written consent); directors’ terms in excess of those permitted by state law; committees including persons who are not directors being authorized with powers of the board.
2. To ensure legal compliance of internal governance practices.
If the bylaws require certain actions to be taken and procedures to be followed, ignoring such requirements may be a breach of the directors’ legal duties and create exposure to the organization and the directors. Meetings should be held as required, notice should be given as required, elections should be held as required. A procedural defect (e.g., improper notice) could result in a dissenting director invalidating a board action (e.g., election of an officer).
3. To ensure the presence of sound governance practices.
Bylaws should contain provisions that routinize certain governance actions. For example, board elections at annual meetings rather than on the anniversary date of each and every director’s election will likely be far more manageable for most organizations with self-perpetuating boards. Requiring that regular board meetings be held at least quarterly will likely help the board better meet its oversight and planning responsibilities.
4. To remove the presence of unsound governance practices.
Some provisions in bylaws may be consistent with the law but make for terrible or overly burdensome policy. A typical example of such provision is the requirement that the organization observe Robert’s Rules. This requirement adds 600+ pages, updated regularly, that the board will be responsible for learning and following. Allowing a quorum to be established with less than a majority of directors then in office may be seen as encouraging directors to think of attending board meetings as optional and not critically important to meeting their duties.
5. To move certain provision to separate policy documents.
While it is appropriate to review an organization’s bylaws regularly (at least every 3-5 years or whenever there is a known change in the law that might affect the governance of the organization), certain provisions that need to be modified more often may belong in a separate policy document. Descriptions of committees and task forces generally are better suited in a separate board-approved document. Detailed descriptions of employees, including the chief executive officer, also belong in employee job descriptions rather than in the bylaws.
6. To educate the board about its responsibilities.
The bylaws may describe the directors’ legal duties and standard of care for observing those duties. They should cover the board’s ability to delegate management to officers, committees, and others, subject to the board’s oversight. The bylaws may also describe exactly whom directors may rely upon for risk mitigation purposes (hint: it’s not just anyone).
7. To guide the board in meeting its responsibilities.
The bylaws should describe how often the board holds regular meetings, how it may hold special meetings to address particularly important or urgent matters, and how it can take action by written consent. They should cover how directors are selected, their terms of office, and whether there are any term limits. They should emphasize the importance for directors to attend board meetings and otherwise live up to their duties (e.g., through the establishment of an appropriate quorum requirement and removal provisions, including for attendance).
Reviewing the organization’s bylaws is a basic part of every board’s legal duties. And well-drafted bylaws will signal a well-governed organization, which will be an important factor for internal and external stakeholders, including potential directors, employees, funders, major donors, and regulators.