Duties of the President and/or Chair of the Board

President vs. Chair of the Board

Who’s in charge? This is a commonly asked question when structuring the governance and management of a nonprofit corporation. Is it the president or chair of the board? Do nonprofits need to maintain both of these positions? And how does an executive director fit into this equation?

Directors vs. Officers

It’s important to first distinguish between directors (board members) and officers. Generally, directors have no inherent individual authority or power. Their authority and power is exercised collectively as a board. Officers, on the other hand, are delegated with certain authority and power, which may be spelled out in a position or job description.

Officers

State laws generally require that a corporation have certain officers. In California, the Nonprofit Public Benefit Corporation Law (the “NPBC Law”) requires such corporations to have the following officers:

  • A president or a chair of the board;
  • A secretary; and
  • A treasurer or a chief financial officer.

The NPBC Law does not explicitly require that any officer be a director, though it may be understood that only a director can serve as chair of the board. Regardless, it is relatively common for all-volunteer organizations to elect officers from among the directors. It is also common for large organizations with employees to hire certain officers (like a CEO and CFO) who are not directors.

Who is the CEO?

The NPBC Law provides that the president, or if there is no president, the chair of the board, is the general manager and chief executive officer of the corporation, unless otherwise provided in the articles or bylaws. Accordingly, if a nonprofit corporation’s articles and bylaws are silent on the issue and assuming the corporation has a president, the president will be the CEO. Similarly, if the corporation’s governing documents are silent on the issue and the corporation doesn’t have a president, the chair of the board will be the CEO. See also Who is the Chief Executive Officer – the Executive Director or the Board Chair?

Duties of the CEO

While the duties of any officer are generally those spelled out in a position description, often contained in the bylaws, the CEO is generally thought to have certain inherent responsibilities and authority associated with an executive in charge of the management of a corporation, subject only to the authority of the board (but not of any individual director) or executive committee.

Should a Nonprofit Have Both a President and Chair of the Board?

As might be expected, there is no one answer that will fit all organizations. However, the following represents my general opinions on how a board might reach an answer specific to its specific circumstances:

  • For all volunteer organizations, there is probably no need to have both a president and a chair of the board unless there is an intent to select each position independently. If the long-term plan is to have one volunteer lead the organization and the board, it seems unnecessary to provide both titles to the individual. In such case, president may be the preferable position title as it suggests a role beyond  presiding over board meetings. Nevertheless, the bylaws might provide for the option of electing a chair of the board should it later become desirable to have a different individual in such role.
  • For organizations with paid employees, there may be advantages to having a compensated CEO and a separate volunteer chair of the board. In such case, the CEO is often provided the title of president. Because the CEO serves at the pleasure of the board, and typically has their performance reviewed and compensation determined by the board, separating the CEO and chair of the board functions by assigning them to different individuals can help avoid the major conflicts of interest that would otherwise be possessed by someone with both responsibilities. In some cases, however, having one individual serve as both CEO and chair of the board may be desirable despite the conflict of interest. For example, this may be true where a founder being compensated to act as the CEO is also the champion and clear leader of the board, which lacks another director able to fulfill the responsibilities of a chair of the board. Lack of developing additional leadership can, however, lead to the twin problems of founder’s syndrome and a rubber-stamp board. From a legal perspective, this may reflect the other directors’ breach of fiduciary duties due to the lack of exercising independent judgment and reasonable care.

Duties of the President

If the president is the CEO, the position description will be reflective of such authority and its accompanying duties and responsibilities. If the president is not the CEO, the nonprofit should make sure that there is a clear delineation between the positions and relative authority and responsibilities of president and CEO. For purposes of the following sample description of duties (probably more suited to a small to medium-sized nonprofit), I’ll assume that the president is the CEO and does not preside over meetings of the board.

Sample Description

The President is the general manager and chief executive officer of this corporation and has, subject to the control of the Board, general supervision, direction and control of the business, activities and officers (other than the chair of the board) of this corporation.   The President has the general powers and duties of management usually vested in the office of president and general manager of a corporation and such other powers and duties as may be prescribed by the Board. Among other things, the President shall be responsible for:

  • Ensuring the organization’s activities are compliant and in furtherance of its mission
  • Leading, managing, and developing the organization’s employees, volunteers, and organizational culture
  • Developing, implementing, monitoring, and assessing the organization’s programs (including their impact)
  • Developing, implementing, monitoring, and assessing sound and compliant financial management practices (including budgeting)
  • Developing, implementing, monitoring, and assessing sound and compliant fundraising practices
  • Developing, informing, and supporting the board and the board committees to carry out their governance functions
  • Partnering with the Chair of the Board to help ensure the Board’s directives, policies, and resolutions are carried out
  • Working with the development staff and Chair of the Board in cultivating and soliciting major foundation grants and individual gifts
  • Developing and maintaining beneficial relationships with donors, funders, supporters, collaborators, allies, vendors, and other stakeholders
  • Ensuring effective external communications about the organization and its mission, priorities, importance, programs, and activities
  • Championing the organization and advocating its mission to internal and external stakeholders
  • Keeping informed and the organization’s leadership informed of significant developments and changes in the internal and external environment
  • Leading the organization’s planning processes
  • Ensuring legal compliance (including all required filings) and sound risk management practices

Duties of the Chair of the Board

Sample Description

The Chair of the Board (if there be such an officer) shall, if present, preside at all meetings of the Board and the Executive Committee, act as a liaison between the Board and the President to help ensure the Board’s directives and resolutions are carried out, and exercise and perform such other powers and duties as may be from time to time prescribed  by the Board. More specifically, the Chair of the Board shall be responsible for:

  • Leading the Board and Executive Committee to carry out its governance functions
  • Ensuring the Board has approved policies to help ensure sound and compliant governance and management of the organization
  • Partnering with the President/CEO to  lead the development and refinement of impact metrics
  • Assessing the performance of the Board and its committees
  • Assuring ongoing recruitment, development, and contributions of Board members
  • Partnering with the President/CEO to help ensure the Board’s directives, policies, and resolutions are carried out
  • Working with the President/CEO in cultivating and soliciting major foundation grants and individual gifts
  • Coordinating an annual performance review of the President/CEO
  • Setting priorities and creating agendas for meetings of the Board and Executive Committee
  • Presiding over meetings of the Board and Executive Committee
  • Serving as an ambassador of the organization and advocating its mission to internal and external stakeholders

If the chair of the board is the CEO, the position description will be reflective of such authority and its accompanying duties and responsibilities (see Sample Description of President’s duties above). In such case, if the nonprofit also has an executive director, it should make sure that there is a clear delineation between the two positions and their relative authority and responsibilities.

Nonprofit Radio: 2017 Legal Tips

Erin will be on Nonprofit Radio this Friday at 10 am PT / 1 pm ET discussing 2017 Legal Tips with host Tony Martignetti. Catch them live on Talking Alternative or a few days later on iTunes.

The New Year means a close look in the corners. We’ve got the legal issues you need to fine tune.

Related Resources

10 Legal Tips in 30 Minutes to Get 2017 Ready 

The Blueprint Forecast for Philanthropy and the Social Economy 2017

10 New Year’s Resolutions for Your Board

5 New Year’s Resolutions for Nonprofits

Kevin Durant to the Warriors: 7 Lessons for Nonprofits

Scoring the winning points at a basketball game

Kevin Durant announced he was signing with the Golden State Warriors after nine years with the Oklahoma Thunder. Weeks ago, the Warriors beat the Thunder 4-3 in the NBA Western Conference Finals after trailing 3-1. But the Warriors could not repeat as two-time NBA champions after falling to the Cleveland Cavaliers in the NBA Finals. As disheartening as the loss was for Bay Area fans, it may have been pivotal in allowing the Warriors to land Durant as the superstar who could take the team back to the championship. Had the Warriors won a second championship, Durant might have faced overwhelming criticism, discouraging him from jumping on the back of a championship team.

So, how does this relate to nonprofits? Glad you asked. Here are 7 lessons for nonprofits to be learned from the Kevin Durant saga:

  1. A loss is sometimes a win; look for opportunities whenever hit with a setback.
  2. Playing it safe is often a risk of slow decline and obsolescence – be bold even if you think you’re at the top of your game.
  3. Consolidation within a competitive industry is a market force to understand – be knowledgable and adaptable to be competitive; there will be a limited number of successful organizations in a particular space.
  4. Your key employees won’t always stay with your organization – make sure you have contingency (succession) plans.
  5. Recruitment is not a one-time event – make it a deliberate, planned, and continuous process.
  6. A team that values every player, no matter their role, will attract the best players for their system – create a pervasive tone of mutual appreciation and respect throughout the organization (starting from the top).
  7. Impact that can be created with the support of a prospective partner is the critical selling point – sell impact when recruiting, fundraising, managing, collaborating, and building movements.

 

Nonprofit Corporation Legal Audit

All too often, whether a nonprofit corporation is legally compliant in its operations receives attention only after a conflict or issue arises. Instead, a nonprofit corporation can better prevent such conflicts and protect itself through regular legal audits of its corporate governance, federal and state tax exemption, other federal tax law matters, employment and volunteer issues, intellectual property, and facilities. Financial audits alone, while important, will not sufficiently account for the larger issue of overall compliance with federal, state, and local laws.

A legal audit will include a wide range of information-gathering and reviewing. In auditing the following areas, questions should look both backward (i.e., have we done what is required?) and forward (i.e., what else can we do?). Nonprofit should keep accurate and organized files so that various organizational documents and financial statements are up to date and easy to access.

The following areas and documents should be reviewed for compliance when conducting a legal audit:

Corporate Governance

  1. Articles of Incorporation (and any amendments)
  2. Bylaws (and any amendments)
  3. A list of current board members, officers, and (if applicable) members
  4. Meeting minutes (board, membership, annual, special, committee, etc.)
  5. Copies of governance-related policies (e.g., conflict of interest policy for directors and officers)
  6. Copies of financial statements and budgets
  7. Copies of any contracts for services to be rendered or received
  8. Copies of any leases and subleases for real or personal properties
  9. Copies of insurance policies

Questions to Consider:

  • Do the Articles and Bylaws correctly describe the nonprofit corporation as it operates today? Do the Articles and Bylaws comply with applicable tax and corporate laws?
  • Do the Articles and Bylaws state the same or similar purpose statements that are consistent with each other?
  • Have all board resolutions been properly taken and documented?
  • Have all elections been properly held and documented?
  • Have governance policies been reviewed for consistency with practice?
  • Have any officers or directors disclosed a conflict of interest, and if so, was it properly recorded and voted upon, in accordance with the corporation’s conflict of interest policy and applicable laws?
  • Does the corporation have directors and officers (D&O) insurance? What types of acts and omissions are covered and not covered?
  • Does the corporation have commercial general liability insurance? What types of acts and omissions are covered and not covered?

Federal Exemption Filings

  1. Application for 501(c)(3) tax-exempt status (IRS Form 1023)
  2. IRS determination letter granting 501(c)(3) tax-exempt status
  3. Copies of IRS Form 990 (for at least three years)
  4. Copies of any communications with the IRS

Questions to Consider:

  • Are the nonprofit corporation’s Form 1023 and past three filings of Form 990 available for inspection at the principal location?
  • Has the purpose or activities of the corporation changed significantly since applying for tax-exempt status? Have such changes been reported to the IRS?

Other Federal Tax Law Issues

  1. Private benefit and private inurement (see Private Benefit Rules – Part I: Private Benefit Doctrine; Part II: Private Inurement Doctrine; Part III: Excess Benefit Transaction Rules)
  2. Lobbying (see Introduction to Lobbying by Public Charities; The Value of Making the 501(H) Election; Lobbying & Grants to Non-501(c)(3) Entities: Know The Rules)
  3. International activities (see Nonprofits – International Charity Activities)
  4. UBIT (see Unrelated Business Income Tax Explained; Unrelated Business Taxable Income – What Doesn’t Count?)
  5. Public support tests (see Public Charity: Public Support Test Part I; Part II) or private foundation rules (see Private Foundation Rules)

Questions to Consider:

  • Do the directors and officers of the nonprofit corporation understand the restrictions under 501(c)(3)?
  • Is the corporation engaged in any unrelated business activities? If it is, are such activities substantial in relation to the corporation’s overall activities and is the corporation paying unrelated business income tax and filing IRS Form 990-T, as required?
  • If the nonprofit corporation is engaged in international grantmaking, does it use expenditure responsibility or properly vet the grantees with an equivalency determination (required for a private foundation, generally recommended for a public charity)?
  • Is the nonprofit continuing to meet certain critical financial ratios (e.g., solvency, public support test)?
  • Does the corporation send written acknowledgements and disclosures to donors in accordance with IRS regulations? See IRS Publication – Charitable Contributions: Substantiation and Disclosure Requirements

State-related Documents

  1. State tax-exempt status determination letter and initial filings
  2. Copies of annual state filing requirements (e.g., Franchise Tax Board)
  3. Copies of communications with the Secretary of State and/or Attorney General (or other appropriate state charity official)
  4. Registrations to engage in charitable solicitations (where applicable)
  5. Certificates of authority to conduct business in a jurisdiction
  6. A list of jurisdictions in which the corporation conducts business, solicits funds, etc.
  7. Records of gross receipts from sales and total purchase prices of all tangible personal property purchased for sale or consumption for sales and use tax purposes (if applicable)
  8. Seller’s permit, if such is required for a retailer of tangible personal property subject to sales tax

Questions to Consider:

  • Is the nonprofit corporation registered and current with applicable state agencies? In California, this includes the Secretary of State, Attorney General, and Franchise Tax Board.
  • Is the corporation in compliance with charitable solicitation laws and registrations in all jurisdictions in which it solicits funds?
  • Has the corporation determined whether its purchases are subject to tax or whether it should collect taxes on its sales? Unlike many other states, California does not provide a blanket exemption from its sales and use taxes to charitable organizations.

Employment & Volunteer Issues

  1. Copies of employment contracts and time sheets
  2. Copies of employee or independent contractor eligibility verifications
  3. Records of taxes withheld
  4. Copies of meeting minutes where executive or other employee compensation was reviewed
  5. Copies of HR-related policies (e.g. hiring processes, performance management, preventing discrimination and harassment, termination processes)
  6. Copies of volunteer and participant waivers or agreements (if applicable)
  7. Training materials for board, management, staff, and volunteers

Questions to Consider:

  • Is the nonprofit corporation correctly characterizing its workers as employees or independent contractors? See Topic 762 – Independent Contractor vs. Employee
  • Does the corporation post the required notices in the workplace?
  • Has the corporation reviewed the overall compensation to any employee to ensure that it is reasonable? For executives, was the compensation package approved in advance by an independent body, who reviewed appropriate comparability data and concurrently documented its decision? See Executive Compensation – The Legal Issues
  • Does the corporation have an orientation process for board members? Do board members understand their fiduciary duties?
  • Does the corporation properly screen prospective employees and volunteers, including background checks when appropriate?
  • Are the volunteer and participant releases and waivers used consistently? Do they adequately protect the corporation from liability?

Intellectual Property

  1. List of copyrights, trademarks/servicemarks, patents, and registrations (if any)
  2. Description of trade secrets (including donor lists) and protective steps to ensure they remain trade secrets
  3. Any policy documents regarding using other intellectual property (“IP”) and/or protecting the corporation’s IP
  4. Copy of website domain name agreement

Questions to Consider:

  • What are the nonprofit corporation’s risks of infringement of the intellectual property rights of other parties?
  • How does the corporation protect its own intellectual property?
  • Is the corporation complying with any provisions in third party agreements regarding non-disclosure of confidential information?
  • Is the information on the corporation’s website up-to-date and accurate and does the corporation have the requisite authority to publish all of the content (including photos and videos) on its website?

Facilities

  1. Copies of the lease agreement(s) and any subleases to tenants
  2. Copies of any original applications for property tax exemption and copies of annual assessor filing requirements (where applicable) (e.g., Board of Equalization and County Assessor)
  3. Copies of insurance policies
  4. Copies of any zoning ordinances or regulations that affect the corporation’s location

Questions to Consider:

  • Is the nonprofit corporation complying with the terms of its lease agreement? Is the corporation subleasing to other tenants? Is that sublease permitted under the master lease?
  • Does the corporation have sufficient insurance related to its properties and facilities?
  • Is the corporation in compliance with various workplace laws applicable to it (e.g., OSHA, ADA)?

Local Issues

  1. Copies of any city and county registrations
  2. Copies of lobbying registrations and periodic reports (if applicable)
  3. Copies of property tax reporting/payments (if applicable)

While the beginning steps of a legal audit can seem overwhelming, that should not be a reason to avoid it. The benefits of a legal audit are two-fold—not only does it bring a sense of reassurance but it may also help a nonprofit corporation determine whether its current way of conducting business “makes sense.” In turn, a nonprofit corporation can reform or correct past practices—improving record keeping procedures, restating a patchwork of Bylaws or Articles amendments into one clean document, instituting a new filing system, and the like—to help facilitate rather than hinder the ability to undergo a legal audit in the future.

Yale Alumni Nonprofit Alliance – Ask a Nonprofit Lawyer Part II: Governance & Bylaws

YANA

 

Ask a Nonprofit Lawyer Part II: Governance & Bylaws

May 10th, 6-7:30pm

RSVP Here

Are you a nonprofit board member who wants to better understand what your fiduciary duties are?  Are you confused about what a nonprofit board’s roles and responsibilities should be versus those of management?  Or are you forming a new nonprofit and want to know what provisions should be included in your Bylaws?  Come join us in an interactive discussion regarding the critical principles of nonprofit governance and the key components of a solid set of nonprofit Bylaws for a California nonprofit public benefit corporation.

 

About the Speakers:

YANA ErinErin Bradrick  |  Senior Counsel, NEO Law Group

Yale Law School (’07)

Erin focuses her practice on corporate, governance, charitable trust, and tax matters solely for nonprofit and exempt organizations. She has worked with many types of exempt entities, including charities, private foundations, social welfare organizations, social clubs, churches, and schools.

 

YANA JeanJean Tom  |  Partner, Davis Wright Tremaine

Yale Law School (’02)

Jean represents a diverse array of non-profit organizations, including public charities, private foundations, social welfare organizations, and trade associations on corporate, tax, and regulatory matters both domestically and internationally.

 

 

Tuesday, May 10th, 6:00-7:30pm

Davis Wright Tremaine

505 Montgomery Street, 8th Floor

San Francisco, CA

Foreign Corporations and the Application of California Nonprofit Laws

Map of CaliforniaA foreign corporation, a corporation formed under the laws of another state, that conducts business in California may be subject to more of California’s laws and jurisdiction than one might think. Generally, activities occurring in California are regulated by California laws (e.g., employment, health and safety, revenue and taxation). California’s Nonprofit Integrity Act of 2004, for example, applies to foreign nonprofit corporations doing business or holding property in California for charitable purposes (Government Code Section 12582.1) and imposes audit and reporting requirements on such organizations.

However, the California Attorney General (the “AG”) asserts that foreign nonprofit corporations transacting business in California are subject to provisions of the California Nonprofit Corporation Law, which includes laws relating to standards of conduct, investments, and examination by the AG. It’s not precisely clear how much business in California would trigger application of the Nonprofit Corporation Law, but the AG has informally stated that a foreign nonprofit corporation operating substantially all of its activities in California will be subject to the Nonprofit Corporation Law, including on any statutory restrictions on how the corporation’s board is composed.

Internal Affairs Doctrine

In general, the internal affairs of a corporation are governed by the laws of the state of incorporation. (Edgar v. MITE Corp. (1982) 457 U.S. 624, 645.) This principle, known as the Internal Affairs Doctrine, applies primarily to issues related to the corporation’s structure or internal administration, such as, the steps required to incorporate, adopt bylaws, elect officers and directors, hold meetings, and take board or membership actions. Thus, a not-for-profit corporation formed under New York’s Not-for-Profit Corporation Law should refer to such law when drafting its bylaws.

However, when a foreign corporation enters California, it is also required to comply with state laws in the conduct of its business. (Black v. Vermont Marble Co. (1905) 1 Cal. App. 718, 720.) California courts may apply its laws to a foreign nonprofit corporation doing business in California, maintaining an office in California, or holding property in California for charitable purposes. “Doing business” can mean a number of activities including, soliciting donations in California by mail or advertisements, having directors or officers perform work in California, or conducting any charitable programs in California.

Courts may be particularly interested in applying local laws to a foreign nonprofit corporation when an important public policy is at issue, such as the protection of donors, members, or residents. In addition, the Internal Affairs Doctrine described above does not generally apply to situations where torts, transfer of assets, or contract disputes are involved. California courts have, in the past, extended the reach of California laws to apply when corporate actions involve California citizens and residents, and impacts the sale or disposition or transfer of shares of stock. (Western Air Lines, Inc. v. Sobieski (1961) 191 Cal. App. 2d 399). According to the California AG, the trend here is that California courts are less likely to apply the Internal Affairs Doctrine when important state interests are at stake.

Furthermore, the less contact the organization has with its state of incorporation, the less likely the courts will apply the laws of that state of incorporation. If the organization formed in New York has little to no contact with New York while maintaining its only office and conducting all of its charitable work in California, the courts are more likely to apply California law to disputes that arise.

Authority Asserted by the California Attorney General

The California AG cites to California Corporations Code Section 6910 to assert authority over foreign corporations transacting business in California. The AG interprets Section 6910 to mean that foreign nonprofit corporations transacting business in California are subject to all of California Nonprofit Public Benefit Corporation Law, which may, in many cases, be different than, and in conflict with, the laws of the state of incorporation.

However, Section 6910 does not make it clear when the California Nonprofit Public Benefit Corporation Law applies. Section 6910 provides as follows:

Foreign corporations transacting intrastate business shall comply with Chapter 21 (commencing with Section 2100) of Division 1, except as to matters specifically otherwise provided for in this part and except that Section 2115 shall not be applicable.

Note that the “Chapter 21” reference is to the Corporations Code provisions otherwise applicable to for-profit corporations, which generally deal with matters such as obtaining a certificate of qualification to do business in California with the Secretary of State, maintaining a resident agent for service of process, filing an annual statement of information, and making unauthorized distributions. The remaining part of Section 6910 provides “except as to matters … provided for in” the Nonprofit Public Benefit Corporation Law. The AG reads Section 6910 as an authorizing statute providing that the Nonprofit Public Benefit Corporation Law applies. A plausible alternative is that it only conditions where Chapter 21 doesn’t apply.

Specific California laws that the AG has asserted against foreign corporations include:

  • 49% Limitation on Interested Directors (Corp. Code §5227) – In California, not more than 49% of the board of a nonprofit public benefit corporation may be “interested persons,” which includes any person receiving compensation from the nonprofit for services rendered within in the past 12 months and anyone related to the compensated person.
  • Self-Dealing (Corp. Code §5233) – Under California law, a director of a nonprofit public benefit corporation cannot engage in a self-dealing transaction (a transaction in which he or she has a material financial interest) with the nonprofit except under certain conditions and pursuant to certain procedures. The transaction must be fair and reasonable and a majority of the directors (not including the vote of the interested director) must approve such transaction after disclosure of the director’s interest. In addition, either (1) the board must have considered and in good faith determined after reasonable investigation under the circumstances that the corporation could not have obtained a more advantageous arrangement with reasonable effort under the circumstances or (2) it must be shown that the corporation in fact could not have obtained a more advantageous arrangement with reasonable effort under the circumstances. More information here.

It is still not clear under what specific circumstances the courts will agree with the AG and apply California Nonprofit Public Benefit Corporation Law over the corporate laws of the foreign state. In the past, a California court opined, “actions taken in California concerning the administration of [a] charity should not escape the scrutiny of California law, merely because the founders chose to incorporate elsewhere.” (American Center for Education, Inc. v. Cavnar (1978) 80 Cal. App. 3d 476).

Nonprofit Compensation: Tips on Using Comparability Data

Executive compensation can be a tricky area for the board of a nonprofit organization. As we’ve discussed previously, the recommended process for determining the appropriate compensation package for an executive of a nonprofit organization is to conduct a review of what similarly-sized organizations, in the same geographic area, offer their executives (of comparable level). But many boards may be wondering where and how to find the data necessary to conduct a proper and sufficient compensation comparison. Here are some tips that will assist a board in finding appropriate comparability data.

What Data is Sufficient?

The IRS requires comparability data to be from similarly-situated organizations, for equivalent positions, in the same community or geographic area. Therefore, three types of comparisons should be made:

  1. Position. In general, compensation should be commensurate with the duties and responsibilities of the job. When comparing one compensation package to another, the comparison should be based on substantially similar duties and responsibilities. For example, is the job local or national in scope? How many employees, departments, facilities, and/or entities are managed by the person, if any? It may be inappropriate to compare a person who manages only a single facility or department with a person who manages multiple entities and employees, even if their job titles are the same. Titles do not equate functionally comparable positions. A full-time position should not be compared to a part-time position, and vice versa. Likewise, compensation covering the whole year is generally not comparable to compensation for only part of the year, unless it is pro-rated. Lastly, be careful when using compensation for the final year of service because generally final compensation includes additional payments such as severance.
  2. Enterprise. The comparisons should be based on enterprises of similar size, which means, similar budget, revenues, number of employees, number of persons served by the organization during a specific period of time, and whether the organization is part of a group of enterprises or a stand alone organization. For example, a nursing home should not be used in comparison with a hospital, even though both may have a “Director of Nursing.”
  3. Similar Circumstances. In comparing compensation packages, it is important to determine whether the comparison is total compensation, including various perks and benefits, or just salary. The IRS has said that when determining the composition of a compensation package, it is imperative that all forms of compensation are properly accounted for, such as insurance, a car, housing allowance, or other fringe benefits. The comparisons should also be from the same or similar geographic area. If there are no comparables in an organization’s geographic area, it is permissible to find some outside the area as long as an appropriate adjustment is made for cost-of-living.

In the past, the IRS has found certain types of comparability data “not appropriate” or sufficient. This was because:

  • It failed to state why certain organizations were chosen as comparable
  • It failed to state whether the compensation reported was just salary or total compensation
  • It included organizations that were not similarly situated based on the factors including, location, revenues, total net assets, and specifics with respect to industry (e.g. for colleges and universities, the number of students and the level of selectivity in admissions)

Therefore, when gathering comparability data, an organization will want to ensure that the comparables are sufficiently detailed with respect to what is included in “compensation,” (e.g., whether just salary, or total compensation including benefits) and use additional data for benefits packages if the comparables only include salary. The data must also be similar enough in geographic location, size, and particular factors specific to the position and industry, as explained above.

Additionally, the number of comparables used in the review is important in whether the board or authorized body used appropriate data. While there is no magic number for large organizations, for organizations with annual gross receipts (including contributions) of less than $1 million, there is a special rule that considers three comparables of similarly situated organizations and positions to be appropriate. An organization may calculate its annual gross receipts based on an average of its gross receipts during the three prior taxable years to meet this special rule.

Where to Get Comparables

Different types of comparable evidence may be used, alone or in combination, to meet the comparability requirements. Here are a few ways to find such information:

  • Search Guidestar for Form 990s. An advanced search on Guidestar will allow the user to limit a nonprofit search by geographical area, category, and income range. After finding such similarly-situated nonprofits, the board can review the compensation information contained in publicly available tax-returns (Form 990). However, note that the “reportable compensation” listed on the Form 990 is just salary, not total compensation, and therefore, does not include benefits. The board will also need to determine whether the positions are similar in terms of duties and responsibilities.
  • Call Comparable Charities. Another method for finding comparables is to conduct independent telephone survey of similar organizations. A director can phone such organizations and ask about the duties of their executive, their annual compensation including benefits, and then put such findings in a brief written summary for the rest of the board or authorized committee to review and consider.
  • Use Other Offer Letters. A well-qualified candidate may have other competing offer letters from similar institutions that an organization may use as comparability data.
  • Commission a Salary Survey. The board or authorized committee can also commission a customized compensation survey from an independent firm that specializes in consulting on issues related to executive placement and compensation.
  • Consider a Generic Salary Survey. Any salary survey should show that the entities are similarly-situated and provide like services. A generic survey that does not demonstrate the likeness of the organizations or positions will not be sufficient. If using a generic salary survey, be sure to find supplemental information that demonstrates the comparability of the organizations and positions, and provide such data to the board or authorized committee along with the survey in order to bolster their review.
  • Don’t Forget to Consider Taxable Entities. There is no rule prohibiting a nonprofit from also using comparables from the for-profit sector. Thus, comparability data may include compensation levels paid by similarly situated organizations, both tax-exempt and taxable, for functionally comparable positions. It may be helpful to use a for-profit comparable when wanting to boost the range of compensation packages under consideration. However, be careful not to rely solely on for-profit data, as such action may draw increased scrutiny from the IRS.

Attorney/Director: Issues for Attorneys Serving on Nonprofit Boards

Attorney Director 2

Attorneys may be of great value to nonprofits when serving on nonprofit boards. They bring to the board a special set of knowledge, skills, perspectives, networks, and experiences, including an ability to spot and address particular issues and problems. For such reason, many nonprofits actively seek out attorneys to serve as directors.

But this can also cause a misunderstanding of the capacity in which the attorney is going to serve. Nonprofits may want and expect the attorney to serve as pro bono counsel while the attorney often wants to serve purely as a director.

However the relationship starts out, it’s not uncommon to see the attorney/director eventually providing legal advice to the nonprofit, whether or not in the official capacity as the organization’s lawyer. Here are a list of issues for an attorney/director to consider in such scenario:

Ethical Considerations

Role Confusion. When you offer a particular opinion to the executive or to other board members, are you communicating as a director or as a lawyer? Does the recipient of the communication know in which capacity you are providing the opinion? The concern is two fold: (1) your words offered as a director may be received with unwarranted and unspoken deference if the rest of the board considers it legal advice, and (2) your legal advice offered as a lawyer may be received without appropriate consideration if the rest of the board considers it the thoughts of a director.

Loss of Independence. Will the dual role compromise your independence of professional judgment? Consider if your legal opinion or advice will be clouded if you are reviewing an action already taken where you participated in the vote or had a preferential viewpoint from a business perspective.

Conflicts of Interest. What is your role if the organization enters into a dispute with your firm or one of your firm’s clients or prospective clients? Will you be aware of the conflict if representing the organization? In addition to potentially harming your firm, you can harm the organization if you either fail to provide zealous representation or withdraw from representing the organization due to the conflict.

Loss of Attorney-Client Privilege. Are you communications with the rest of the board protected by the attorney-client privilege? If it’s clear that the communications are to be attorney-client communications, they should be protected by the privilege. However, such protection may be lost if it’s not clear that you are communicating only as a lawyer or if the communication is recorded in minutes to which other persons have access.

Competence. Do you have sufficient competence in the areas of law in which you have been asked to provide legal advice as an attorney to the organization? The competency issue is of course critical in avoiding malpractice, and attorney/directors must be careful when asked to provide advice in areas in which they possess some knowledge but don’t have the requisite competence.

Heightened Exposure to Liability

Standard of Care. A director’s standard of care is generally expressed as that of an ordinarily prudent person in a like position under similar circumstances. While there are cases of inside directors (who are employees) of for-profit corporations having a higher standard of care than outside directors, there does not appear to be authority that extends to directors of nonprofit corporations with specific professional knowledge, skills, and experience that might be relevant in exercising their fiduciary duties. Accordingly, directors who happen to be lawyers should not be held to a higher standard of care than other directors. But there have proposals (including in a 2004 Discussion Draft Proposal from the Staff of the Senate Finance Committee) that would require directors with special skills or expertise to use such skills or expertise in meeting their duty of care. And it’s plausible that a director also acting as an attorney to the organization on a particular matter may be held to a higher standard of care based on being comparable to an inside director.

Reliance Defense. In performing the duties of a director, a director may be entitled to rely on information, opinions, reports or statements prepared or presented by an attorney. This may serve as a defense to a claim if, for example, a director took an action that would otherwise have been considered negligent but not for the director’s reliance on the opinion of a lawyer that it was proper. An attorney/director, however, cannot of course claim reliance on her or his own opinion as a defense against a claim.

Vicarious Liability. In performing the duties of a director, an individual serves in her or his individual capacity and owes a duty of loyalty to act in the best interests of the organization. If a director is serving in such capacity as an agent and at the direction of her or his employer, the employer may be subject to vicarious liability for actions taken by the director.

Insurance. The role confusion issue may extend to whether insurance will cover acts or omissions of an attorney/director. Directors’ and officers’ (D&O) insurance generally covers certain acts or omissions of a director acting in such capacity but will not cover legal advice offered by an attorney/director. Professional liability or malpractice insurance generally covers certain acts or omissions of a lawyer acting in such capacity but will not cover such individual if acting in the capacity of a director. Because it’s often unclear in what capacity an attorney/director is serving, some professional liability insurance carriers will not provide coverage where legal advice is being given to an organization on which the insured also serves as a director. Further, where it’s not clear in what capacity an attorney/director was acting, both D&O and professional liability insurance carriers may deny coverage.

 

Tips for Attorney/Directors

  1. Inform management and the board about your role and the issues regarding attorney-client privilege up front.
  2. Identify in what capacity you are communicating (make sure it’s accurately reflected in the minutes).
  3. Refrain from voting on material financial transactions with your law firm.
  4. Identify potential gaps in coverage between your professional liability insurance and the nonprofit’s D&O insurance.
  5. At all times when rendering legal advice, exercise the independent professional judgment required of a lawyer (e.g., advising against illegal action even if favored by the board).
  6. Diligently perform your duties as counsel, within the limits of applicable law, once an action has been approved by the board even if you disagreed with the action as a director.

Part of a 1/13/16 presentation for the Bar Association of San Francisco: Duties and Responsibilities of Serving on a Nonprofit Board.

Additional Resources

Reasons to have – and reasons not to have – an attorney on the board (Blue Avocado)

Lawyers’ Service on Nonprofit Boards (American Bar Association)

Lawyers As Nonprofit Directors – Maximizing Opportunities, Mitigating Risks (Proskauer)

The Lawyer as Director of a Client (American Bar Association)

 

New California Regulation Poses Threat to Nonprofits Not Properly Registered

venus flytrap - dionaea muscipula with a trapped fly

Effective as of January 1, 2016, new regulations related to administrative enforcement of violations of the Supervision of Trustees and Fundraisers for Charitable Purposes Act go into effect. We wrote about the regulations when they were first proposed (see our post explaining our opposition to the regulations here).

Also read Erin Bradrick’s article in the Nonprofit Quarterly:

California’s New Regulations: The Start of a New Problematic Trend in State Charity Oversight?

Now that regulations are set to become law, all nonprofits operating and/or raising charitable funds in California must be prepared to comply and stay in compliance with the registration requirements. Failure to comply can result in suspension or revocation of a nonprofit’s registration status, and operating while suspended or revoked can potentially result in dire consequences, including, in worst case scenarios, personal liability of board members and forced distribution of the nonprofit’s assets to another nonprofit.

Registration and Annual Reporting Requirements

The California Office of the Attorney General (“AG”) describes the registration and reporting requirements (applicable to most 501(c)(3) and 501(c)(4) organizations except religious organizations, educational institutions, and hospitals) as follows:

The Supervision of Trustees and Fundraisers for Charitable Purposes Act (Government Code sections 12580-12599.8) requires registration and annual reporting by all charitable nonprofit corporations, unincorporated associations, trustees, and other legal entities holding assets for charitable purposes. The law’s application is not limited to entities that are tax exempt under section 501(c)(3) of the Internal Revenue Code. With very limited exception, the Supervision of Trustees and Fundraisers for Charitable Purposes Act applies to any person/entity holding money or property for charitable purposes, including entities that are tax exempt under other subsections of 501(c), entities that are not tax exempt, and for-profit entities that hold assets for charitable purposes. … Nonprofit religious organizations, educational institutions, and hospitals are exempt from the registration and reporting requirements.

Suspension or Revocation by the AG

Registration status refused, suspended, or revoked for:

  • Misuse of charitable assets
  • False or misleading statements and/or conduct in connection with a solicitation for charitable purposes
  • False or misleading statements in a requiring filing with a government agency, including the AG, IRS, and Franchise Tax Board (FTB) – Note that the omission of material information in a required filing, like a redacted schedule of contributors (Schedule B, Form 990) filed with the AG, constitutes a false or misleading statement.
  • Failure to comply with statutory Standards of Conduct applicable to directors and managers

Registration automatically suspended for:

  • Nonprofit’s tax-exempt status is suspended (which can happen with missing a single filing) or revoked (which will happen automatically with missing required filings for 3 consecutive years) by the IRS or FTB
  • Nonprofit fails to file with the AG an annual registration renewal (Form RRF-1) together with a copy of its Form 990 for 3 consecutive years
  • Nonprofit corporate status is suspended or revoked by the California Secretary of State (which can happen with missing a single filing of a Statement of Information)

Prior to suspending an organization, the AG will first mail a notice to the registrant identifying what is needed to resolve the suspension. If the AG does not receive the information needed to resolve the suspension within 30 days of the issuance of the notice, the registration is suspended. This notice will only be helpful if the AG has the current address of the organization on its records.

Registration automatically revoked (without further action by the AG) if:

  • Nonprofit has been suspended for one year.

Potential Penalties for Operating While Suspended or Revoked

As a result of operating while suspended or revoked, directors may be held personally liable and the AG may direct the nonprofit’s funds be distributed to another nonprofit. While the AG has informally told us that it would not take such actions except in egregious cases, it has the authority to use its discretion without any further evidence of misconduct. When you factor in that more than 100,000 nonprofits operating in California are not in compliance with the registration requirements and the AG is now going to make a push at compliance, it’s now critical for nonprofits to comply with all of the registration and reporting requirements with the AG, the California Secretary of State, and the FTB. As Erin writes in the Nonprofit Quarterly article:

Section 999.9.3 of the regulations provides that, if an entity that is required to register with the California Attorney General’s Registry of Charitable Trusts has had its registration suspended or revoked, “[m]embers of the board of directors or any person directly involved in distributing or expending charitable assets [while the organization is suspended or revoked without the written approval of the Attorney General] may be held personally liable” for the amounts of such expenditures. The same Section goes on to provide that “[t]he Attorney General may direct a registrant whose registration has been suspended or revoked to distribute some or all of its charitable assets…to another charitable organization or into a blocked bank account.”

Make sure you file:

California Nonprofits

  • Form CT-1 (initial registration) or Form RRF-1 (registration renewal) together with a Form 990 with the AG every year
  • Form CT-694 (annual solicitation financial report) with the AG for each year in which more than $1 million was collected in contributions from donors in California
  • Form 199 or 199-N with the FTB every year
  • Statement of Information (Form SI-100) with the Secretary of State every two years (or earlier if updating certain information)

Out-of-State Nonprofits Operating in California

  • Form CT-1 (initial registration) or Form RRF-1 (registration renewal) together with a Form 990 with the AG every year\
  • Form CT-694 (annual solicitation financial report) with the AG for each year in which more than $1 million was collected in contributions from donors in California
  • Form 199 or 199-N (if the nonprofit is recognized by the FTB as tax-exempt) or Form 100 (if the nonprofit is taxable) with the FTB every year
  • Statement of Information (Form SI-350) with the Secretary of State every year (or earlier if updating certain information)

Out-of-State Nonprofits Fundraising Residents of California

  • Form CT-1 (initial registration) or Form RRF-1 (registration renewal) together with a Form 990 with the AG every year
  • Form CT-694 (annual solicitation financial report) with the AG for each year in which more than $1 million was collected in contributions from donors in California

BoardSource Leadership Forum 2015

Charming New Orleans

New Orleans

The 2015 BoardSource Leadership Forum (BLF) was held in New Orleans on November 9-10 with more than 900 board members, chief executives, staff, and nonprofit professionals attending to discuss the newest thinking and best practices in nonprofit governance.

Marking the 10th anniversary of Hurricane Katrina, BLF 2015: Leading Together for the Public Good speaks to our proven ability to mobilize our energy, efforts, and voices to make a difference and even change our own trajectories when called upon to do so.

Sessions and Keynotes

The sessions were organized into three tracks: The People, The Work, and The Culture. Our senior counsel Erin Bradrick presented on Nonprofit Board Scandals and the Lessons Learned:

Nonprofit boards are in the news, but, unfortunately, it’s often not for flattering reasons.  In this session, Erin Bradrick, senior counsel with the NEO Law Group, will review some of the recent nonprofit governance scandals that have surfaced and discuss the lessons to be learned from them. She’ll also discuss how to stay out of trouble when entering into collaborations, creating earned income streams, dealing with conflicts of interest, and making compensation decisions. There will be an interactive discussion on how to spot red flags related to these and other issues, and how investing in a strong governance infrastructure can save headaches in the long term.

A number of other sessions caught my eye, including:

  • Transformational Governance: How Boards Achieve Extraordinary Change
  • One Board’s Journey toward Racial & Social Justice
  • Boosting Board Performance Where It Counts: Onboarding a New CEO
  • Ethics and Accountability: From the Mailroom to the Boardroom
  • Charity is OUT; Social Entrepreneurship is IN

The keynote speakers were James Carville (American Political Consultant and Commentator), Mary Matalin (American Political Consultant and Commentator), Kevin Washington (YMCA of the USA), and Art Taylor (BBB Wise Giving Alliance). In midst of the Presidential election campaigning, it’s interesting to see the trend of nonprofit conferences highlighting political commentators. Hopefully, the trend serves to increase voter engagement among nonprofit constituents whose voices have too often not been heard.

Twitter Highlights

  • “Save the culture first, and the rest will follow. Without the culture, it’s just another place.” – James Carville on New Orleans
  • “It matters who’s in charge!” – Carville
  • “You are the solution bringers.” – Mary Matlin to a room full of nonprofit leaders
  • Statistical research says: board relationships & engagement in strategic planning highly predictive of organizational success
  • Taking a principled approach to ethical challenges & questions w/ framework for accountability – article
  • To practice generative governance, you must be willing to ask your board questions that you don’t already have the answers to
  • Gen Next brings fresh perspectives on old problems & new networks to boards
  • Keys to a great board meeting: community building, inspiration, consent agenda, education and generative governance discussions
  • Boosting nonprofit board performance where it counts: Onboarding the CEO – article
  • Governance policies only serve their purpose if they are abided by and enforced – article
  • The sustainability of an organization is dependent on the relationship between the chief executive and board chair.
  • Not a good fact: 42% of Board Chairs identify the Internet as the primary resource for their preparation; need to equip our leaders better
  • Nonprofit risk management: What’s inside is what counts – article
  • Stand for Your Mission While Staying Within the Rules – article