Nonprofit Bylaws - Common Issues

I just completed the first part of my new Bylaws Review website (still under construction).

Here are some excerpts:

Basics About Bylaws

Bylaws may contain any provision, not in conflict with law or the corporation's articles of incorporation, for the management of the activities and for the conduct of the affairs of the corporation. Bylaws should provide guidance to the corporation's board of directors and reassurance to government authorities, funders, and other interested stakeholders. In addition, they allow contractual parties to verify that corporate actions were properly taken.

...

Common Problems

Here are some common problems I find when reviewing bylaws of California nonprofit corporations:

• Outdated mission statement. Organizations evolve over time. If your activities no longer fall within the scope of your mission, the mission statement in the bylaws must be amended. You may have other charitable trust issues as well. Talk to an attorney.
• Board actions by email.  Not allowed.  See my post on the Nonprofit Law Blog: Board Actions by Email - California Nonprofits.
• Directors voting by proxy.  Not allowed. 
• Director election provisions that do not meet actual practice. 
• No restriction on interested directors.  Not more than 49% of the board of a nonprofit public benefit corporation may be "interested persons." 
• The period of notice for a special meeting of the board is far too long. The notice period should not be so long as to prevent a board from responding to an emergency.
• The quorum requirement is too low.  While the law generally allows a quorum to be as low as one-fifth of the board, such a low quorum serves to discourage attendance and disempower the directors.  For example, if you have 20 directors, and a quorum of 25%, then you only need 5 directors to hold a valid meeting, and 3 votes out of the 5 to take a valid board action (i.e., as low as 3 out 20 directors can take an action).
• Failure to distinguish between the "authorized number of directors" and the "directors then-in-office" when describing the requirements for a quorum and particular board actions.
• No differentiation between board and non-board committees. 
• Executive committees given more authority than is permissible under law. 
• Volunteer board chair holding the title of CEO without consideration of whether the Executive Director would be in a more appropriate position to carry out the associated responsibilities. 
• Officer election provisions that do not meet actual practice. 
• Officer job descriptions that do not meet actual practice. 
• Inclusion of provisions for "board officers" and "corporate officers" without clarify about their respective duties and responsibilities. 
• No provision for electing or appointing subordinate officers.  What happens when an officer is on vacation or absent for an extended period?  A subordinate officer, like an assistant secretary,to hold office for a specific, short term may be a good solution.
• Indemnification provisions that do not reflect the board's decision whether to maximize protection of the organization's directors, officers, and/or other agents.
• Reporting requirements not required by law and not consistently observed. 
• Lack of clarity whether the organization has or does not have voting members. 
• Unclear membership qualification provisions. 
• Membership termination provisions that do not provide the due process required by law. 
• Members given management and/or governance responsibilities that create a greater exposure to liability than necessary.
• The notice provisions for membership meetings do not comply with the law and/or are inconsistent with actual practice.
• The quorum requirement is too high.  As a result, an organization may not be able to hold a valid membership meeting to take required actions like an election of directors.
• Electronic communications between the organization and the members do not comply with the law.
• Ballot voting provisions do not comply with the law and/or are inconsistent with actual practice.
• Proxy voting provisions do not comply with the law and/or with actual practice.
• Incorporation of Robert's Rules, adding over 600 pages of additional policies and procedures to know and follow.  See Disorder From Robert's Rules of Order, Charity Governance Blog.
• Conflicting provisions that result in fights among directors and/or members and that can lead to litigation and harmful media coverage.
• Modification of statutory provisions that changes their meaning and results in a failure to comply with applicable laws.

Why Using Another Organization's Bylaws Is A Bad Idea

Too many organizations use another organization's bylaws, often found on the web, as the template on which to build their own bylaws.  There are several reasons why this is not a good idea:

• The other organization's bylaws are not in compliance with the law. 
• The other organization's bylaws are designed to comply with the laws of another state or jurisdiction. 
• The other organization's bylaws do not include important provisions that may apply to your organization by default under applicable law. 
• The other organization's bylaws have not been customized to meet your needs. 
• A change to the other organization's bylaws may be inconsistent with applicable law. 
• Another organization's governance systems are often too easily adopted without careful thought.

Your bylaws, and any amendments to the bylaws, should be adopted only after careful and thoughtful consideration.  The bylaws are the instruction and operating manual of the nonprofit.  If the manual is faulty, you're building on a shaky foundation, and it will reflect on how others (including foundations and major donors) perceive the organization.  Ask yourself:  would you invest a meaningful amount in a company that ran its operations based on policies and plans it copied from an unrelated organization?

Comments

[Gene Takagi]

The Code does not explicitly prohibit proxy voting by directors. Rather, it states how a board action can be taken.

For California nonprofit public benefit corporations,see Section 5211(a)(8):

"The articles or bylaws may not provide that a lesser vote than a majority of the directors present at a meeting is the act of the board."

And see Section 5211(b) for board actions taken without a meeting:

"An action required or permitted to be taken by the board may be taken without a meeting, if all members of the board shall individually or collectively consent in writing to that action. The written consent or consents shall be filed with the minutes of the proceedings of the board. The action by written consent shall have the same force and effect as a unanimous vote of the directors. For purposes of this subdivision only, "all members of the board" does not include an "interested director" as defined in Section 5233."

[Cheryl M. McCormick, Ph.D.]

Thank you so very much for an informative piece! May I please inquire about the specific reference of CA Code that prohibits a director from voting by proxy? This would be extremely helpful to me as I guide my organization and board.

Thank you! Cheryl

[Gene Takagi]

William, these questions are not related to the post "Nonprofit Bylaws - Common Issues." So, I will remove them.

But I did want to respond to your last post. If the boards are overlapping, the directors will owe a duty of loyalty to the c7 and to the c3. What happens when one organization has obligations to the other (e.g., reporting obligations)? How does the board handle a request from c7 members to have the c3 produce and run educational programs that would be of benefit to the c7 members? How about eligibility of scholarship recipients? Conflicts can arise, and independent directors can really help in identifying these conflicts.

[william puller]

Follow up to 11/14/09 Response to 501c7/501c3 Question.

Separate meetings and minutes are maintained by each org. There is no conflict of interest as the objectives of the 501 c7 are carried out by the 501c3.

[Gene Takagi]

There are likely no legal prohibitions against having completely overlapping boards. But attorneys in this area typically discourage this because of the potential for the organizations to fail to maintain legal separation and the inherent conflicts of interest of every director when the organizations interact.

[william puller]

My 501c7 organization has created a non-profit 501c3 organization to carry out our scholarship program and other charitable activities. The articles of incorporation of the non-profit state that the controlling 501c7 organization appoints or elects the board of the non- profit. Question: Can we appoint the 501c7 board as the non-profit so long as regular and annual meetings are separate and sepatate minutes, books and records and kept.