Last week, I had the pleasure of having lunch with association attorney Jim Seely after reading the recently published second edition of his book: The Legal Guide for Association Board Members. The Guide was designed for corporate directors of 501(c)(6) trade associations and business societies but holds important lessons for all board members of nonprofits.
The Guide consists of four principal sections: (1) The Association's Legal Structure, (2) Association Liability for Programs and Activities, (3) Legal Concerns for a New Era, and (4) The Board Member's Legal Liability. Here are some of the important takeaways:
- Antitrust laws apply to associations with exceptional force. An entire chapter is devoted to issues such as price fixing, boycotts, membership exclusion, members discipline, codes of ethics, services to nonmembers, and certification and credential programs.
- Associations must draft contracts and agreements that will meet the organization's precise needs. Seely focuses on three common types of contracts: group hotel contracts, computer contracts, and endorsements (see Seely's guest post on the Nonprofit Law Blog describing repercussions from a poor endorsement agreement).
- The most important risk management device for board members is education. The Guide recommends directors' manuals (containing pertinent legal documents like the articles and bylaws) supplemented by legal workshops and legal opinion letters.
- Board members should pay special attention to the function and structure of committees. Delegation of authority must be made with due care, reasonable limits, and adequate oversight. The Guide describes the Hydrolevel case, a U.S. Supreme Court decision that held an association liable for the acts of one of its committees.
- Ensure that the association's CEO has ample authority to use the services of legal counsel whenever the CEO determines it is in the best interests of the association to do so. This is a management function, and a board does not want to handcuff the executive from taking timely proactive and defensive measures to "head off or minimize liability to the association."
- The ability of members to generate public content [on Association-owned listservs and social networking sites] that has not been examined by association staff creates a fertile environment for potential liability. The following actions, among others, are detailed: asserting the association's ownership of the listserv or site, establishing and enforcing appropriate rules of use, and reminding users that their messages will be widely published and could subject a user as well as the association to liability.
- When a board member assumes office, he must conform his conduct to certain legal standards and must be aware of the legal obligations attached to the position. Seely discusses the applicable standard of care and issues such as conflicts of interest, Sarbanes-Oxley, the redesigned Form 990, and the dangers of acting outside the scope of one's authority.
- There are ways that associations can help their board members avoid personal liability. The Guide recommends five particular methods:
- meaningful position descriptions,
- legal workshops,
- indemnity and insurance,
- written legal opinions, and
- annual legal reports.
During lunch, I posed three questions to Seely, and he provided me with the following answers:
- A fundamental issue is the failure of volunteer members to understand that any association or nonprofit must be properly operated in the manner of a successful business with the immediate purpose of making a profit to fund the ultimate goal of advancing its tax-exempt purpose.
- The failure of board members to understand their legal duties as directors and their potential personal liability, regardless of whether they are compensated as directors.
- The failure to define adequately the relative authority of directors, officers and the CEO.
- The failure to appreciate the hazards of the improper use of emails for board and member meetings.
- The failure to understand the need for legal review of significant contracts, such as hotels, computer services and sponsorships.
- The failure to approach contract negotiations properly, specifically the failure at the outset to define precisely the association needs with the goal of having those needs addressed in the ultimate contract.
Q2. Why should Association (and other nonprofit) boards be aware of the Hydralevel case?
Hydrolevel involved a rogue committee chair who used his position as committee chair to compose and distribute a letter on association stationery to injure an industry competitor. The competitor sued him and the association. Despite the fact that the chair had clearly abused his authority, the U.S. Supreme Court ruled the association liable for damages because it provided the chair the “apparent authority" to act on its behalf.
The Hydrolevel case should serve as a wake-up call. Most nonprofit boards rely heavily on the work of committees. At a minimum:
A board should be careful to define in writing (bylaws, policy, procedure) the exact authority (“charge”) of the committee and its members.
The board should require each committee member to sign a statement that she has read and will abide by the charge.
The committee should closely follow the same procedures as the board itself to include notice, agenda, quorum and minutes.
Whenever feasible, a staff member should attend committee meetings.
Committee stationery should not be provided to its members; rather, all committee correspondence, including electronic correspondence, should be processed by staff for editing and return to the originator for approval before it is sent.
Q3. What is an annual legal report and why should a nonprofit consider producing one?
The annual legal report is an excellent management tool that pulls together and reviews all important legal documents from articles and bylaws to pending significant contracts.
Upon completion of the review, legal counsel will provide management the annual report which is in effect a status report as to the nonprofit’s important legal issues together with specific recommendations for action when needed – all in one place.
My thanks to Jim Seely for sharing his wisdom.
Jim is the founding attorney of Association Legal Services whose practice focuses on trade and professional associations. He can be reached at email@example.com. You can also follow Jim on Twitter at AssnLaw.