Nonprofit Law Blog

The Legal Guide For Association Board Members

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:
  1. meaningful position descriptions,
  2. legal workshops,
  3. indemnity and insurance,
  4. written legal opinions, and
  5. annual legal reports.

During lunch, I posed three questions to Seely, and he provided me with the following answers:

 

Nonprofit Mergers & Alliances (2nd ed.)

I'm currently reading the recently published 2nd edition of Nonprofit Mergers & Alliances by Thomas A. McLaughlin and can already recommend it to nonprofit executives and board members thinking about collaborations and/or mergers.  Indeed, the book had me at "hello" or, rather, its first sentence:  "The best time to consider a merger or an alliance is before it is necessary, when coming together with another organization will mean combining strength with strength, and when the collective energies and the creativity of the two or more entities can be used proactively instead of being sapped by the demands of crisis management."  It's not that a weakened organization should not seek a merger; rather, the most benefits from a merger will result from a merger of strengths.

McLaughlin, Vice President for Consulting Services for the Nonprofit Finance Fund, discusses early in the book why nonprofit services are fragmented and how consolidation is part of a nonprofit's life cycle.  He devotes a chapter to integrated service delivery and why it will be "a central goal of the next generation of nonprofit managers."  Key to such integration is the use of information as a strategic tool and the consequent need to invest in expensive information technology.  And this will "boost the minimum economic size in virtually all fields, which in turn will put more pressure on groups to merge and find new ways of collaborating."

The book identifies four levels on which nonprofit collaborate:  Corporate, Operations, Responsibility, and Economics.  A merger is defined as a collaboration that entails change on all four levels.  An alliance is defined as a collaboration that entails change on one to three levels (not including the "Corporate" level).  

Mergers are more fully described with helpful discussions of pros and cons, myths, and common issues, including size of the board, composition of the board, and selection of officers.  McLaughlin further breaks down a merger into three phases:

1. Feasibility Assessment.  "The objective is for planners to learn about each other's organization and to conduct some serious analyses of the major aspects of each.  The result of this stage should be an agreement to proceed - or not."
2. Implementation Planning.  "During this stage, the participants carry out deeper analyses as necessary and formulate a plan for how to make the collaboration succeed."
3. Integration.  "This is where the plain old day-to-day management work occurs.  Often the bulk of executing the integration plan falls on managers and staff support people who were not as intimately involved in the first two phases."

The final chapter in the book discusses "The Seven Stages of Alliance Development" and notes that "alliances are far more open-ended and inherently ambiguous than outright mergers."  McLaughlin emphasizes that "the thing that makes them even more difficult is that leadership in an alliance derives not from an assigned position or role but rather from a delicate mix of personality, organizational identity, and resources."  The seven stages of alliance development are:

1. Initiate, explore, and analyze
2. Synthesize and plan
3. Establish shared objectives
4. Develop a working committee structure
5. Gain quick victories
6. Institutionalize buy-in
7. Implement and evaluate

Mergers are like marriages - they vary widely and there is no single formula or book to ensure a particular merger's success.  But Nonprofit Mergers & Alliances is a good primer (and reader-friendly, as claimed on the book jacket).  It covers a very complex area and contains many practical tips and common pitfalls.  And executives and board members of nonprofits would be wise to review a good resource on nonprofit mergers even if they should also retain a merger consultant and attorney (both highly recommended, resources permitting).

You've Gotta Have Heart

I recently skimmed You've Gotta Have Heart: achieving purpose beyond profit in the social sector by Cass Wheeler, former CEO of the American Heart Association (1997-2008).  Wheeler's stated goal of writing the book:  "to increase your organization's or your operation's effectiveness by 5 percent (or better) over your current projections."

Here are some of the many helpful takeaways, supported in the book by real-life examples:

• A mission statement is not the same as a true sense of mission.  Nonprofit organizations must have a pervasive sense of mission.  Without a cause that resonates with volunteers and donors, nonprofits will ultimately fail and die off.
• Good intentions are no longer enough.  Nonprofit organizations must apply some businesslike, bottom-line mentalities to maintain their credibility with increasingly skeptical and results-oriented donors.
• Determine core values and stick to them.  Your organization's core values are your ethical standards: what is important to your organization and how you will do business.
• Every nonprofit needs a strategic driving force.  A driving force is "the primary determinant of the products and services an organization will and will not offer the the market ... it will and will not serve."
• Know your business model and change it if necessary.  ... Your business model is the process by which you acquire financial resources and how (and by whom) those resources are expended.  Be aware of how it helps or hinders you in achieving your  mission.
• Every nonprofit needs a breakthrough goal.  It provides accountability and allows you to make difficult decisions about the allocation of limited resources.  It provides excitement among your employees, volunteer, board members, donors, and the public.
• A bold goal is meaningless without rock-solid execution.  ... When you set a breakthrough goal, you have to be willing to hold your organization's feet to the fire.
• Shout your goal from the rooftops.
• Marketing is not a dirty word.  As long as a nonprofit organization's marketing is effective in boosting image, driving mission, extending reach, and increasing revenue, not only is it acceptable for a nonprofit, it is essential.
• Any marketing effort must link to your organization's mission and strategic driving force.
• Incorporate diversity into your efforts.  Your organization must reflect the diversity of your constituents to serve them most effectively.  Look to partnerships, local networking opportunities, supplier diversity, and affinity groups to learn about best practices and ensure equal service and opportunities for all."
• Remember to declutter.  The only way to have room for innovation is to let go of programs, activities, and products that no longer produce a return on investment.
• You must have a people strategy.  Developing your staff is not a program to implement; it is a way of being.
• Make deposits in people's emotional trust accounts.  Think of positive acts of leadership and management as making deposits into an emotional account with each person on your team.  The more goodwill you have in your trust account, the better positioned you are if you ever need to make a withdrawal, such as asking for a favor or forgiveness for a mistake.
• Implement best practices with your board.
• Advocacy and lobbying should be considered by nonprofits large and small.  We have a responsibility to speak out on issues that affect our constituents and advocate for better public policies.
• Develop a specific and realistic strategic alliance value proposition.  This is a simple statement that defines:  (1) what you bring to the table in a partnership and (2) what your organization expects to receive from partner organizations.
• Personal alliances drive professional alliances.

Wheeler combines strong business acumen and integrity with an appreciation of nonprofit organizational cultures.  Moreover, You've Gotta Have Heart is accessible, insightful, and widely applicable.  It's a book that I'll sit down and read more thoroughly soon.