Nonprofit Law Blog

Changing a Nonprofit’s Mission

 

 

A nonprofit's mission describes the purpose and reason for being of the organization. Although a mission statement should always be consistent with the nonprofit's "specific purpose statement" described in the Articles of Incorporation, the mission statement is generally crafted with an eye to the public. A well-conceived mission statement motivates donors, inspires volunteers, and encourages support.

An organization's mission is often articulated on its website, marketing materials, and other publications. When an organization decides to change its mission, legal issues may be triggered depending on the significance of the change and also where the mission is stated.

For example, when considering an overhaul of organization's mission, a threshold consideration is whether the change remains consistent with tax-exempt purposes specified in Section 501(c)(3) of the Internal Revenue Code (the "Code"). Below are some additional considerations when changing a nonprofit's mission:

• Governing Documents. Generally, the board must approve changes to an organization's mission. If the nonprofit's mission is stated on its Articles of Incorporation and/or Bylaws, and the new mission statement is substantively different from the existing one, board action must be taken to amend those documents and, in the case of the Articles, the amendment must be filed with the Secretary of State.
• Consistency. An organization's mission should remain consistent in all publications. Thus, if a nonprofit decides to amend its mission, the change should be implemented everywhere-- including on its website, a letter to a donor, and a grant application. Consistency promotes good governance by keeping the organization's mission clear and focused.
• Charitable Trust Doctrine. A change to an organization's mission may affect donations received by the organization. Use of charitable funds is generally limited to the activities specified in the corporation's governing documents and possibly on its solicitation materials at the time such funds were received. If an organization's mission broadens, for example, from supporting musical education, to fostering all arts education programs, contributions received under the original mission are limited by the charitable trust doctrine, and may only be used pursuant to those limitations.

A nonprofit's mission should be specific enough to provide organizational clarity and prevent mission drift. Most changes to the mission should be approved by the board, as any change may affect public perception and support. Keeping the above considerations in mind will allow an organization to change its mission thoughtfully and strategically and anticipate the consequences of such change. Any substantial change to the organization's mission must also be reported to the IRS on its Form 990 annual information return.

ADRP Keynote: What You Can Learn From Recent Nonprofit Scandals

Everyone loves a good scandal. That's why they fill our newspapers, television programs, and popular websites. But scandals in the nonprofit sector result in diminished or discontinued services, laid off employees, penalties imposed on responsible persons, publicly embarassed board members, and the death of organizations. They also result in a loss of public trust and can lead to substantial changes in the law.

On April 2, 2013, I had the great pleasure of presenting as the keynote speaker for an Association of Donor Relations Professionals Regional Workshop. The topic:  What You Can Learn From Recent Nonprofit Scandals.

Here are 7 key points from my presentation:

• Board composition and numbers matter; guard against founder's syndrome
• Policies are important but must be understood, implemented and enforced
• Public perception is critical - be careful of conflicts of interest and sweetheart transactions, even if they are not unlawful - be responsive 
• Communications responding to crises that are only CYA pieces will not fool the public
• Delegate, but only with due care and proper oversight (e.g., reporting)
• Outside assistance can be invaluable (e.g., audits, legal opinions, investigations)
• Donor relations professionals should review their organizations' key communications, including their websites and the Form 990

Here are 3 opinion articles for The Chronicle of Philanthopy we've written covering recent nonprofit scandals:

'Three Cups of Tea' Scandal Offers Lessons for Charities and Trustees

Avoiding Trouble: What Nonprofits Can Learn From Sex-Abuse Scandal

Basic Board Governance Failures Stand at the Center of the Penn State Debacle

Starting a Nonprofit: 10 Considerations in Electing the Initial Board

 

The board is ultimately in control of the nonprofit corporation and responsible for its actions. So, you want to be careful in determining the composition of your charitable nonprofit's initial board. Here are 10 considerations:

1. The prospective board members should be aware and and prepared to accept the fiduciary (legal) duties and responsibilities of a nonprofit corporate director.
2. They should share the founder's (or founding group's) vision for the organization. And they should have a passion for the organization's mission and a passion for the success of the organization and the work it does.
3. They should have the capacity to serve as board members and to attend the number of meetings the founder/founding group believes is necessary to properly govern the organization during its startup phase.
4. They should bring a valuable skill set and perspective to the organization. Recruiting for diversity in skill sets, backgrounds and perspectives should be very seriously considered.
5. They should be team players who work well with others. Board members individually have no inherent authority (unless such authority is delegated to them or they are a sole director), but they have collective authority to manage the organization and exercise all corporate powers.
6. They should have a basic understanding of the legal requirements associated with operating a nonprofit corporation exempt under 501(c)(3). See Corporate Governance for Nonprofits - The Practical Lawyer.
7. They should be amenable to creating and adopting an appropriate set of governing documents and policies and contributing to the initial business plan that will be incorporated in the Form 1023 application for recognition of 501(c)(3) status.
8. Some of the prospective directors should be willing and capable to take on additional roles required by the corporation (e.g., officer and/or committee positions).
9. All prospective board members should be appropriately vetted. A founder/founding group should review evidence of how such prospects rate on the criteria described above.
10. The number of directors should meet any minimum requirements under state law, and if applying for 501(c)(3) status, should probably include a minimum of 3 directors (others might suggest a minimum of 5) to avoid private benefit concerns. In California, a majority of the directors should not be compensated (either as employees or independent contractors) or related to a compensated person. This may be a good practice for any organization to be operated as a public charity regardless of whether it's required under state law.

Under special circumstances, a founder may wish to retain the power to select and remove board members, but that's a topic for a future post.

Additional Resources:

The Board Building Cycle: Nine Steps to Finding, Recruiting, and Engaging Nonprofit Board Members - BoardSource

A Fresh Look at Diversity and Boards - Blue Avocado

Recruiting and Vetting Nonprofit Board Member - The Bridgespan Group

10 Issues to Address in Your Nonprofit's Social Media Policy

 

1. Copyright and trademark infringement.  Tip: understand the fair use doctrine.  Trap: expecting attribution to offer protection against charges of infringement.
2. Fundraising and foreign state registration requirements. Tip: check out The Unified Registration Statement.  Trap: disregarding registration laws and their application to funds raised through social media (see the Charleston Principles).
3. Events and foreign state qualifications to do business.  Tip: think about whether you are responsible for an event organized through your social media channels and whether it triggers the need to qualify to do business in a foreign state (see Make it Your Business to Know if Your Corporation is "Doing Business").  Trap: organizing an event then claiming it's not your responsibility.
4. Volunteers (and agents of the nonprofit) or independent supporters.  Tip: recognize that the more you control individuals, the more likely they are your agents and the more likely you're responsible for them.  Trap: instructing people to act in the nonprofit's name and not providing any rules or limits to their authority.
5. Supervision of agents of the nonprofit (authorized communications, confidentiality issues, harassment/discrimination, defamation, bullying, privacy).  Tip: provide written rules and guidelines to make clear what is and is not acceptable in an agent's use of social media (whether the agent is an employee or a volunteer).  Trap: relying on an agent's common sense to avoid violating any laws.
6. Advocacy and rules regarding lobbying and political activities (for agents of the nonprofit and users of the nonprofit's social media and communication platforms).  Tip: check out the Alliance for Justice/Bolder Advocacy for resources - you may be able to do much more in this area than you think.  Trap: liking political candidates and publishing unsolicited comments with political messages on a moderated site - digital advocacy offers particular challenges.
7. Collaborations with other organizations and partnership/joint venture issues.  Tip: make sure you recognize whether you want your obligations to one another to be enforceable.  Trap: inadvertently creating a partnership in which each partner may be completely liable for harm created by the other partner.
8. Ownership of social media accounts.  Tip: state in writing who owns social media accounts identified by individual and organization (e.g., Gene@NEO).  Trap: claiming ownership of a social media account in which the individual was given no rules or terms of use to freely publish anything of personal interest.
9. Employee use of social media and protected activities.  Tip: know that certain uses of social media to complain about management and the board may be protected from retaliation - see Emily Chan's article in The Nonprofit Quarterly: “I Thought We Were Friends!” Can Nonprofits Terminate Employees for Their Social Media Posts?  Trap: adopting overbroad policies that restrain employees from exercising their rights to engage in concerted activities for mutual aid or protection.
10. Violations of policies.  Tip: develop internal and external response strategies for violations of policies.  Trap: failing to respond in a timely manner (e.g., The Accidental Rebranding of Komen for the Cure - Kivi Leroux Miller)

 

Recommended Resource: 

Social Media For Nonprofits - Slideshare channel (175 presentations and counting)

Screwtape's 10 Tips for Building a Better Board

 

1. Limit the board to family and friends, people who will support whatever you want to do.
2. If you add more board members, make sure they have a high net worth.
3. Allocate minimal resources to recruiting; just have existing board members ask their rich friends.
4. Don't worry about diversity; 86% of nonprofit board members are white, non-Latinos.
5. Don't worry about whether the prospective board members will commit sufficient time to the organization; you need their money and connections.
6. Don't worry about whether the prospects have the right set of skills and knowledge to govern the organization; you need their money and connections, not their interference.
7. Inform prospects that board service is easy and will require minimal time.
8. Don't inundate prospects with organizational materials; it will only confuse them; these things can wait.
9. Don't ask prospects to submit their qualifications; you need to base the relationships on trust.
10. If someone recruits a prospect, make sure you elect the prospect; don't make enemies.

Private Benefit Rules – Part III: Excess Benefit Transaction Rules

The final private benefit rule discussed in this series is the excess benefit transaction rules, codified in section 4958 of the Internal Revenue Code (“IRC”), which are a similar but distinct set of rules from the private inurement doctrine discussed in Part II. Similar to the private inurement doctrine, the excess benefit transactions rules are concerned with a certain subset of individuals who stand in a particular relationship with the organization. However, the excess benefit transaction rules have nuanced differences in applicability, penalties, and available protections.

Applicability of the Excess Benefit Transaction Rules

The excess benefit transaction rules apply to any entity that has status as a 501(c)(3) public charity or 501(c)(4) organization (i.e., social welfare organizations) at any time during a five-year look back period from the date the excess benefit transaction occurred:

•  An excess benefit transaction is defined as any transaction in which an economic benefit is provided by the organization directly or indirectly to or for the use of any disqualified person, and the value of the economic benefit provided exceeds the value of consideration (including the performance of services) received for providing the benefit. (Treas. Reg. 53-4958-4(a)(1)).
• A disqualified person is a person in a position to exercise substantial influence over the affairs of the organization at any time during the five-year look back period from the date of the excess benefit transaction. (Treas. Reg. 53.4958-3(a)(1)).

The question of disqualification is factual inquiry that looks at actual powers and responsibilities as opposed to titles. Therefore, voting members of a governing body (e.g., directors) and those with the ultimate responsibility for implementing decisions of the governing body (e.g., President) or managing the finances of the organization (e.g., Chief Financial Officer) during the five year look back period would likely be considered disqualified irrespective of their titles in the organization and whether such influence was actually exercised. (See Treas. Reg. 53.4958-3(c)). Additionally some parties are automatically disqualified persons such as the family members of a disqualified person or an entity in which a disqualified person owns at least 35% control.

Additional facts and circumstances that tend to show substantial influence include (see Treas. Reg. 53.4959-3(e)(2)):

• The person founded the organization;
• The person's compensation is primarily based on revenues derived from activities of the organization, or of a particular department or function of the organization that the person controls;
• The person has or shares authority to control or determine a substantial portion of the organization's capital expenditures, operating budget, or compensation for employees; or
• The person manages a discrete segment or activity of the organization that represents a substantial portion of the activities, assets, income, or expenses of the organization, as compared to the organization as a whole.

Examples of Excess Benefit Transactions

Often the same situations that would trigger a private inurement issue also trigger a potential excess benefit transaction violation. Common situations include:

• Loans to and from the Organization. Federal tax law does not prohibit a disqualified person from making loans to the public charity or social welfare organization and vice versa. However such loans have the potential for abuse and are a common problem area with regard to excess benefit transactions. The IRS is commonly concerned about the legitimacy of the loan and terms of repayment. Circumstances that help to show an excess benefit transaction has not occurred include:
  • The organization makes a bona fide loan to a disqualified person with an interest rate at or above market value;
  • The disqualified person makes a loan to the organization with an interest rate below market value; and/or
  • The recipient’s intent to repay the amounts and transferor’s expectation of repayment and intent to enforce payment are supported by evidence.

• Compensation for Past Services. Many nonprofit executives are paid below what a board might otherwise approve or desire to provide due to economic factors. Sometimes, a board will attempt to acknowledge the value of such services despite current limiting circumstances through arrangements such as an agreement at the outset to pay a higher amount at a later date for services to be rendered or an agreement at a later date to pay an additional amount in recognition of past services already rendered. The IRS will generally treat the deferred compensation as having been earned in equal amounts in each year unless there is sufficient evidence to show an alternative payment schedule. The common concern here is whether the total compensation, in consideration of the services rendered over such time period, is reasonable. Circumstances that help to show an excess benefit transaction has not occurred include:
  • The total compensation the person received was less than the value of the services the person performed for the organization during the prior years;
  • The board followed the Rebuttable Presumption of Reasonableness for each year in question (see below); and/or
  • The board evaluated and concurrently documented its consideration of the annual aggregate compensation including the deferred compensation in comparison to the fair market value of such services for each year in question.

Penalties for Excess Benefit Transactions

If an excess benefit transaction has occurred, the IRS can levy taxes, commonly referred to as intermediate sanctions, on both the disqualified person who received the excess benefit and the organizational manager(s) who knowingly approved the excess benefit transaction. Pursuant to IRC section 4958, the IRS is authorized to impose the following penalties:

• 25% excise tax of the excess benefit on the disqualified person who received the excess benefit; and an additional 200% excise tax of the excess benefit if the violation is not corrected within the taxable period.
• 10% excise tax of the excess benefit on the organizational manager who knowingly participated in the transaction (maximum of up to $10,000).

Historically, the intermediate sanctions have been used as an alternative penalty to revocation under the private inurement doctrine because the penalty of revocation is so severe. However, the IRS can impose both the intermediate sanctions under the excess benefit transaction rules and revoke exempt-status under the private inurement doctrine for the same unlawful transaction.

Protections Against Excess Benefit Transactions

Compensation is probably the most problem-ridden area for exempt organizations with respect to excess benefit transactions. Luckily, the regulations provide for a process to create a presumption that payments under a compensation arrangement are reasonable (i.e., the Rebuttable Presumption of Reasonableness). Generally, if the IRS penalizes a disqualified person under the excess benefit transaction rules, such individual bears the burden to prove that the compensation arrangement was reasonable. However, if an organization follows the Rebuttable Presumption of Reasonableness procedures, the burden of proof shifts to the IRS to show the compensation arrangement was excessive. Therefore, while this presumption is rebuttable by the IRS, in practice, this creates an obstacle that the IRS is not likely to deal with unless a clear or egregious violation has occurred.

 The Rebuttable Presumption of Reasonable consists of three steps:

1. The compensation arrangement or the terms of the property transfer are approved in advance by an authorized body of the organization composed entirely of individuals who do not have a conflict of interest with respect to the compensation arrangement or property transfer (Treas. Reg. 53.4958-6(a)(1));
2. The authorized body obtained and relied upon appropriate data as to the comparability data prior to making its determination (Treas. Reg. 53.4958-6(a)(2)); and
3. The authorized body adequately documented the basis for its determination concurrently with making that determination (Treas. Reg. 53.4958-6(a)(3)).

Although the Rebuttal Presumption of Reasonable is prescribed with respect to compensation arrangements, it generally lays out a process that organizations are encouraged to follow in approving any transaction with a disqualified person or other individual with a possible conflict of interest.

Certain filing organizations should also remember that the annual information return with the IRS (i.e., Form 990 and Form 990-EZ), which is a publicly available document and signed under penalty of perjury, requires organizations to disclose whether an excess benefit transaction has occurred or the organization became aware that an excess benefit transaction has occurred in a prior year (see e.g., Form 990, Part VI, Question 89b). Organizations are well advised to understand the consequences of this rule both in terms of intermediate sanctions and the loss of good will and public trust that results from organizations that allow such violations to occur under their leaders’ oversight.

For more information on excess benefit transactions, please see the following Internal Revenue Service Exempt Organizations Unit internal documents:

• AN INTRODUCTION TO I.R.C. 4958 (INTERMEDIATE SANCTIONS) (2002)
• Intermediate Sanctions (IRC 4958) Update (2003)

Private Benefit Rules – Part II: Private Inurement Doctrine

The private inurement doctrine is another private benefit rule applicable to public charities. The doctrine comes directly from the language of section 501 of the Internal Revenue Code that only organizations “no part of the net earnings of which inures to the benefit of any private shareholder or individual” may be exempt under section 501(c)(3). A 501(c)(3) organization that violates the private inurement doctrine fails to be operated exclusively for one or more exempt purposes and is subject to revocation of its exempt status. (See Treas. Reg. Section 1.501(c)(3)-1(c)(2)).

There is no strict definition for “inure” but this is generally understood as providing unjust enrichment from the organization’s gross or net earnings to another party. (See People of God Community v. Commissioner, 75 T.C. 127 (1980)). Unlike the private benefit doctrine discussed in Part I, the restriction on inurement is absolute (i.e., the doctrine does not allow for incidental private inurement). Additionally, the private inurement doctrine is narrower in reach than the private benefit doctrine, which can apply to any person. “Private shareholder or individual” is defined in the Treasury Regulations as “persons having a personal and private interest in the activities of the organization.” (See Treas. Reg. Section 1.501(a)-1(c)). In other words, the private inurement doctrine generally applies to persons, commonly referred to as “insiders,” who are in a position to influence or control use of the organization’s assets for personal gain such as founders, directors, or officers.

It is important for public charities to understand the private inurement doctrine does not bar the organization from entering into transactions with insiders.  The private inurement doctrine does however bar the organization from providing a disproportionate share of benefits to an insider regardless of whether the inurement conferred is $1 or $1,000.

Private inurement violations may be found in situations involving:

• A compensation arrangement with an insider where there is no upper limit (see People of God Community);
• A compensation arrangement that is based on factors extrinsic to performance at and benefit to the organization (see G.C.M. 39498);
• Use of gross or net earnings to provide goods and services to insiders; or
• Paying more than fair market value in exchange for goods or services provided by an insider.

Organizations should also be wary of the certain transactions that due to their complexity, unfamiliarity, or other circumstances, can be more difficult to analyze and may result in private inurement violations for unwary or uninformed organizations, such as:

• Assignment of rights to intellectual property developed by insiders and funded, in whole or in part, with organizational assets;
• Compensation arrangements with added considerations such as deferred compensation, bonuses, fringe benefits, or retirement or severance packages; or
• Use of organizational assets to support, fund, or otherwise invest in an insider’s business.

Boards of directors should furthermore be cautious of poor governance practices that can exacerbate the likelihood of private inurement violations under their oversight, such as:

• A failure to acquire sufficient information to allow for thorough board discussion and informed decisions prior to board approval;
• A limited understanding about the fiduciary duties of care and loyalty;
• The absence of a conflict of interest policy; and
• A lack of knowledge about applicable state laws that may place additional restrictions or procedural requirements on transactions with insiders.

The private inurement doctrine is often overlooked because of its overlap with the private benefit doctrine which subsumes the private inurement doctrine. Additionally, the penalty of revocation has historically not been enforced except in egregious cases. However, regardless of whether an organization would face such a severe penalty at the hands of the IRS, the private inurement doctrine is a cornerstone principle that all public charities should understand.

*Please note 501(c)(3) private foundations are subject to self-dealing rules under Internal Revenue Code section 4941 which generally prohibits private foundations from engaging in transactions with certain disqualified persons.

For more information on the private inurement doctrine and private benefit issues, please read the IRS Exempt Organizations internal document “Overview of Inurement/Private Benefit Issues in IRC 501(c)(3).”

Part I discusses the private benefit doctrine and is available here.

Private Benefit Rules – Part I: Private Benefit Doctrine

The conferment of private benefits by 501(c)(3) organizations is governed by a set of federal tax laws that are commonly not well understood. Most nonprofit leaders know to be wary of any organizational transaction, arrangement, practice, or policy that may potentially or actually serve private rather than public interests. However, they often struggle in understanding what type and degree of private benefit may be permissible and under what circumstances. Nonprofit leaders can appropriately navigate such concerns by learning the three principal rules that govern public charity private benefit issues: the private benefit doctrine, private inurement doctrine, and excess benefit transaction rules. The first rule, the private benefit doctrine, is discussed in this post.

Private Benefit Doctrine

The private benefit doctrine is the broadest of the private benefit rules in both its applicability and scope. The doctrine applies to any individual to whom the organization may confer a benefit and is not limited to monetary benefits.

The private benefit doctrine is derived from the requirement under section 501(c)(3) of the Internal Revenue Code that an organization be organized exclusively and operated primarily for one or more qualifying exempt purposes (e.g., religious, educational, or charitable). Although “private benefit” is not explicitly referenced in the statute, an organization will fail this requirement if it confers private benefits upon an individual that are more than incidental, quantitatively and qualitatively, to the furthering of its exempt purposes. (See Gen. Couns. Mem. 39862, Nov. 21, 1991.)

The distinction between private and public interests can appear subtle at times but it is an important one for 501(c)(3) organizations to understand. As the IRS notes in an internal publication:

The distinction between an individual as a private person and the individual as a member of the general public incorporates the following two concepts which are basic to unraveling inurement problems: (1) An individual is not entitled to unjustly enrich himself at the organization's expense. (2) Benefits directed to an individual as a member of a charitable class do not constitute unjust enrichment. (1990 EO CPE Text, "Overview of Inurement/Private Benefit Issues in IRC 501(c)(3).")

Homeless shelters are classic examples of public charities that confer benefits such as food, clothing, and shelter to individuals as members of a charitable class (e.g., the disadvantaged, underserved, impoverished). However, if a homeless shelter is set up to serve a single person or certain designated individuals, it will be conferring impermissible private benefits to such individuals even if they fit the description of someone who is a member of a typical charitable class.

The private benefit doctrine is a particularly important concept to understand when forming and operating a 501(c)(3) tax-exempt organization. As the Treasury Regulations explain, “it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals, the creator or his family, or persons controlled, directly or indirectly, by such private interests.” (Treas. Reg. 1.501(c)(3)-1(d)(1)(ii).) Importantly, the IRS furthermore acknowledges, “genuine public benefit often provides an incidental benefit to private individuals.” (2001 EO CPE Text, "Private Benefit Under IRC 501(c)(3).")  The key is that such benefit to a private individual must be incidental both qualitatively (i.e., the private benefit is a mere byproduct of the public benefit) and quantitatively (i.e., the private benefit is insubstantial in amount).

Facts and circumstances that commonly raise concerns for the IRS include:

• Serving too small of a class of beneficiaries;
• Entering into transactions on unreasonable or unfavorable terms to the organization;
• Engaging in substantial activities not clearly in furtherance of the organization’s exempt purposes;
• Conferring benefits to private parties beyond the scope necessary to further the organization’s exempt purposes;
• Establishing exclusive business dealings with a particular for-profit business; and
• Failing to consider alternative sources or comparative prices when purchasing goods and services.

Clearly establishing with the IRS in the organization’s Form 1023 exemption application and annual Form 990 information returns its exempt purposes and how it is organized and operated in furtherance of those exempt purposes can be especially critical for organizations that also have certain circumstances that have the potential for private benefit violations such as business relationships with persons in control of the organization, governing bodies composed of a small group of individuals, or a narrow class of intended beneficiaries. While such factors may not necessarily preclude tax-exempt status, a poorly prepared exemption application that fails to address these potential abuses can result in significant delays in processing or, at worst, a denial of tax-exempt status. Additionally, similar mistakes on a Form 990 can lead to an audit, undesirable public scrutiny and media backlash, or, in severe cases, a revocation of tax-exempt status.

Screwtape's 10 Pieces of Advice to New Board Members

1. Be fashionably late to meetings.
2. Don't show up too often so the board recognizes it's special when you do.
3. Start preparing for a meeting just before you go in so the materials are all fresh on your mind.
4. Dominate the discussion; to sound smart, use buzz phrases like "we've got to collaborate," "what's our value proposition," and "we need to pivot out business model."
5. Be intimidating to discourage people who might otherwise disagree with you (yelling and cursing generally work well).
6. Frequently check your phone for messages (texting is even better); it shows you're important.
7. When in doubt, go with the majority or whatever the executive recommends (that will always keep you out of trouble).
8. Complain, but don't offer solutions; that's management's job.
9. Kill two birds with one stone: do business with the organization; for all your good work, it's okay to get some return benefits, and that goes for all the directors.
10. Above all, keep the admin costs as low as possible; that's the key to great governance.

 

Executive Session Tips

Executive sessions are generally closed discussions of a board of directors that may include invited attendees such as an executive director or certain staff members. These sessions can occur at the end of a board meeting or separate from a board meeting if no formal actions are to be taken. Executive sessions can be a useful tool for a board for addressing sensitive and/or legal matters such as an executive director evaluation. The possibility of keeping the executive session discussions private can also be a great advantage for organizations that have voting memberships, are subject to open meeting laws, or have general board meeting minutes maintained by the staff.

When done properly, executive sessions can create a “safe space” for directors to discuss a matter openly and honestly, help to foster trust among the directors and allow for better independent decision-making. Executive sessions can, however, also be a hindrance to better board governance when used improperly or carelessly, creating distrust between the board and staff, unnecessary secrecy, and paranoia. Below are some of the important factors a board should consider when using an executive session.

Confidentiality

• Inform participants whether all or part of the discussion should remain confidential;
• Appropriately mark materials as confidential and determine what would be appropriate to include in the meeting minutes if they will be disclosed to members or staff;
• Limit access to executive session materials or minutes to those persons who participated in the executive session to the extent legally permissible; and
• Ensure compliance with any applicable open meeting laws.

Transparency

• Determine what information needs to be communicated to appropriate parties after the executive session;
• Determine whether a vote, if any, should be conducted in the executive session or can be taken during the general board meeting; and
• Document the reasons for or topic of the executive session in the general meeting minutes.

 Process

• Determine whether regularly scheduled or ad hoc executive sessions will better facilitate proper oversight and open discussion by the board;
• Manage clear expectations with excluded parties regarding follow-up by the board, even if there is nothing to report; and
• Ensure that the discussion remains on topic with respect to the agreed upon agenda for the executive session.

For more information about executive sessions, please read the BoardSource publication “Executive Sessions: How to Use Them Regularly and Wisely.”

More information on state open meeting laws is provided by Sunshine Review.