Yesterday's post, Are Charity Boards Ready for Tough Times Ahead?, covered in broad terms a board member's duties to lead an organization during challenging periods. Here are some specific matters demanding a board's attention:
Insolvency. Boards must pay proper attention to ensure that the organization remains solvent and able to pay its obligations as they become due. If the organization enters the "zone of insolvency," a board member's responsibilities expand from a fiduciary responsibility to protect the assets of the charity to a broader role of balancing the interests of its creditors and other stakeholders. In addition, the board must plan a way for the charity to become solvent (financial turnaround) or decide to merge or dissolve. Because of the fragile nature of the charity while it struggles with the imminent threat of insolvency, the board should consider reviewing its existing governance policies and adopting temporary governance policies covering areas such as:
- Conflicts of interest
- Budget adjustments and board review of financial performance
- Financial management policies (including restrictions against "borrowing" from temporarily restricted net assets)
- Investment policies
- Controls on entering into new contracts or incurring new obligations without board approval
- Controls on ensuring all payroll tax obligations are timely paid
Debt covenant compliance. Boards must pay attention to the charity's debt covenants to protect against defaulting on a loan agreement. For example, in order to obtain a loan, a charity may have agreed to maintain a certain net fund balance or unrestricted assets ratio. During challenging periods, it may be difficult to maintain such levels. And this problem may have been exasperated by a change in the laws and accounting rules governing the characterization of assets (e.g., UPMIFA and FSP 117-1). Talk to your accountant about this.
Investments. The board must provide greater oversight over its investments during challenging periods. Is the portfolio and its management prudent under such circumstances? Is cash flow an issue? What are the opportunities and threats associated with the investments apart from their returns? How does the board provide oversight? If management of the investments is delegated to an investment committee, how does the board oversee this committee?
Program and staffing decisions. Boards must determine if, under the challenging circumstances, programs need to be cut, transferred, or restructured. In addition, they must make decisions about the size and deployment of the workforce. The simplest decision to implement may at times be an elimination of a program or a reduction in the workforce. But the simplest decision may not be the best or the easiest decision. Boards really need to think and discuss the options and not leave all of these critical organizational decisions up to the executive or staff.