Volunteering For Liability
George began to have an uneasy feeling at the first board meeting he attended of the community youth symphony organization. The incoming volunteer president awarded the outgoing president with a T-shirt that said: "Never Volunteer for Anything." The incumbent volunteer members of the board laughed -- a little too heartily, George thought.
George began to have an uneasy feeling at the first board meeting he attended of the community youth symphony organization. The incoming volunteer president awarded the outgoing president with a T-shirt that said: “Never Volunteer for Anything.” The incumbent volunteer members of the board laughed — a little too heartily, George thought.
As the year progressed, George learned what the message on the T-shirt meant. The outgoing president had found himself immersed in an extraordinarily time-consuming and draining investigation into alleged misappropriation of funds by staff. The volunteer president had spent many hours at the organization’s office during “his” year dealing with the legal, financial and personnel issues that threatened the viability of the organization. Very little of the organization’s resources that year had gone into its mission: assisting the youth of the community. Dark hints were beginning to appear in the local newspaper that someone should take responsibility for the alleged misappropriation.
George had agreed to serve on the board because he believed in the organization’s mission. He began to wonder, though, what sort of personal liabilities he might have signed up for.
When George went to his lawyer, he learned a lot that eased his mind and a few good ideas to protect himself. (Of course, there’s not really a George. There really was a T-shirt, though. And the events in George’s story have happened in enough different organizations that they cumulatively tell a familiar story. We’ll continue with George and his composite organization.)
George learned that nonprofit organizations are big business in the United States. In a typical year, Americans donate and deduct on their federal tax returns more than $135 billion to tax-exempt organizations. The average taxpayer itemizing deductions gives more than $3,500 to such organizations. And that’s just what goes to educational, scientific, charitable and religious organizations. Beyond that, a large amount goes to trade and professional organizations, chambers of commerce and the like that also operate as nonprofit organizations with volunteer boards.
Those nonprofit organizations depend on millions of volunteers like George to make things happen: to run colleges, homeless shelters, medical societies, trade associations, civic boards, scouting organizations and thousands of other types of nonprofit organizations that help people. Without the Georges of this world, much of what we value in America wouldn’t happen. Indeed, we like to think that business and community leaders — the readership of this magazine — feel a responsibility to serve on volunteer boards that help others and the community.
George was also relieved to learn from his lawyer that the risk of serving on a volunteer board would be manageable. If George followed some basic rules, he could minimize the risk of liability to an acceptable level. Here are the rules George’s lawyer gave him for checking out the board and for his service on the board after he joined:
1. Check out the organization’s insurance for officers and directors.
Make sure the organization has errors and omissions insurance that covers directors and officers (often called “D and O coverage”). Ask your company’s insurance department to look at the policy and tell you whether you’re covered adequately. Things to look for include whether the policy will pay your attorneys’ fees while a claim is pending against you, or whether you will have to “front” the attorneys’ fees and try to get them back from the insurance company if you win. The organization’s bylaws should also include an indemnification provision that requires the organization to defend you in a claim arising out of your service on the board. The time for George to make that review is before his first board meeting.
2. Plan to serve on a volunteer board long enough to know what you’re doing.
Serving on a board for a one-year term would probably not give George a chance to learn enough about the organization to know what he’s doing. Short terms for board members leave the staff without the guidance they deserve. Susan Hill, the executive director of the American Board of Facial Plastic and Reconstructive Surgery, reports a saying among nonprofit organization executives about volunteer board turnover: it’s like “talking to a parade.” George will probably need about a year of board meetings to learn where the money comes from and where it goes, who on the staff does what, how the staff’s compensation is set, and what recurrent issues come up in the organization’s activities. Toward the end of the first “rookie” year, directors typically reach a point on the learning curve where they can consider constructive changes. Directors also feel some reticence to make changes toward the end of their service on the board. At that point, directors do not want to initiate major changes that will become the “new” directors’ challenge to see through. If George is going to have a serious impact, he’ll need to be on the board at least three years. He should probably turn down service on a volunteer board with shorter terms.
3. Check out the membership of the board and the organization’s finances.
George ought to ask himself whether he would be comfortable with decisions made collectively by the members currently on the board. Similarly, he ought to ask diplomatically whether the organization is financially viable. He may still want to serve on the board if the organization is facing financial challenges. He may in fact bring needed expertise in addressing that crisis. But George needs to know what he’s getting into.
4. Don’t expect the staff to operate on autopilot without policy input.
Nonprofit organizations typically have long-term staff supervised on a day-to-day basis by an executive director. The executive director typically provides the directors with what the executive director believes would be helpful for them to see at monthly or quarterly meetings. When the staff seems to work well together, the directors may be tempted to let the organization operate on autopilot: the directors just show up at the meetings, read the reports, compliment the staff and leave. Of course, a director must be careful not to become such a distraction that the director interferes with the staff’s mission. As Ms. Hill observes: “Board members are responsible for policy of an organization — not its day-to-day operations; leave that to your executive director.” At the same time, a director has a legal duty to understand the organization’s finances and operations. An active director must know how to read the financial reports and understand the trends reflected in those reports. Ask questions. Keep asking until you are satisfied with the answer.
5. If you’re joining the board of a trade or professional association, focus on antitrust “hot buttons.”
Trade and professional organizations bring competitors together at meetings and conferences. If an antitrust investigation arises in an industry, you can safely bet that the industry’s trade association will come under close scrutiny. If prices go up in the industry shortly after a trade association meeting, those conducting an investigation into those prices will want to know what happened at the meeting. They’ll subpoena all tape recordings, notes kept by staff, minutes and agendas. Other antitrust claims can arise from competitors unhappy with the trade association’s published standards for the industry’s products. Exclusions from membership often also produce antitrust claims. All trade associations need to have an antitrust compliance policy, a protocol for avoiding sensitive antitrust issues at meetings, and a way of making sure the records of the organization accurately reflect that compliance.
6. Make sure the organization knows its limits on “lobbying” and “electioneering.”
Different types of nonprofit organizations are subject to different limits on “lobbying” for changes in legislation and “electioneering” for specific candidates. Every year, dozens of cause-oriented nonprofit organizations face accusations that they have stepped over the line and subjected themselves to the risk of losing their tax-exempt status. If George is joining the board of a cause-oriented organization, he’ll need to make sure the organization knows where the line is and respects it.
7. Understand compensation proposals.
George will likely have to vote on the senior staff compensation at some point during his service on the board. If the staff is doing a good job, a temptation will arise to pay whatever the budget allows. In many cases, that makes good sense. But George ought to insist on looking at the history of compensation changes and develop an understanding of how the compensation of senior staff is determined and how that compensation relates to other organizations of similar size and with a similar mission. George ought to watch out in particular for cronyism. If the long-term chairman of the compensation committee is the organization’s insurance broker, and if the executive director is pushing for the organization to buy more insurance through that broker, George might want to look particularly carefully into the compensation committee’s proposals. Tax law can make directors of nonprofit organizations personally liable in some cases for grossly overpaying senior staff.
A Happy Ending
George checked out the organization and applied these seven rules. He did his job as a director well. Like the millions of volunteer board members who contribute such service every year, he did his share to help people. He felt good about it.
At the end of his years of service on the board, George received a plaque that he hung on his wall. He got no T-shirt and no liability.