Non-Profit Organizations and 10 Best Practices in Governance September 27, 2017 Non-Profit Organizations and 10 Best Practices in Governance Presented at the Corporate Counsel Women of Color General Counsel Training Boot Camp by: Susan Hardison Chase The Legal Aid Society of New York Community Development Project 2090 Adam Clayton Powell Jr., Blvd. New York, NY 10027 (212) 426-3009 Kwanza Butler Charter Communications Counsel, Spectrum Networks 75 Ninth Avenue. 6th Floor New York, NY 10027 (212) 379.3692 Vivienne LaBorde Lincoln Center for the Performing Arts Director, Government & Community Engagement 10 Lincoln Center Plaza New York, NY 10023 (212)875-5456

Fiduciary Duties of Directors and Officers Director Liability Topics for Discussion Fiduciary Duties of Directors and Officers Director Liability 10 Best Practices in Governance Resources

Fiduciary Duties of Directors and Officers of a Non-Profit Organization The Duty of Care. Act in good faith; and with the degree of diligence, care and skill that an ordinarily prudent person in a like position would exercise in similar circumstances. The Duty of Loyalty. Directors (and officers) must have an undivided allegiance to the corporation and its mission when using the power of their position or information they possess concerning the corporation or its assets. The Duty of Obedience. Directors must be faithful to the corporation’s mission and purposes and ensure that the corporation complies with applicable laws and regulations including its own internal governance documents and policies.

Director Liability and Indemnification Federal and certain state volunteer liability laws provide some safeguards for board members of not-for-profit corporations who are not compensated, other than receiving reimbursement of expenses, and who act in good faith. However, board members may have personal liability for excise taxes, fines, and other penalties as a result of certain legal violations, such as self-dealing, failure to pay required payroll taxes and other taxes, or knowing approval of excess benefit or self-dealing transactions. Indemnification. The board should consider including indemnification provisions in the corporation’s governing documents, based on a review of the laws of the states in which it is based and operates.

1 Active Participation in Board Meetings Be familiar with the important corporate documents, corporation’s mission, finances, and activities. Regularly attend Board and Committee Meetings. Review any written material disseminated in advance of meetings. Be informed, be active, exercise independent judgment, and ask questions. Delegate tasks requiring specialized expertise to qualified professionals. When making decisions, a director must reasonably believe (based on complete and accurate information) that the action undertaken is in the best interest of the organization. Ensure the accuracy of the meeting minutes and record dissents.

2 Adherence to Organizational Mission Ensure consistency of corporation’s purposes as stated in its certificate of incorporation with its mission statement and activities. Corporate resources must be used to carry out purposes as stated in the certificate of incorporation. Periodically review the mission, and vote to amend the purposes clause if needed in order to expand or change operations. Directors should treat all matters involving organization as confidential until there is a general public disclosure.

3 Compliance with Regulatory Obligations Exercise meaningful oversight to ensure that the organization complies with applicable laws. Sales and other State taxes; Employment laws; Civil rights statutes; State Attorney General Regulations Internal Revenue Code (“IRC”) regulations Set up internal controls, a tickler system or periodic checklist if there is no annual audit or audit committee. Regularly review & comply with corporate governance documents. Require that the Board Review a copy of the IRS Form 990

4 Implementation of Policies and Procedures Create a culture of accountability and transparency. Conflict of Interest Policy Whistleblower Policy Document Retention Policy Ethics Policy Investment Policy

5 Management of Conflicts of Interest Adhere to the conflict-of-interest policy. Annually review and acknowledge the policy. Directors, officers & key employee must disclose potential conflicts. Board to determine if transaction is fair, reasonable and in the best interest of the corporation at the time of the determination. Proper handling of conflicts, and documentation of the board’s action, is key to compliance. Federal law (IRC § 4958) imposes excise taxes on conflict of interest transactions that unduly benefit directors and other insiders. Professionals serving on the board of directors.

6 Oversight of Executive Leadership Ensure that approval of compensation complies with state and federal requirements, as well as with the corporation’s governing documents. Annually evaluate the performance of the organization’s chief executive; conduct such an evaluation prior to any change in that individual’s compensation. Routinely monitor the Chief Executives. Require written reports at board meetings, develop a questionnaire for staff or stakeholders, pay attention to feedback both positive and negative; and adhere to and enforce policies and procedures.

7 Financial Oversight & Accountability Keep complete and accurate records. Fundraise and forecast. Do not provide loans to directors, officers or key employees. Spend a significant percentage of the annual budget on programs that fulfill your mission. Honor the donor’s intent when given restricted funds. Establish a “reconciliation procedure” where no one person is responsible for recording revenues, writing checks, examining bank statements and balancing checkbooks. Mindful of Conflicts and Duties

8 Establishment of Committees Committees facilitate the flow of information from the corporation to the full board. Gives board the ability to delegate its authority, which can more easily assemble on short notice and take needed action. Ensure each committee has a clearly defined charter and annual work-plan. The most common board committees are the Executive Committee (empowered to take action between board meetings) and the Audit Committee (exercises critical oversight responsibilities).

9 Organizational Strategic Planning Establish, review and approve strategic & long- term plans consistent with mission. Forecast and address industry trends and changes. Monitor organizational performance against plans. Facilitate the implementation of the strategic plan. Include succession planning for the board, executive director and key employees.

10 Regular Board Evaluation and Development Establish effective, systematic processes for educating and communicating with board. Board self-assessment every three years. Terms of service should overlap for continuity. Set term limits and clear procedures for removing board members.

Resources The Nonprofit Compliance Checklist, a web-based tool that provides nonprofits with information and links to websites to help with compliance with legal obligations, available at: www.lawhelpny.org. GuideStar, available at www.guidestar.org. Principles for Good Governance and Ethical Practice, A Guide for Charities and Foundations, available at: http://www.independentsector.org/wp- content/uploads/2016/11/Principles2015-Web-1.pdf. The BoardSource website, available at: http://www.boardsource.org, includes Ten Basic Responsibilities of Nonprofit Boards and Nonprofit Answer Book. Probono.net, Community Development/Nonprofit area, another excellent source of documents and training materials for the nonprofit law practice, available at: http://www.probono.net/ny/nonprofit/library (membership area only, but membership is free).