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Copyright 2011 Fennemore Craig, P.C. 1 STANDARDS OF CONDUCT FOR NONPROFIT LEADERS Laura A. Lo Bianco Fennemore Craig, P.C. May 17, 2011
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Copyright 2011 Fennemore Craig, P.C. 2 FIDUCIARY DUTIES A director’s and officer’s duties are to be discharged: In Good Faith With a Duty of Care With a Duty of Loyalty
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Copyright 2011 Fennemore Craig, P.C. 3 GOOD FAITH Honesty of purpose and honesty in fact.
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Copyright 2011 Fennemore Craig, P.C. 4 DUTY OF CARE With the care an ordinarily prudent person in a like position would exercise under similar circumstances.
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Copyright 2011 Fennemore Craig, P.C. 5 DUTY OF LOYALTY In a manner the director/officer reasonably believes to be in the best interests of the organization.
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Copyright 2011 Fennemore Craig, P.C. 6 Reliance on Others In discharging duties, a director or officer may rely on information, opinions, or reports, including financial statements and financial data, prepared/presented by others in certain circumstances. However …
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Copyright 2011 Fennemore Craig, P.C. 7 A director/officer is not acting in good faith if he/she has knowledge concerning the matter in question that makes reliance otherwise permitted unwarranted. Reliance on Others
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Copyright 2011 Fennemore Craig, P.C. 8 Watch Out For Conflicts of Interest Private Inurement Excess Benefit Transactions What are the Penalties? –Conflicting transaction voided (state law) –Revocation of exempt status (federal law)
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Copyright 2011 Fennemore Craig, P.C. 9 Conflict of Interest Defined A “conflicting interest” is: The interest an interested person affiliated with the nonprofit has respecting a transaction effected or proposed to be effected by the nonprofit, if at the time of the transaction or decision to enter into the transaction, the person has some financial interest or is related to someone with a financial interest.
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Copyright 2011 Fennemore Craig, P.C. 10 Private Inurement Prohibition found in many subsections of Code Section 501(c) “…no part of the net earnings of which inures to the benefit of any private shareholder or individual…”
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Copyright 2011 Fennemore Craig, P.C. 11 Excess Benefit Transaction The prohibition against excess benefit transactions and the intermediate sanctions rules apply only to excess benefit transactions between “disqualified persons” and a public charity or a social welfare entity.
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Copyright 2011 Fennemore Craig, P.C. 12 Step 1 Make the “required disclosure” of the conflict of interest. Step 2 Disinterested or “qualified” directors or committee members should evaluate the transaction. What should the Board do?
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Copyright 2011 Fennemore Craig, P.C. 13 Step 3 Decision should be made by the “qualified” directors – without influence of the interested director. Step 4 Basis for the transaction should be adequately documented.
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Copyright 2011 Fennemore Craig, P.C. 14 The Board should adopt a policy regarding transactions between the organization and interested persons. May not be required under state law, BUT A GOOD IDEA FOR ALL ORGANIZATIONS Provide structure under which to address potential conflicts Create rebuttable presumption against excess benefit Answer Form 1023 and Form 990 questions positively Conflicts of Interest Policy
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Copyright 2011 Fennemore Craig, P.C. 15 TOP TEN “BEST PRACTICES” For Effective Board Governance
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Copyright 2011 Fennemore Craig, P.C. 16 TEN Identify the array of skills needed for effective board oversight; assess whether board composition is appropriate; adjust board composition as needed.
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Copyright 2011 Fennemore Craig, P.C. 17 NINE Clearly delineate and communicate the respective roles of the board, its committees and senior management.
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Copyright 2011 Fennemore Craig, P.C. 18 EIGHT Establish a system of internal controls that require senior management to inform the board of significant transactions and create a means or employees to report compliance concerns.
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Copyright 2011 Fennemore Craig, P.C. 19 SEVEN Empower the board to ask the “ hard questions ” by educating the directors about their fiduciary duty to be fully informed and make necessary inquiry.
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Copyright 2011 Fennemore Craig, P.C. 20 SIX Establish and implement an effective annual self-evaluation mechanism (including the opportunity for anonymous input) for the board to review its performance and the performance of its committees.
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Copyright 2011 Fennemore Craig, P.C. 21 FIVE Establish a board audit committee comprised of independent directors to oversee financial reporting, risk assessment and management practices; select an “ independent ” auditor.
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Copyright 2011 Fennemore Craig, P.C. 22 FOUR Adopt a substantive conflict of interest policy, which will establish a rebuttable presumption of reasonableness for all transactions with interested parties.
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Copyright 2011 Fennemore Craig, P.C. 23 THREE Keep appropriate corporate and financial records.
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Copyright 2011 Fennemore Craig, P.C. 24 TWO Know and follow your governing documents, policies, procedures and audit recommendations.
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Copyright 2011 Fennemore Craig, P.C. 25 ONE WHEN IN DOUBT, SEEK, OBTAIN AND FOLLOW THE ADVICE OF AN EXPERT.
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Copyright 2011 Fennemore Craig, P.C. 26 Questions? Laura A. Lo Bianco, Director Fennemore Craig, P.C. (602) 916-5000 | llobianc@fclaw.com
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