Keeping Nonprofits’ Officers and Directors on Board

Safeguard your Nonprofit Board Members’ Personal Assets

Directors and board members of nonprofit organizations are entrusted with the management of assets such as property, employees and the organization’s reputation in the community it serves. These officers drive the organization’s mission and administer policies and activities that advance its performance and ability to sustain itself. Board members are expected to make decisions in a disinterested fashion without view to personal gain. They are also expected to ensure that the organization governs itself in accordance to laws and in an ethical manner. Because they represent the organization, board members have exposures to lawsuits that other for profit corporate board members do. Directors and officers can be accused of mismanagement of the organization’s funds, property and employees. These type of wrongful acts result in financial losses as opposed to bodily injury or property damage.

There are three ways that directors are protected from being sued personally in the course of legal action taken against the board or organization. The first is the use of an exculpatory provision in the charter of the organization as allowed by state corporations codes. The language used in these clauses absolves the director or board members from liability for unintended negligent acts. If it can be demonstrated that the board member, director or officer performed due diligence and acted in a disinterested fashion, it is likely that breach-of-fiduciary-duty claims brought at the beginning of litigation would be dismissed. The second vehicle by which board members are protected is the use of indemnification clauses in the by-laws of the organization. These clauses state that the organization will assume defense costs on behalf of the board members and directors. The third way that members of an organization’s board are protected is through a Directors and Officers Liability insurance policy. This type of insurance coverage will pay defense costs and other monetary damages the director, officer or organization is legally obligated to pay for a claim arising from adverse managerial decisions.

The most common D&O claim for nonprofits are Employment Practice liability claims. These claims can include allegation of discrimination, harassment, retaliation and wrongful termination. These lawsuits are expensive to defend, settle and award and costs can reach to the tens of thousands of dollars. Boards of directors should ensure that employment policies are in place and that they are being applied consistently and uniformly throughout the organization by the executive director and all managers. Check with your state’s Department of Labor for guidelines and ask your insurance broker for best practices guidelines. Many insurers will provide counseling and brochures on employment practices.

Other types of D&O claims can arise from lack of financial oversight. Mismanagement of grant funding from governments and foundations can lead to litigation and prosecution, damage to an organization’s reputation and suspension of grant funding. Ensure agreements made with funders are reasonable and that your organization can meet accounting requirements. Ensure that your organization maintains designated bank accounts with no comingling of assets, maintains proper spending records that account for all assets and implements proper controls and oversight to deter fraud and measure accountability.

For more information on proper nonprofit employee management, please visit the National Council of Nonprofits site at https://www.councilofnonprofits.org/tools-resources/managing-nonprofit-employees. For more information regarding financial best practices for nonprofit board members, please visit NCN’s site at https://www.councilofnonprofits.org/tools-resources/financial-literacy-nonprofit-boards.