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The Fiduciary Role of a Member of a Board of Directors

Posted by HMS Law Group | Nov 17, 2016 | 0 Comments

After the announcement of unprecedented enforcement action by the Federal Trade Commission and all 50 states targeting four non-profit organizations, leaders of non profits have come to realize that they are operating in an environment of increased scrutiny from authorities. While it has always been prudent to contemplate the balance of risks and benefits to serving on the Board of Directors at a non profit, it may be time to take a fresh look when accepting such an opportunity. In this newsletter, we will help you to understand the risks, rewards, and responsibilities that non profit Board members face by addressing some of the key considerations that the role requires.

The Risks

The rewards of serving on the Board of Directors at a non profit organization are numerous and diverse. Such service is not free of major risks, however, including the risk of litigation over compliance issues and the Board's handling of certain activities. Non profits must comply with laws and regulations in major areas that include fundraising, employment, tax exemptions, and unrelated business income tax (UBIT). Although universities have been a primary target for recent UBIT investigations from the IRS, regardless of your exempt purpose, the IRS will examine every small transaction or even parts of a transaction to determine whether the transaction furthers your organization's tax exempt purpose. The distinctions can often be subtle-for example, income-producing real estate is usually structured to avoid UBIT, but a non-profit's ownership of a parking lot or garage may trigger tax liabilities on a portion of the income derived.

In addition, although volunteers are an integral part of any non profit operation, strict screening for potential volunteers along with active supervision of current volunteers is essential to protect against litigation. Non-profit Board members have been named in lawsuits alleging negligent screening and supervision of volunteers, so regular assessment and revision of policies and practices can be useful. Strong volunteer policies often include background screening of credit history, motor vehicle records, and criminal records; mandatory training and assent to receipt of training materials; and even dismissal of volunteers who act improperly.

The Responsibilities

Service on a non profit Board is similar in many regards to service on a corporate Board. A director of a non-profit Board must follow (1) a duty of care by acting as a prudent person, (2) a duty of loyalty by faithfully pursuing the interests of the organization instead of outside interests or personal interests, and (3) a duty of obedience by acting to further the organization's stated mission. Other specific responsibilities may include the review of compensation structures for the non-profit's senior management, supervision of senior management, budget approval, financial monitoring, strategic planning, and even crafting short term goals for the organization. Non profit Board members often get closer to the operations of the entity than their corporate counterparts and may be expected to undertake tasks that are comparatively more granular and tactical.

The Rewards

If you are passionate about the mission of the non profit that you serve, you may find your work to be incredibly rewarding professionally and personally. Many non profit Board members report that their service enables them to build strong relationships in the business community, as well as leadership skills that augment their existing work life. Giving back in a non profit setting provides fertile common ground for developing business relationships with other members of the community who may have been previously inaccessible. In addition, studies have found that non profit work can increase happiness for organizational members, driving a sense of personal worth and achievement. If you are aware of the risks and feel ready to tackle the challenges of service, you may find the ultimate payoff is well worth your time and effort.

If you would like to schedule a fiduciary training session for your non-profit's Board of Directors or have questions regarding the operation of a non-profit, contact the attorneys at HMS Law Group.

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