PERSONAL FINANCE: Before Joining a Nonprofit Board of Directors, Do Your Homework
Editor’s Note: In the economy of the Berkshires, non-profit organizations play a major role. Membership of the Board of Directors offers opportunities to invest your time, expertise and money. This is the second of two articles that explore what you should consider before joining a nonprofit board.
Being invited to join the board of directors of a nonprofit is flattering and exciting. The genesis of the invitation is often multifaceted and may include recognition of your previous service as a volunteer, strategic alignment based on your skills and business or professional affiliations, your position within the community served, and your ability to support its fundraising efforts. .
In my previous article on joining a nonprofit board, I discussed the required elements of mutual attraction and mutual expectations between you and the nonprofit organization (the three Ws: “Work, wealth, wisdom”). Once you get past the initial flattery stage, it’s important to do a thorough organizational review, just like you would when considering a commercial job, before agreeing to become a director.
Chemistry with the president and employees
To develop my “commercial job” analogy, think of the process of joining a board of directors like a reverse job interview. Without a great working relationship with the Chairman of the Board, your service to the Board will be an ineffective and miserable experience. I want to emphasize the “working relationship” because you probably already have some degree of personal relationship with the president, otherwise you wouldn’t have been offered a seat. In life, we have all had friends who we personally love, but who we wouldn’t want to work with (or for.) You should speak with current and past directors to learn about the chair’s management style.
It’s never fun to work with an autocratic boss or a completely disorganized boss – even more so when you volunteer. Board meetings should be reasonably structured, while allowing flexibility and encouraging director input. If you still have serious doubts about the chairman’s management style after talking to other directors, it would be in everyone’s best interest to pass on the invitation to join the board. In addition to considering your own comfort, high turnover on the board of directors is badly reflected in an organization.
Unless you are very familiar with the organization, having perhaps been a volunteer, you will want to tour its facilities and meet its employees. (Of course, some small nonprofits may have virtual offices and very few or no employees.) You’ll want the opportunity to ask staff questions, discuss any turnover issues, and get a feel for employee morale.
You will want to review recent financial data for the organization. Without needing to be a CPA or a financial analyst, you still want to develop an understanding, at least in general terms, of sources of income and expenses, and the balance sheet. Does anything jump out at you when you compare income sources year over year? Are there any unusual expenses that should raise questions? Is there an increase in professional fees that could indicate a lawsuit? Can variations in liabilities from year to year be adequately explained? As you go through the financial statements, ask to see the organization’s strategic plan (hopefully they have one) and the current year’s operating budget. On all these points, you must ask yourself: “Does what I am reviewing make sense to me?”
You will need to understand the finances of the organization in order to be an effective administrator. By asking questions during your decision-making process, you will limit surprises in the future. I say “limit surprises” because more than business ventures, nonprofits tend to have more variability when it comes to funding sources.
Nonprofits operate within a restrictive legal framework, and in an appropriate manner. They are unique legal and fiscal creations because, in general, they do not pay income taxes and the donations they receive are deductible from contributor tax. Federal and state agencies that oversee the nonprofit world expect and demand compliance with their laws and regulations. Directors of not-for-profit organizations have a collective duty to know that the organization is in full compliance with these laws, as well as the laws and practices that apply to businesses in the for-profit sector.
Your basic due diligence should include reviewing the minutes of previous board meetings, reading the accountant’s audit report, and confirming the submission of IRS Form 990 to the nonprofit.
Past or threatened litigation is a major cause for concern. You will want to fully understand the nature of any litigation and make your own non-legal assessment of whether it could have been avoided and how it affects the organization’s business practices. Within the confines of attorney-client privilege, you may want to consider asking the organization if you can speak with their attorneys, although before you get to that, you may have already decided to forgo accepting. a position of administrator.
Finally, you should never consider joining an organization that does not have adequate directors and officers (D&O) liability insurance. D&O insurance is designed to protect directors from most legal liabilities during their tenure. Learn about the policy deductibles. Besides liability indemnity, you’ll want to make sure legal fees are covered and know how they can affect overall liability limits. My advice is to ask to see the policy, and if you have any questions, ask to speak directly with the organization’s insurance broker.
Just as your reputation matters to the organization, the reverse is also true. You don’t want to associate with an organization that is in the press for the wrong reasons. As a manager, your reputation will be tied to that of the organization – for better or for worse. You want to be sure that your association will be worth your commitment – and your implied approval – before you become its representative. By investing time in initial due diligence, you increase the likelihood that your tenure as a director will lead to a productive use of your time and talents, and that your service will be a positive experience. Being a responsible director is a lot of work, and when the fit is right, it’s an extremely rewarding experience.
The author does not provide tax, legal, financial, or investment advice. This material has been prepared for informational purposes only. You should consult your own tax, legal, financial, and investment advisers before committing to any transaction.