Board of Directors-2 (Legal)
Articles, Bylaws, Resolutions, Policies
Articles of Incorporation
The articles of incorporation (or other forms of description, such as charters, constitutions, articles of association, etc.) are established when the organization files for incorporation with the appropriate state or provincial agency. A Board of Directors gets its authority from the articles. This governing document specifies, for example, its name, the purpose or mission of the organization, place of business, primary officers, etc.
In
Corporate Bylaws (Board's internal specification of how the Board will be organized and operated)
Bylaws specify the Board's rules of internal operation, for example, number of members of the Board, length of the terms of membership, all of the officer positions, how meetings are conducted, etc. In some states in the
Board Resolutions (single acts of approval for, eg, contracts, dues, etc.)
Articles, charters, constitutions, etc., and bylaws are ongoing rules. A resolution is used by the Board to draw attention to a single act or Board decision, for example, to approve or adopt a change to a set of rules, new program, new contract, etc. Resolutions are included in the minutes for the Board meeting. Here is a sample.
Board Policies (Board's guidelines for how members will work together)
Board policies are guidelines for how the Board members can best work together, e.g., when they want to meet, how members should be on Committees, how they recruit and orient new members, how they manage for consistent meeting attendance, how the Board will work with the chief executive officer, how they will avoid conflict-of-interest, etc.
Conflict of Interest
NOTE: Many experts believe that the conflict-of-interest terms should be in the bylaws, rather than Board policies. Often, state statute (which takes precedence over bylaws) specifies terms to avoid conflict of interest.
What is a "conflict of interest?
What is a conflict of interest?
Conflict of interest is difficult to define, yet many people think they know it when they see it. The legal definition of conflict of interest, usually set out in state laws governing nonprofit corporations, is very specific and covers relatively few situations. Most conflicts fall into a gray area where ethics and public perception are more relevant than statutes or precedents.
Conflict of interest arises whenever the personal or professional interests of a board member are potentially at odds with the best interests of the nonprofit. Such conflicts are common: A board member performs professional services for an organization, or proposes that a relative or friend be considered for a staff position. Such transactions are perfectly acceptable if they benefit the organization and if the board made the decisions in an objective and informed manner. Even if they do not meet these standards, such transactions are usually not illegal. They are, however, vulnerable to legal challenges and public misunderstanding.
Loss of public confidence and a damaged reputation are the most likely results of a poorly managed conflict of interest. Because public confidence is important to most nonprofits, boards should take steps to avoid even the appearance of impropriety. These steps may include:
- Adopting a conflict-of-interest policy that prohibits or limits business transactions with board members and requires board members to disclose potential conflicts.
- Disclosing conflicts when they occur so that board members who are voting on a decision are aware that another member’s interests are being affected.
- Requiring board members to withdraw from decisions that present a potential conflict.
Establishing procedures, such as competitive bids, that ensure that the
Accountability, Legal, Lobbying, Ethics and Risk
There is more emphasis on Board accountability than ever before, especially because of growing public concern in the U.S. about large salaries paid to CEOs of large, publicly traded for-profits; numerous occasions of corruption in those types of organizations; and the "Enron" debacle where the public perceived that the Enron Board did not exercise due diligence in governing that corporation. At its most basic, accountability is having to report to a certain constituency (for example, to stockholders in the case of for-profits and to the public in the case of nonprofits) about what an organization is going to accomplish and also the status of achieving those accomplishments. Accountability is being responsible and accepting the consequences of the actions of the organization, whether those consequences are positive or negative. Progressive and socially responsible organizations take that definition of accountability even further and see themselves as being responsible to "stakeholders" -- to groups of citizens who have a direct or indirect interest in the operations and effects of the organization.
Legal Considerations
When Considering Legal Protection for Directors and the Organization:
- Directors cannot abdicate their responsibility to be in charge and to direct
- Directors must make certain the organization is operating within a legal framework
- Directors have a legal responsibility for the protection of all assets
- Directors must validate all major contracts by giving and recording formal approval
- Directors must attend most board meetings, not just on occasion. Absence from a board meeting does not release the director from responsibility for decisions made. A pattern of absence may indeed be presumed to increase an individual's liability because she/he cannot demonstrate a serious dedication to the obligations of the position.
- There is no absolute protection against someone bringing suit against you. Conscientious performance is the standard. The best defense is a good offense: strive hard to do everything right and be able to show that you tried hard, then you are much more like to be OK.
- Remember: The assumption in the law is not necessarily that you must make the correct decision, but that you must make the decision correctly. (It helps greatly to be able to show that the board made serious consideration of an action before the action was taken. Board minutes should reflect this care taken.) It is not a crime to be wrong, but did you ask the right questions and respond as another reasonable individual would in that situation? - Board members are more at risk for taking no action than for taking the wrong action for the right reasons.
- While you have the right to rely on information supplied to you in due form, and on the accuracy and integrity of others (particularly in areas of special competence) you must use reasonable judgment in this area, too.
- If it smells fishy, find out where it has been swimming -- and how long it has been dead.
Key Suggestions:
- Attend meetings- Read minutes and make sure they are correct
- Record objections and ensure a debate on controversial or difficult issues. It is your duty to review plans and policies and how they are carried out, not to be accommodating to people because they have been around for a long time in the organization and are doing their best.
- Always have comprehensive and up-to-date personnel policies that are reviewed by a professional, authorized by the board and well understood by management. If a manager's actions are not in accordance with a policy, courts will usually assume the manager's acts to be the official stance of the organization and to have superseded the policies.
- Ensure that all employment and income taxes are paid. Understand the distinction per the IRS between an "employee" and an "independent contractor."
- Schedule a presentation from an insurance agent who is well versed in board liability matters. Have him or her explain: general liability, professional liability, workers compensation, asset protection, and directors and officers insurance. If you get directors and officers insurance, be sure the policy covers employee suits against the organization.
- Review financial statements and insist on understanding them. Most boards probably should have two levels of reporting: in detail for a sophisticated finance committee, and in a simplified form for monthly reports to the rest of the board, supplying data which has been reviewed by the finance committee.
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