“To whom much is given, much is expected.” Your mother’s words echo in your head as a friend calls to ask you to join the board of a well-respected organization. Maybe it’s the local Y. The board of trustees of your kids’ school. A hospital. Your town’s chapter of a medically-focused fundraising organization. Your alma mater’s board of governors. “Hmmm… maybe it is time to give back,” you think to yourself.
Serving on a board of directors, while both personally rewarding and with great benefits to our communities, is not something that should be taken lightly – or without due diligence – to be sure that as you give your time and talent, you are not unwittingly putting your personal assets at risk for the actions of the board. Good to serve the greater good; better to serve without risking your family’s security.
While it is true that board members of nonprofit (510(c)3) organizations may have additional protection from personal liability, they are not exempt from any and all liability that causes harm to the organization, its employees or beneficiaries. While not quite as dramatic as that of for-profit boards of directors, some say that recent case law developments are beginning to treat outright negligence as gross negligence, thereby pulling directors into the exceptions to the existing liability shield that was put in place to protect them.
What are some things to consider when asked to serve on a board?
First, understand the mission of the organization and how the board functions to support the mission. Any measure of potential legal liability will involve how well the board member performs his/her duties to carry out the nonprofit’s goals. Can you support it? Be proud and passionate about it? Unfortunately, not even nonprofits are exempt from embarrassment and scandal.
Second, can you carry out your legal duty as a board member? Can you regularly attend meetings? Participate fully in the meetings so that you are well-informed before voting? Frequent travel resulting in missed meetings may not exempt you from any resulting liability based on ignorance.
Third, can you carry out the fiduciary duties without conflicts of interest and with the support of competent staff and other board members? Turbulent financial times and legislation like Sarbanes-Oxley require additional oversight of financial, audit and investment activities, much of which rests on the board’s shoulders.
Finally, what does the organization provide its board members as a first line of protection against financial consequences? Does it have a written indemnification in its articles or bylaws to reimburse its directors and officers against liability incurred as a result of their activities on behalf of the organization? Has the organization purchased directors’ and officers’ liability insurance? If so, what is the limit and is it sufficient for the officers and the number of board members? Will the organization’s insurance policy pay for defense costs in addition to the policy limit or is it included in the limit? Does it include protection from actions against the board for employment related lawsuits?
So, you’ve answered the call from your friend. You’ve heeded your mother’s words and considered the role on a board. You asked some serious questions. You are excited about the mission of the organization and its impact for the greater good.
But you still have some nagging concerns that potential personal liability might impact your family’s assets. Can you do anything beyond diligent governance and insurance provided by the organization? Perhaps. Some insurers offer individual nonprofit directors’ liability insurance.
If you would like to discuss this further, that’s why we’re here at MAGIS. Give us a call!