Managing Board Member’s Liability Risks — Three Handy Checklists
Not-For-Profit Advisor, 2004 Spring


Although the following article is  written with a focus on family foundations, we at Plante & Moran feel there is applicability to all not-for-profit organizations.

Board members control family foundations and are charged with responsibility under federal and state law for the effective operation of those foundations. Anyone joining a nonprofit board — whether a family foundation or public charity — should be concerned about personal liability. One of the best ways to manage liability is to use a checklist. The three checklists presented here provide guidance for new board members (to be reviewed before they agree to join the family foundation board), existing board members (to review their annual participation in foundation activities), and for the board as a whole (to review the foundation manager’s operations compliance).

Personal Checklist Before Joining the Board

(Pre-director Review)

• Ask for a written list of board duties and meeting dates. How many meetings are you expected to attend? Does the organization provide board training? How many committees will you be expected to serve on, and how often do those committees meet?

• Determine why you were asked to join the board. Do you have specific expertise, fundraising ability, or other specific talents that make you an attractive board member?

• Ask for a copy of the charity’s current strategic plan.

• Review the organization’s last two annual reports. How clearly is the financial information presented? How well does the report communicate the charity’s mission, services, and use of funds?

• Check Guidestar (www.guidestar.org) to review the charity’s latest Form 990. Does this information correlate with information presented in the annual report? What is the relationship of the charity’s expense to its expenditures on programs? How do staff salaries compare to national norms?

• Review the current list of board members. Contact several to determine if the charity believes in an active board involvement (or are board members expected to show up, vote, and not get involved) and if the board and staff have a strong, open working relationship.

• Ask the chief executive officer (or CFO) to share a written description of the foundation’s board indemnification policy, D&O policy coverage and limits, and other insurance covering the charity and its volunteers.

• Ask how the organization funds its operations. Does it rely on government grants, individual donations, fees for services, membership fees, or other revenue?

• Ask how the organization manages reserves. If it has an endowment, ask to see the most recent investment returns.

Comment: Asking these questions will provide critical information to the potential board members and may help add formality and much-needed structure to the family foundation. If the foundation is unable to provide critical information on the list (meeting dates, responsibilities, board role, latest 990 (or 990 PF), and indemnification policies), there are two recommended courses of action. You can insist the nonprofit meet those standards before joining the board, or you can seek advice of counsel about the wisdom of accepting the appointment.

Personal Checklist for Board Service (Annual Evaluation)

• Did you attend the board’s annual workshop and/or training session?

• Did you attend at least 80% of the scheduled board meetings?

• Did you review the minutes of each meeting you attended to ensure the board’s actions were correctly reflected?

• Did you review the minutes of meetings you did not attend to learn the actions taken by the board in your absence?

• Did you participate in key decisions made by the board, asking questions, listening to the opinions of others, and voting only when you had the facts and professional input needed to make a decision?

• Did you review the charity’s budget and financial statements on a monthly or quarterly basis, asking questions to clarify items you did not understand? Did you raise concerns when those figures varied from those projected and approved?

• Did you review the charity’s audited financial statements? Were those prepared in a timely manner? Did you review the accompanying management letter and address all items raised as a concern?

Comment: If you answered “no” to any of these questions, you may need to consider whether that was because the information was not readily available (and you should ask for it as you move into the next year) or whether you have the time or interest to continue as a member of the board.

Board’s Annual Operational/Management Checklist

• Has every board member been asked to sign a conflict of interest statement, agreeing to put the interests of the charity above personal interests and to reveal any conflicts of interest in matters put before the board?

• Has the board evaluated the performance of the charity’s CEO? Was this performance review in writing? If there were material issues or questions, were these shared with the board?

• Is the board satisfied with the performance of staff? Did the board review the salary levels for the chief executive officers and staff, comparing those to salaries of comparable nonprofits?

• Does the board have a current strategic plan? If not, are there plans to engage in this long-term planning process?

• Has the organization made its financial statements available to the board? Has the finance committee reviewed and approved these statements?

• Is the charity operating in accordance with its budget and

with its available revenues and assets?

• Has the board reviewed (annual review) the charity’s financial policies investment management policies, gift acceptance policies, and donor data policies?

• Did the finance committee, and board, review the endowment’s investment returns, comparing those returns to investment policy guidelines?

• Do the organization’s fundraisers operate effectively and in accordance with ethical standards?

• Did staff share statistics on the charity’s performance in serving the public good? For example, did it provide data on the number of individuals served, or some other measure of its programmatic effectiveness?

• Has the organization filed all tax returns with the IRS? Has it filed a copy of its 990 with the state attorney general?

• Did the charity have an audit performed by an outside firm? Has the board received those results? Were any exceptions noted on the management letter?

• Did the charity perform an annual risk assessment? Does the charity have adequate insurance coverage based on that assessment? Does the charity have policies in place ensuring claims will be reported on a timely basis? Was director coverage reviewed and shared with the board?

• Was the board informed of lawsuits or other liabilities incurred by the charity during the year?

• Does the charity have a strong nominating committee with a process designed to recruit the most effective board members? Did the committee meet and nominate new directors successfully?

Comment: The answers to these questions are critical to the foundation’s or charity’s liability management. If you answered “no” to any of these questions, the organization’s management must take steps to correct the oversight. If it is unwilling to do so, you may want to consider resigning from the board. At a minimum, you should seek advice of personal counsel.