PERSONAL FINANCE: Before joining a nonprofit board, do your homework

editors note: In the economy of the Berkshires, nonprofit organizations play a major role. Board membership offers opportunities for investment of your time, your expertise, and your money. This is the second of two articles that explore what you should consider before you join a nonprofit board.

Being invited to join the board of a nonprofit organization is flattering and exciting. The genesis of the invitation often is multifaceted and can include an acknowledgment of your prior service as a volunteer, a strategic alignment based on your business or professional skills and affiliations, your standing within the community being served, and your ability to support its fundraising efforts. .

In my previous article on joining a nonprofit board, I discussed the requisite elements of mutual attraction and mutual expectations between you and the nonprofit (the three W’s: “work, wealth, wisdom”). Once you are past the initial flattery stage, it is important to conduct a hard-nosed review of the organization, as you would when considering commercial employment, prior to agreeing to serve as a director.

Chemistry with the chair and employees

To expand upon my “commercial employment” analogy, think of the process of joining a board as a reverse job interview. Without a great working relationship with the board’s chair, your board service will be an ineffective and miserable experience. I want to emphasize “working relationship” as you likely already have some degree of a personal relationship with the chair or you wouldn’t have been offered a seat. In life, we’ve all had friends whom we like personally, but wouldn’t want to work with (or for.) You should speak with current and past directors to learn of the chair’s management style.

It’s never fun working with an autocratic boss, or a completely disorganized boss – even more so when you’re volunteering your services. Board meetings should be reasonably structured, while allowing for flexibility, and encouraging director input. If you still have meaningful doubts about the chair’s management style after speaking with other directors, it would be in everyone’s best interest to pass on the invitation to join the board. Besides considering your own comfort, high board turnover reflects poorly on an organization.

Unless you are very familiar with the organization, perhaps having served as a volunteer, you will want to tour its facilities and meet its employees. (Of course, some smaller nonprofits may have virtual offices and very few, if any, employees.) You will want an opportunity to ask the staff questions, discuss any turnover issues, and get a sense of employee morale.

financial considerations

You will want to review the organization’s recent financials. Without needing to be a CPA or financial analyst, you still want to develop an understanding, at least in general terms, of the sources of revenues and expenses, and the balance sheet. Does something jump out at you when comparing year-over-year sources of revenues? Are there unusual expenses that should raise questions? Is there a spike in professional fees that might indicate a lawsuit? Can changes in year-over-year liabilities be adequately explained? While going through the financials, ask to see the organization’s strategic plan (hopefully they have one) and the current year’s operating budget. On all these points you need to ask yourself: “Does what I’m reviewing make sense to me?”

You will need to understand the organization’s financials in order to be an effective director. By asking questions during your decision process, you will limit surprises in the future. I say “limit surprises” because more so than with commercial enterprises, nonprofits tend to have more variability when it comes to funding sources.

legal considerations

Nonprofits operate within a restrictive legal framework, and appropriately so. They are unique legal and tax creations because, in a general sense, they do not pay income taxes and the donations they receive are deductible from the contributors’ taxes. The Federal and state agencies that oversee the nonprofit world expect and demand compliance with their laws and regulations. Directors of nonprofits have a collective duty to know that the organization is fully compliant with these laws, and the laws and practices that apply to businesses in the for-profit sector, as well.

Your basic due diligence should include reviewing the minutes of past board meetings, reading through the accountant’s audit report, and confirming the submission of the IRS Form 990 nonprofit filing.

Past or threatened litigation is a reason for major concern. You will want to fully understand the nature of any litigation and draw your own nonlegal assessment as to whether it could have been avoided, and how it reflects upon the organization’s business practices. Within the bounds of attorney-client privilege, you may want to consider asking the organization if you can speak with their attorneys, although before reaching this point, you may already have decided to pass on accepting a directorship.

Finally, you should never consider joining an organization that doesn’t have adequate Directors and Officers (D&O) liability insurance. D&O insurance is designed to protect directors from most legal liabilities during their tenure. Ask about the policy’s deductibles. Besides indemnification from liability, you will want to ascertain that legal costs are covered, and learn how they may impact the overall liability limits. I advise asking to see the policy, and if you have questions, ask to speak directly with the organization’s insurance broker.

final thoughts

Just as your reputation matters to the organization, the reverse is also true. You don’t want to associate yourself with an organization that is in the press for the wrong reasons. As a director, your reputation will be attached to that of the organization – for better or worse. You want to be sure that your association will be worth your commitment — and your implied endorsement — prior to becoming its representative. By investing time in upfront due diligence, you are increasing the likelihood that your directorship will lead to a productive use of your time and talent, 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 is 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 advisors before engaging in any transaction.

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