Board Blog Number 4 • December 2018 • By Matt Jakubowski of Arthur J. Gallagher & Co.
It may be the last thing you are thinking about when you volunteer on the board of a nonprofit, but are you aware you might be putting your personal assets at risk? The reason for that is nonprofits face many of the same threats as for-profit businesses, including the potential for lawsuits. If the nonprofit is sued and lacks the proper planning and protection, you could lose your savings, your home and other assets.
Nearly two out of three nonprofits reported a Directors & Officers liability claim within the past 10 years.1 These lawsuits can be brought by donors, vendors, competitors, employees, government regulators and others, and they are not limited to suing the nonprofit organization. As a member of the board, you could also be sued personally, and be responsible for the cost of hiring your own attorney to defend yourself.
“Serving on a nonprofit board can be a commitment of your time, talent and treasure,” says Thomas Herendeen, Non-Profit D&O Product Manager for Travelers. “You’ll want to take the time to understand the nonprofit’s mission, how it operates and whether you might have any conflicts of interest before you decide to join a board.”
Asking a few questions in advance can help you protect your personal assets, while also helping to ensure that the nonprofit has the strong board governance procedures and the proper coverage in place to protect its mission.
Following are six things to consider before you join a nonprofit board.
1. What’s expected of you as a board member? Learn what other board members will expect of you, such as:
- Are there specific governance responsibilities?
- What is the time commitment and how many meetings does the nonprofit hold?
- Are you expected to fundraise on behalf of the group?
2. Who else sits on the board of directors?
- Who chairs the board? Consider meeting with the chairperson before committing to the board.
- What is his or her leadership style? Is the board committed to effective governance?
- Attend a board meeting before you commit to joining the board.
3. Does the organization have employees?
- If so, does the organization have an employee handbook and other written employment policies and procedures?
- Are managers and employees trained to make sure that they comply with employment laws?
- Are personnel decisions centralized and made by human resource professionals?
4. Have you reviewed the reporting and corporate governance documents and the bylaws?
- Review budgets, employee salaries and resource allocations, among other financial documents.
- What percentage of funds are used for administrative costs compared to fulfilling the organization’s mission?
- Check to see if complete, up-to-date board meeting notes and other records are maintained. These could help in a future dispute.
- Do the bylaws provide indemnification to the board members to the fullest extent permitted under the law?
- Do the bylaws provide for the advancement of defense expenses?
5. Are there pending or past lawsuits or regulatory investigations?
- Recent auditing issues or internal disagreements could influence your decision to join the board.
- Check the media and charity evaluation websites for negative ratings or reviews.
6. Does the organization have a Directors & Officers Liability insurance policy?
- If so, it’s also important to understand the scope of coverage and limits of liability provided to make sure you’re protected.
- What is the financial rating of the insurance carrier?
- Does the carrier offer risk management tools to help to the nonprofit organization mitigate risk?
It can be a rewarding experience to serve on a board of a nonprofit organization, but it is important to protect yourself by doing the legwork necessary to make an informed decision about all the potential risks before doing so.