It doesn’t matter how well-established you are in your career. It’s an honor to be invited to serve on a board of directors – especially if it’s a nonprofit board for a cause that means something to you. However, did you know that being a board member could put your personal assets at risk (regardless of whether it’s a for-profit or nonprofit organization)?
Unfortunately, nonprofit organizations face many of the same risks as for-profit organizations. This means members of a nonprofit board can be held personally responsible for the organization’s real or alleged misconduct – just like for-profit board members. However, before you turn down the opportunity, it’s important to understand that there are steps you can to ensure you, your assets, and your financial security are protected.
Here are six essential questions to explore fully before saying “yes” to any invitation to serve on a nonprofit board.
What’s Expected of the Nonprofit Board Members?
One of the risk exposures of serving on a nonprofit board is being accused of misguiding the organization or not providing proper governance. So, it’s important to understand what’s being asked of you prior to accepting the invitation, including any specific governance responsibilities, the expected time commitment, and whether there are financial/fundraising responsibilities.
Does the Nonprofit Have Employees?
Employees are an organization’s biggest asset – and one of their greatest liabilities, too. Failure to comply with the many employment laws can result in wrongful termination, sexual harassment, and discrimination lawsuits (among countless other possibilities). Despite not being the manager who’s being accused of acting in a certain way, board members can be held accountable if proper policies and procedures weren’t put in place to avoid such circumstances.
Be sure to ask about whether there are written employment policies and procedures, employee handbooks, and organization-wide trainings – and whether HR is as involved in all employee-related processes as they should be.
Can You Review Governance Documents?
Board members are exposed to risks associated with misuse of funds, fraud, and misrepresentation of assets. So, it’s important to understand the state of the nonprofit’s financial circumstances and business documents – as well as the protections offered to board members by the bylaws. Ask to review financial documents, including budgets, salaries, and resource allocations, and make sure you understand what percentage of the organization’s funding is used for administration versus fulfilling the mission. Also, be sure past meeting minutes and other key governance documents are accessible, as they’ll play a key role if a lawsuit does arise.
What Do the Bylaws State About Board Member Indemnification?
Bylaws are basically the operating manual for the organization’s board of directors, so it’s important to understand what they state. This is especially true when it comes to whether the bylaws provide as much liability protection as is permitted by law. In addition, the bylaws should clearly state whether (or not) the organization can offer financial advancements for the legal costs board members would take on if a lawsuit were to occur.
Are There Any Past or Pending Lawsuits or Investigations?
This may seem like a no-brainer, but it’s important to understand whether the organization is in any trouble before you join the board. If they are involved in pending investigations or litigation (or there’s been some in the past), be sure you consult with an attorney before aligning yourself with the organization.
Do They Provide Directors & Officers Insurance Coverage?
Directors & Officers (D&O) insurance[MBG1] protects the organization’s leaders, including nonprofit board members, from the costs associated with mounting a defense and paying any damages, such as awards and settlements. Not only do you want to ensure they have D&O coverage – you also want to ensure they offer quality coverage. Inquire about the scope of the coverage, the liability limits, and the financial rating of the insurance carrier (as a measure of its reliability). Talk with your commercial insurance broker to make sure you’re fully covered.
Let’s Discuss Whether You’re Fully Covered.
At Swarts, Manning & Associates, we provide a unique perspective on all of your commercial coverage options, and we help to determine which carrier best fits your business needs. We strive to find you the broadest coverage at the best available rate. Give us a call to get started: (833) 878-2820.Each week, Swarts, Manning & Associates covers relevant topics for your business. Stay tuned to hear more discussions about managing your insurance and industry-specific tips.
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