Becoming a Nonprofit Board Member (Part 3)

I started this series with a hypothetical invitation for the reader to join the board of a local nonprofit organization. In my last two articles, we looked at the responsibilities of a board of directors and the duties a board member owes to his or her organization. So far, so good; nothing has scared you off, right? Well, now it is time to finally make the decision about whether you want to say yes to becoming a board member for this particular organization. To answer this question, your due diligence needs to focus on two areas — one internal and one external.

The internal questions relate to whether you are right for the board. You need to look yourself in the eye and ask some hard questions. Remember, the organization has certain expectations of you as a director. And you need to understand exactly what these expectations are, in order to decide whether or not you are prepared to make the sacrifices of time, effort, and — in many cases — money required.

The first question I ask prospective board members to think about is whether they are passionate about the organization and the contribution it is making to society. A lot of experts will tell you that passion for the organization and its cause is perhaps the most important thing that anyone can bring to an organization. When I list my desired qualifications for a board member, I list passion for the organization at the very top of the list. If you don’t have passion, you may find yourself unwilling to make the sacrifices or put in the time and effort to meet the organization’s expectations.

The second thing you should ask yourself is whether you think you can contribute to the board. You have already determined that you have a passion for the cause, but that may not be enough. Do you have knowledge, skills, experience, contacts, or some other qualities that will help the board perform its functions? You may wish to ask those who extended the invitation what they see as the characteristics that make you a desirable board member. If they are a high-functioning board, they will have thought this question through in advance and be prepared to offer you a specific answer. There are a great many reasons they might think you would be a good board member, so you should ascertain just what they have in mind and then ask yourself if you see your ability to contribute the same way they do.

The third question is whether you can give the board the time and energy it deserves. All of us are busy. Many of us have work or family commitments that tax our ability to give time and/or energy to a nonprofit — even one that we have a personal passion for. You need to find out what the time requirements are, then decide whether you can realistically meet those expectations or not.

The fourth question has to do with financial commitment. Many boards have director expectations that are financial in nature. This may come in the form of a direct gift. It may come in the form of an expected purchase of tickets or merchandise offered by the organization. Or it may simply be that they expect you to absorb the costs of being a director, such as the price of meals, travel, and gas. Whatever form these financial expectations take, you need to be prepared to meet them before signing up for board duty.

Finally, you need to ask yourself if you can put the interests of the organization ahead of your own. Remember, this is part of your duty of loyalty to the organization. Regardless of your personal feelings, aims, and goals, the interests of the organization must come first; and you need to honestly ask yourself whether you are prepared to do this.

OK, now you have determined that you are right for the tasks ahead. What’s left? Simply this: You need to now determine if the organization is right for you. When buying real estate or anything tangible, the prudent buyer will research the product and determine if it is right for him or her. The same is true of deciding to join the board of an organization.

You already know what the mission and programs of the organization are; you asked this question when you were determining if you had a passion for the organization. So let’s turn to other critical questions.

I recommend you first take a look at the other leaders of the organization, both staff and board. Do you know them? Are they people you respect or can respect? Are they people you can work with on a personal basis? You need to be comfortable with the people you are sharing responsibility with. In the course of board work, conflicts can develop even among people that know, like, and respect each other. Don’t aggravate this by choosing to be involved with people you are not comfortable with. If you don’t know some of the people you might be dealing with personally, ask around in your network of friends and professional colleagues. You can probably find someone you trust to let you know the quality and character of those you will be working with.

Second, find out how the board has defined its responsibilities. Having read the first article in this series, you know what responsibilities the board should have. So find out if they know what they should be doing. You should also find out through discussions with current board members or staff executives, how the board functions in carrying out their responsibilities. Are they keeping their focus at a high level? Or are they groveling in minutia? You want the former; and you want to run, not walk, away from the latter.

Next, turn your attention to the financial condition of the organization. At a minimum, you should review the organization’s last few annual reports and their Form 990s. These are public documents and are required to be made available to the public upon request. You may also be able to find reports or evaluations of the organization on the Internet. Guidestar.org will have copies of the Form 990s if they are being filed; and there are groups that evaluate nonprofit organizations, particularly charities, with regard to their effectiveness and practices. Use these resources to help focus your questions to the organizational representatives you are dealing with.  You should also ask to review the audit results if the organization is of a size that requires an annual audit. Pay special attention to any management letter that the auditors prepared. This letter will contain insights into the organization that may not be revealed in the formal documents.

Next, find out where the organization is going. The organization should have a vision and a strategic plan to move itself forward. See what these say, and then ascertain whether the board is actually paying any attention to the plan. Some organizations have strategic plans that are no more than a dusty notebook on the shelf. Others have plans that are living documents, consistently being referred to, with progress measured toward the established goals. You want to be associated with an organization that fits the latter description, and not the former.

The fifth question concerns how the board does its work. Are there active committees that carry on the work of the board, or is the worked centered in the full board? Also try to ascertain whether the full board is really making decisions, or if there is a smaller group within the board that seems to be making the decisions and then informing the other board members after the fact. Be especially wary of an overactive Executive Committee that has cornered the decision-making in an organization, to the detriment of the full board.

The sixth question is how will the board prepare you to be a fully participating board member. There will always be some uncertainties for new board members and some period of adjustment as you develop your “sea legs” and get the feel for operating within the board environment. But the organization owes you an orientation process to develop the knowledge and understandings necessary to contribute. At a minimum, you should understand the following: (1) the organization’s legal documents, including its bylaws; (2) the structure and operation of the organization; (3) the key issues facing the organization now and in the near future; (4) what the board has been doing (in the form of minutes and/or reports); (5) their financial documents (if you have not already reviewed them); and (6) how the board conducts its business, including its operating rules, policies, agenda-setting, and meeting management rules. This is the short list of things you should look for in the organizational orientation. If you don’t get offered such an orientation, ask for one. You particularly don’t want to assume the legal obligations of a board member if you are in the dark about what is really happening within the organization.

The final question that needs to be asked is what protections does the organization offer its directors. This is an absolutely critical item and should be a deal-breaker for you if you are not comfortable with the protections provided. The American Bar Association’s Guidebook for Directors of Nonprofit Corporations states: “In recent years, litigation against directors of many varieties of nonprofits has increased in frequency. … [A]ll directors need to understand the action that may be taken to protect them against liability related to their service on [a] nonprofit corporation’s board.” (p 189) Two particular areas that should be examined are indemnification and insurance.

Indemnification is a term describing what the corporation might repay a director for expenses arising from a lawsuit against the director. Such indemnification is controlled by the laws of the particular state in which the corporation operates as well as by the bylaws of the organization. There are two types of indemnification: “mandatory indemnification” and “discretionary indemnification.” The prospective board member should clearly understand what the rules are for his or her organization. The details of this highly technical, legally complex subject are well beyond the scope of this short article. Suffice it to say, that this is a critical topic for the prospective director and one that should be thoroughly understood before committing to an organization. It might even be worthwhile consulting a personal attorney on this matter before agreeing to become a board member.

There is one additional item related to indemnification that should be explored, and that is the advancement of expenses. In some cases, the corporation’s indemnification procedures may call for reimbursement only after the fact. This could create big financial challenges for the director involved. The best arrangement is one that provides for the advancement of expenses, so that the director’s legal defense against any accusations can be undertaken by the organization.

The second subject regarding protection from liability is insurance. Even if the corporation has indemnification procedures, the ability of the corporation to fulfill those promises is dependent upon its financial circumstances. It is desirable to have insurance against this risk in addition to the indemnification offered. The type of insurance you want to particularly ask about is called Directors and Officers (D&O) insurance. (Note: Some large nonprofit corporations self-insure against such risk.) The key thing to understand about D&O policies is that the coverage can depend upon the laws of the state involved and the terms of the individual policy offered. Prospective directors should understand what the terms of their policy are and should ideally be provided with a memorandum by the organization that outlines the D&O coverage being offered. As with indemnification, this is a highly technical and legally complex subject that should be explored with trained advisors before making a final decision.

Whew! That was a lot of work. Who would have thought when you got the invitation to join a local nonprofit board that the process of deciding whether to say yes would be so long and arduous? To the extent that my series has complicated your life or made your decision difficult, I apologize. But at the same time, isn’t it better to be informed in advance than to discover these questions after an uncomfortable situation has occurred down the road? Please don’t be discouraged. Most good nonprofits will pass all of the tests above with flying colors.

In closing, let me congratulate you on your willingness to give back to the community, and express my hope that your service on a nonprofit board is satisfying and fulfilling. It is important to your community that good people like you serve on these nonprofit boards!