April 19, 2012
Prompt Action by Nonprofit Board Members Key to Avoiding Fiduciary Liability
As reported by the Daily Tax Report, at a Georgetown University Law Center program yesterday on Nonprofit Governance, Missouri Attorney General Bob Carlson provided simple advice - nonprofit boards can avoid potential legal liability for a breach of fidicuary duties if their reaction to such breach "is quick and shows immediate action." Carlson provided the example of a nonprofit executive director that failed to share financial information with the board of the directors, resulting in the board being completely unaware of the organization's near collapse. Upon learning of the dire financial status of the organization, the board immediately fired the executive director, installed an interim director, “and essentially righted the ship on the fly, so the organization did not go under.” Their prompt reaction, opined Carlson, prevented them from being sued. Carlson stated that he typically gives Board members the opportunity to correct a fiduciary problem, and only pursues lawsuits if there is not a sufficient response.
Along with IRS Exempt Organizations Director Lois Lerner, Carlson advised erring on the side of transparency, with both officials providing examples of items that nonprofits should considered posting to their websites: financial statements, executive compensation, and the minutes of meetings. He believes that more transparency ultimately leads to better fundraising ability, because donors often complain about their lack of knowledge with respect to the use of their donations. Both Carlson and Lerner agreed that recruiting and retaining "engaged" board members is essential to smooth operations and avoidance of trouble. In addition, board knowledge of its governance responsibilities leads to overall better decisionmaking.
NOTE: Lerner advised that the IRS will release the preliminary results of its study of governance on April 19, 2012.
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