Starting and Managing a Nonprofit Organization: A Legal Guide

By Bruce R. Hopkins | Go to book overview

CHAPTER EIGHT
Governance: Board Duties
and Liabilities

The law and practices—some of them just emerging—concerning governance principles pertaining to nonprofit organizations and the matter of potential board-member liability have quickly become some of the principal issues arising in the nonprofit law context. Scandals embroiling for-profit corporations and accounting firms—involving fraud, tax avoidance, conflicts of interests, and questionable accounting practices— led to enactment of the Sarbanes-Oxley Act in 2002. The principles embodied in that legislation are quickly being imported into the nonprofit sector, largely by means of the voluntary adoption by charitable organizations of a variety of policies and procedures.


BASICS OF GOVERNANCE PRINCIPLES

Traditionally, the law as to governance of a nonprofit organization—corporation or otherwise—has been largely confined to state rules. These principles, however, are now quickly becoming part of the federal tax law as well as organizations’ practices. Although new federal law on the subject, in the form of legislation and regulations is not imminent, IRS forms and instructions are playing a major role in reshaping the charitable governance scene.

The essence of the emerging governance principles is that a charitable organization (and perhaps other types of tax-exempt entities) must be managed by its board of directors or board of trustees. It is becoming unacceptable for a board to meet infrequently and be merely the recipient of reports from an organization’s officers and staff. The developing law is requiring the board of the nonprofit organization to become directly involved, be knowledgeable about the organization’s programs and finances, understand the climate in which the entity operates, avoid conflicts of interest, place the objectives of the organization above personal desires—and govern.

These emerging principles are also forcing structural changes in the operations of nonprofit organizations. No longer are the operative documents confined to articles of organization and bylaws. The law is beginning to demand organizational and management policies and procedures, conflicts-of-interest policies, codes of ethics for senior officers, investment policies, and written program objectives and performance measures. Independent audit committees are becoming commonplace. Lawyers,

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