Many businesses value involvement in the community as a way to increase their exposure and contribute to worthy causes. Volunteer service on the board of directors of a local non-profit corporation represents one common way that business owners and their employees can become active in the community and charitable causes. Whatever an individual's passion - from helping with an animal shelter to working with troubled youth - he or she can likely find a non-profit focused on that area of interest.
While service on the board of a non-profit can prove valuable for both the individual and the organization, the role does come with many legal duties and some risks that all individuals should clearly understand and appreciate before beginning service.
The Role of Directors
Oregon law requires each non-profit to have a board of directors. The rights and responsibilities of a non-profit's board are defined in the first instance by Oregon statute, much like the law governing boards of directors of for-profit corporations.
By statute, all of a non-profit's corporate powers are "to be exercised by or under the authority" of the board and the affairs of the organization are to be managed under the board's direction. That means the board has ultimate control and responsibility over the organization, even if it has officers or staff carrying out the day-to-day functions. Given the board's statutory role as the ultimate authority over the organization, service as a director should not be taken lightly.
An organization's bylaws and articles of incorporation will provide more specific detail about the qualifications for and manner of becoming a board member (by election, designation, or appointment), the length of terms, manner of acting, and the particular responsibilities. In some cases, a director may also be considered an officer, a role that comes with additional duties. An individual interested in serving on a non-profit's board of directors should closely review the articles and bylaws before committing to the role.
Standard for Directors' Actions
Oregon law provides minimum standards that directors must meet in performing their role as overseer of the non-profit. Specifically, all directors must act (1) in good faith; (2) with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and (3) in the manner the director reasonably believes to be in the best interests of the corporation. Notably, these standards mirror those of directors of for-profit corporations. The standards are not relaxed in the non-profit context just because the board consists of volunteers and the organization has a charitable mission.
What do those standards mean in practical terms? In A Guide to Nonprofit Board Service in Oregon, 1 the Oregon Attorney General's Office identifies a number of specific duties that the standards encompass, including the duty to make decisions based on adequate information, to avoid conflict of interest transactions unless specific disclosure and approval processes are followed, and to strictly adhere to the non-profit's bylaws and articles of organization. While the law does not require directors to always make the decision that proves correct in hindsight, it does require that they conduct reasonable due diligence and act only in furtherance of the non-profit's mission.
Adhering to the standards of conduct is important not only to help an individual director avoid potential liability but also to ensure that the non-profit remains in compliance with state and federal laws. A non-profit's tax-exempt status depends on its funds being used only to advance its charitable or otherwise exempt purpose.
The directors bear the ultimate responsibility to ensure the proper use of the non-profit's funds. While a non-profit may pay and provide benefits to a CEO (referred to as the Executive Director in many organizations) and other employees, the directors must ensure that the pay and benefits do not exceed a reasonable amount. Under federal tax law, if the person receiving pay exercises "substantial influence" over the organization (such as the CEO) and receives an unreasonably high salary or benefits, the amount of pay deemed excessive may represent an "excess benefit transaction."
The IRS may require the excess benefit to be returned to the non-profit, along with interest and a penalty. Further, directors who approve an excess benefit could face a penalty of 10 percent of the excess benefit, up to $20,000, for each transaction.
Liability of Directors
Directors may face personal liability in other areas as well. Under state law, a director has immunity from liability except for acts that constitute "gross negligence" or "intentional misconduct." Nevertheless, a director who votes for or otherwise assents to an "unlawful distribution" is personally liable for the amount of the distribution, unless the director complies with the applicable standards of conduct described above.
An unlawful distribution in this case refers to dividends or other payments to members or directors or officers of the organization, other than payments for property or services that further the corporation's purposes. Directors, in short, can face liability if they do not exercise proper care to ensure that all of the non-profit's resources go only to advance the organization's cause.
Directors can also run into problems if the organization has paid employees and does not follow correct tax withholding requirements. If the organization does not properly withhold or pay over payroll taxes, a director who is involved in day-to-day financial operations or has actual knowledge of the non-compliance has potential liability for the amount that should have been withheld or turned over. Similarly, directors are subject to a penalty if the non-profit has paid employees subject to state workers’ compensation laws and fails to pay the required premiums.
In some situations, a director facing potential liability may be entitled to indemnity, that is, protection against payment of any claim and the cost of defense, from the non-profit corporation. For example, state law requires the non-profit corporation to indemnify a director from the cost of defense when the director successfully defends against a claim. A non-profit's articles of incorporation may provide for required indemnity in other situations as well. Further, state law provides that the non-profit may, but is not required to, indemnify a director even if not provided for in its articles.
In recognition of the potential liabilities faced by volunteer directors, many organizations also maintain liability insurance covering its directors and officers. Oregon law expressly allows non-profits to purchase this type of insurance. Any individual interested in serving as a director should check into what insurance coverage exists.
Conclusion
An engaged and effective board of directors is vital to the success of a non-profit. Before serving as a director, however, an individual should carefully consider all of the duties and potential liabilities that come with the role. Upon reflection, some individuals may find that they would rather volunteer with the non-profit in a different role directly related to providing services than serve as a director overseeing the overall operations.
Those individuals who do decide that the director role is appropriate should have a clear understanding of all the duties encompassed, both as set out in state and federal law and the non-profit's governing documents. Through conscientious service directed solely at advancing the non-profit's mission, a director can both minimize the risk of personal liability and provide invaluable service to the non-profit.
1 See http://www.doj.state.or.us/charigroup/pdf/nonprofit.pdf.