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Transcript of "What to Know Before Serving on a Nonprofit Board"
Taisha Sturdivant: I'm sure that many of you might want to hire Teresa to represent your nonprofit board in the future. Please note that nothing she's sharing today should be taken as legal advice. We ask that you refrain from asking highly specific questions that are so specific that they won't really be beneficial to everyone, because again, what she's presenting does not constitute legal advice. Now without further ado, it's my pleasure to introduce Teresa Santalucia, partner Klein Horning, LLP. Klein Horning is one of the nation's premier firms focusing on affordable housing and development law. Teresa's practice certainly focuses on those areas where she also counsels community organizations and addresses the concerns of both newly formed and well established nonprofit institutes, the negotiations implements joint venture in conflict of interest policies, and advises on nonprofit compliance issues at the state and the federal level. She has a wealth of knowledge that she's willing to impart on us. I'm going to go ahead and turn it over to Teresa. Again, thank you for joining us, Teresa.
Teresa Santalucia: Great. Thank you. Hello everyone. It's nice to be here with you. I want to thank Brandeis for giving me this opportunity to talk with you all. Especially thanks to Courtney who is moderating everything and hopefully behind the scenes. If you have any questions, you can shoot it to her in chat. Also, thanks to Taisha and Napoleon who helped organize this, it's particularly nice to work with Taisha, who I've worked with for three years and nice to see her. Also I wanted to introduce Rachel Shack, she is an associate here at Klein Horning and helps me with the nonprofit practice and she is online as well. Today is a seminar. We're going keep it about an hour or under. I'm going to try to give you a general overview. I understand that this is not just Massachusetts specific. I'm based in Boston at Klein Horning, but I'm trying to keep the information broad. Depending on where you are, you can apply it to your nonprofit. We're going to talk about what you know if you are thinking about serving on a nonprofit board. Just a preface, I worked with a lot of different nonprofits. Many nonprofits are going through a real struggle in terms of bringing on new members. They are struggling with the generational divide, they are struggling with having diversity, inclusion, making sure that voices of the communities that they serve actually sit on their board. It's something that they have been, boards have come to me with this issue, and especially over the last couple of years, they've really wanting to figure out how to bring new people onto their boards to reinvigorate the boards. One of the things that I say to boards is, what you should do is, offer people a training so they actually understand what their responsibilities are on the board, and give them the tools so they can be effective board members. Out of that, I have often given trainings to help people just get a better understanding about what being a board member on a nonprofit organization is all about. Because I think once people have a better understanding, they feel more comfortable, being able to express their views and their perspective and also staying on a board and making sure that they're able to commit to that board. There we go. One of the things I like to pride myself on is not being too legalese on any of these presentations, trying to make sure that I don't get too in the weeds and legal terms. But as an attorney, as any good attorney, I'm going to give them my disclaimer, that's how you shall also profits that, the information in this presentation is meant for educational purposes only. It is not intended or offered as legal advice. The purpose of the seminar is to provide fundamental training to prospective board members wishing to serve on a nonprofit board. It's also good refresher for anybody who is already serving on a nonprofit board. Here's our goal. We are going to have a high level overview of understanding of nonprofit legal characteristics and some legal requirements related to nonprofits. Again, we're going to be looking at this as 30,000 overview. I want everybody to recognize that each state has their own specific requirements for nonprofit boards and how they operate. I'm giving more of general view. We'll discuss the characteristics of a nonprofit, the governance of a nonprofit, roles, procedures, legal duties of a nonprofit board member, some liabilities and protections to cover those who volunteer for nonprofits. We'll also talk briefly about some compliance issues both at the state and the federal level. We'll leave some time for some questions and answers at the end. But like Taisha said, she's going to monitor those questions in the chat room and if anything, rises to the level of where we are, I'm happy to stop in and answer those questions as well. Let's talk about when I say NPO, I'm usually talking about a not-for-profit organization or nonprofit organization. I'm also talking about a 501C3 organization, an entity that receive tax exemption from the IRS under section 501C3. Typically, a nonprofit has an exempt purpose. These are characteristics of a nonprofit. They have an exempt purpose, means their entire purpose for being is for an exempt reason. Usually that's charitable education, literary, religious, or a specific designated purpose. They are organized and operated exclusively for one or more of those exempts purposes. Those are keywords organized and operated exclusively for those exempts purposes. There's no private inurnment. That means there's no private benefit. The organization is not created to benefit a private individual or a private entity. The organization is created again, in order to further an exempt purpose. There is a prohibition on political engagements and political campaigning. There are limitations on lobbying. I do a whole other seminars. If you're really interested in lobbying and political engagement, that is something that can take up another whole couple hours. But I do want to note that those are also restrictions on a nonprofit. There are also some general characteristics of a nonprofit organization, typically that provides services to benefit a charitable class of people, too often is not provided by a private company or governments. Typically nonprofits are corporations. They are created under state nonprofit corporation law. For instance, in Massachusetts, Massachusetts is generally Chapter 180. Every strict state has its own nonprofit corporation law. There are a few states that actually don't have a separate nonprofit corporation law, they just incorporate as a regular corporation. Every nonprofit has an articles of organization, sometimes they're called articles of incorporation or specific charter. Those are the formation documents. Almost all nonprofits have bylaws of the internal workings of the organization. Nonprofits are all run by a board of directors. Board directors have the authority of the nonprofit and the responsibility for the nonprofit. Why would you want to join as a member of a board of a nonprofit? Perhaps it's to support their mission, maybe you feel tied to their mission. It might be because you want to build leadership skills and it's a great way to do it and participate in your community. Sometimes you can gain expertise and really important issues, if you're really passionate about literacy, and joining an organization that promotes literacy can be a great way to do that. It's a wonderful opportunity for personal networking. Getting out there, again, in the community and networking with people who share similar interests. It can be very helpful professionally. A lot of times, if you are joining a nonprofit, you're making all kinds of new connections in the community and people see you there. That can be helpful professionally. A lot of times people trying because they're just too nice to say no. Their competence and people say, oh, you'll be great to join a nonprofit. There's a whole host of reasons as to why you may want to join a nonprofit. But if you're ever thinking about joining a nonprofit, you should take a step back and just examine why you want to be there.
Teresa Santalucia: If you've examined yourself and you're joining a Nonprofit not just because you're too nice to say no, but because you actually think that there's a good reason, I would ask that you pay attention a little bit to the governance of the Nonprofit and the strappings of the Nonprofit. Learn a little bit about it before you join. One of the things I wanted to just go over is a structure of a typical Nonprofit. Like I said, all Nonprofits are created under state corporation laws. Most states have a specific corporation law for Nonprofit. That then dictates how an organization is created in the state. Most organizations and most states file articles of incorporation or articles of organization with a state agency that then creates the corporation. They also file bylaws. Those articles and bylaws then govern how the board of directors sometimes in some states are called trustees, run the organization. What I like about this chart, it's on the screen, is that the Board of Directors are right there in the middle. There is a state law, there is an article, there are bylaws, there's organizing documents, but it's the Board of Directors that is really the heart of the organization in terms of monitoring, of making sure that the organization is engaged in the activities that should be, making sure that it is compliant with all laws that govern the organization. I put here in a little circle members. There are some states that allow Nonprofits to be member organizations. I don't mean members in terms of a fundraising category, so MPR often has for instance, campaigns that say send in $25 and become a member, you get a card that says you're a member. I mean a legal member. There are some states that allow Nonprofits to have legal members. For instance, here in Boston we have quite a few tenant organization, so it's a Nonprofit corporation and all the tenants are members of that corporation. They're like shareholders. That's how they act. The members then elect the directors. Not all states allow members. Not all Nonprofits have members but it's one thing to look at to see if you are a member organization or not a member organization. The Board of Directors then has the job to hire, evaluate and if necessary, fire the Executive Director or CEO. The Board of Directors appoints officers, so President, Secretary, Treasurer, Vice President, those are officers. That's a role that supports the Directors. Sometimes Directors serve as officers as well but it's really important to make sure that there is a differentiation. They are two separate roles within the structure. The Board of Directors also appoints and gives authority to committees that may be used to help the Directors function. All other staff of a Nonprofit organization are under the Executive Director and CEO. I mean the Executive Director and CEO is in charge of managing, hiring, firing, managing those other stuff. That's another thing that's really important to know that as a Board of Director, you should have a one-on-one communication with the Executive Director. The Executive Director tends to manage the rest of the staff. The Board's role, when somebody comes to me and says I'm thinking about joining a board, what is my role? What do I need to be paying attention to? This list may not be all inclusive but I think it hits on a lot of the things that a board member is responsible for. One, you need to adhere to your legal duty. There is in most states legal duties and that's in the Nonprofit corporation laws of what a Nonprofit Director is supposed to do. The Board is also supposed to review, adopt and adhere to the purpose of the organization. We talked about being organized and operated exclusively for its exempts purpose. It should have organizing documents at hand and the Board is responsible for making sure that the organization actually engages in the work that it was created to do. The board is responsible for adopting and monitoring policies, for developing and evaluating leadership. Developing and evaluating leadership on the board but also its staff. Developing, approving and reviewing a strategic plan. Hopefully your Nonprofit has a plan to move forward and it's the board's responsibility to update that and to make sure that you are in fact moving along that plan. A board's role is to engage in fundraising. Board members are essential to helping to develop funds for the organization in order for it to carry out its purpose. Board members are responsible for financial accountability of the organization, so board members should be looking at the finances of the organization, making sure audits are done in an appropriate time stand, making sure that there is accountability for the organization and that any of the charitable assets of the organization are in fact being used appropriately. The board should be ensuring that there is legal compliance. There are requirements at the local level, state level and federal level for all Nonprofit corporation and it's the board's job to make sure that they are in fact, complying with those laws and regulations. We're going to talk about each one of these items that are listed in red. First is legal duty. A lot of people have heard fiduciary duty. There are typically two legal duties that a board member has when they serve on a Nonprofit corporation. These are your fiduciary duties. One is the duty of care and one is the duty of loyalty. Every state has a little bit different definition as to what these are but in general, the duty of care is that the Director must exercise duties with the same care as an ordinary, prudent person in a similar position with respect to a similar organization. When you are acting on behalf of the organization, are you acting with the same care that somebody else would think is reasonable? The duty of loyalty. A Director must perform duties in good faith and in a manner reasonably believed to be in the best interest of the organization. As a Director, you have a duty of loyalty to that organization, to act on behalf of that organization, not on behalf of yourself or your neighbor or friend or another business, but to act on the best interests of that organization and that is a legal duty of a board member. This duty of care is a pretty broad nebulous definition. When people say what does that actually mean, I try to break it down into a few rules that you should comply with in order to meet your duty of care. When people say what does it mean to have a duty of care, I say here are some basic guidelines. You should attend board meetings and if you're on a committee, those committee meetings. You can't be exercising your duty of care to the organization if you don't know what's happening. You should request and review entity information. If you have any questions, you should ask for that information and look for it. For instance, if somebody comes with a proposal about how to spend the charitable assets or funds of the organization, you should ask for due diligence for that, you should make sure it's in line with the requirements of your organization. You want to make sure that you have that information, particularly articles and bylaws in hand. You want to understand financial statements. I've had some people say to me, I just feel like I'm not sure that I will understand the balance sheets of an organization so maybe I don't want to join. I think it's not that you have to be familiar with the ins and outs of every single aspect of the finances of the organization but you should have a good understanding of the funds coming in, the funds going out, whether you have reserves, whether you're covering all your basis. You should rely on third parties, accountants or auditors to come in and give a third party assessment of your finances. You need to be able to vote independently, which means you need to vote with your own voice, your own conscience, your own experience. You need to be able to voice your opinion. If you ever find yourself on a board and you're not able or not comfortable voicing your own opinion, then I think you should reevaluate whether you should be on that board or not, or whether you're able to change how that board dynamic works because every board member should be comfortable enough to express their opinion in board discussions. I wanted to be clear that Directors can rely on third party information, so if an Executive Director comes and gives a report, you should be able to rely on that. Same thing if an Attorney comes and gives a report to the the Directors, you should be able to rely on that. As long as you have reasonably secure, competent third parties to provide information. The duty of loyalty. When somebody says, how do I comply with the duty of loyalty? One of the most basic ways to do that is to prohibit acts of self interest. You want to manage any kind of conflict of interest that might arise on the board. For instance, a very simple example is an organization provides grants to scholarships and if a board member knows that their niece is going to apply for a scholarship to the Nonprofit. You want to make sure that that board member is open and transparent with our other board members, that they look at their conflict of interest policy to see if that is in fact allowed for her to participate in that and then manage the conflict if there is one. Perhaps the board member recuses themselves from any decisions about scholarships that year in order to try to make sure that it's transparent and avoid any sort of conflict of interests. Every Nonprofit who has applied to the IRS for 501C3 exemption has to have a conflict of interest policy. If you are about to join a board and you're asking the other board members or an Executive Director about what kind of documents you can get to learn a little bit more about the organization, a conflict of interest policy is something that you might want to ask for. In addition, it's good practice for the board members every year to certify whether they think that they may have any conflicts with the organization. Conflicts are not always prohibited, it just has to be managed and the board has to follow the conflict of interest policy.
Teresa Santalucia: There's a third duty. It's not in every state, but it's one I actually like a lot. For instance, in Massachusetts, this is not in our nonprofit corporation law. But I like the duty of obedience because it basically requires that non-profits ensure that the nonprofit resources are used in a manner consistent with the non-profits purpose and that the nonprofit doesn't engage in unauthorized activities. The reason I like it is, because it really makes sure that directors focus in on the purpose of the organization. I think sometimes people join an organization because they see all the great work that it's doing in the community, but they haven't really focused in what the organization was created for and has tax exemption for, and so this duty really makes directors hone in on what the purpose of the organization is. Let's talk about your organizing documents. We mentioned them before, they're really important documents. If you are about to join a nonprofit, you want to make sure that you get a copy of these. Most of this information is actually public now, so you could actually pull it from your Secretary of State website or the IRS website, but every organization should have this on hand. Many organizations put it on their website. The first is your Articles of Organization. We talked about this. It provides the purpose language so that language of, what is the organization supposed to be engaged in? Typically, this language says, the organization is organized and operated exclusively for the charitable activity of, and then you fill it in weather that is running a food pantry, or providing affordable housing or youth league sports. But they will have specific language about what kind of activity that nonprofit can engage in. The reason that this is important is, if that nonprofit engages in activities outside of that purpose, then they are not tax exempt. Their tax exempt status does not apply to those activities outside of the stated purpose. The articles of organization, also describe the rights and the powers of the organization. It's a public document, so anybody can find it. When a new nonprofit comes to me, one of the first things I do is look up the articles of organization to get a good snapshot of the organization. I like to call it the birth certificate of the organization, because it says the name, the purpose of the organization, initial directors and officers, the address of the organization. The other really important document is the Bylaws. The bylaws are house rules. It defines how the governance of the organization is going to run. It talks about things like the size and qualification of the board, it talks about how board members are elected, how you can remove board members. In my line of work as an attorney working with non-profits, I'm often often reviewing by-laws to see how we actually get raw board members off boards. It defines committees and how committees are appointed, talks about notices, officers, how to amend. Bylaws are really important and it's always amazing to me how many non-profits draft bylaws, spend a lot of time, and then put them in a desk drawer and never look at them again until something bad happens, and then everybody is trying to find the last copy of the by-laws. I always recommend that a nonprofit make sure that they read their bylaws at least once a year. Typically, nonprofit should think about revising and updating and refreshing their bylaws, maybe every three to five years. It does include important information about your organization. It is important, especially as a new board member, that you have those bylaws. I was at a board meeting one time recently in the past year, and a new board member had received a copy of the bylaws and the articles that I had actually read them. I went to a board meeting and that new board member knew more about how that organization should be run than everybody else on the board who had been on the board for years, because they'd actually spent time reading the bylaws of the organization. It can be a really helpful tool in terms of educating new board members about what their role is and how they should be running meetings. An important thing to note, in terms of the organization and the operation of a nonprofit is the role of the board. The board really is charged with ensuring that the nonprofit is organized and operated exclusively for charitable, educational, whatever the exempt purpose is, and ensures that all the activities and programs and services are aligned with that mission. Again, you can't do that unless you know what that mission is, and so you need to be familiar with the articles which states you're mission. Another thing I just wanted to talk about a little bit is the policies and procedures. This really varies depending on the size of the organization. You might have a very small nonprofit. There's just three directors and it's all volunteer driven, or you might have a very large nonprofit that has 23 board members and 17 departments, and 100 employees. In the middle there's a range. Every nonprofit has a different format and different scope. But these are some of the most common policies that nonprofit corporations tend to have. Again, as you get bigger, these become more important to have in place to help guide the board. These are not personnel policies. These are more policies that the board needs to be paying attention to and that the board needs to adopt. There's conflict of interests, provisions and policies. Whistleblower policies, that's something really important for board members to have in place and to know no document retention joint venture, if the organization is entering into a new joint ventures with poor profit organizations. Affiliate procedures, if you have any affiliates, gift acceptance, privacy policies, CORI policies, investment policies. Again, I can probably add more policies to this list, but these are the ones that are the most common. I would say the top three, if a small nonprofit came to me and said, "Pick three of these policies that you think that we need." I would say the conflict of interest, the whistleblower and the document retention policy. Just to talk a little bit about the conflict of interest policy. We talked about this when I was talking about the duty of loyalty. Every organization is required by the IRS when you apply for tax exemption to have a conflict of interest policy. The policy is not a complicated formula and it's not secret language. The IRS actually gives a form of conflict of interest policy that you can use and adopt. Most conflict of interest policies are pretty standard and follow the IRS recommended language. The most important things about a conflict of interest policy is that board members should disclose any transaction in which a director has a personal interests, even if they're not sure if it's a conflict of interests or not, then that's director who's considered now an interested director, should remove themselves from the conversation. The other directors need to pull out their conflict of interest policy and determined whether there's a conflict or not. If there is a conflict, whether they can manage that conflict in a way that is transparent and fair. Important thing to know about conflicts of interests is that, if they're not managed transparently, if they're not managed by the board, and conflict of interests do happen, then the IRS, upon an audit, could impose penalties that are on the nonprofit, but also on the individual director that may have benefited under that conflict. Let me give an example, we work with a lot of organizations that are engaged in the provision of affordable housing. I was working with an organization that provides affordable housing, and its executive director called me and she said, "I'm so torn up about it. One of our board of directors or members, he's a fairly well-known landscape architect. He wanted to do that landscape of this beautiful new affordable housing project, and he wanted to do it for costs, so not charging a fee just for the materials and labor." I said, well, that's great, that sounds wonderful. She said, "Well, we can't do it because it's an obvious conflict." I said no, that's not true because I drafted your conflict of interest policies, so let's pull it out and review it. He came to you, he said he would like to provide this service at a low cost. You brought it to the board and he took himself out of the conversation. Now, what the board needs to determine is, is there a conflict? The Board said, "Yes, there's a conflict. He sits on the board and now he's going to be doing work for the organization." But the question was, can that be managed that conflict? For instance, what if the board went out and did this work and got three other bids for the same work. The board member also bid the work. When they compared the bids, he was providing the work for half the price as the other applicants. They were able to document that. They were able to show that engaging in a contract with that director was beneficial for the organization because he was able to provide the services for below cost and they were able to move forward. The key here was that they followed a process, that they were transparent, they documented that process. I think that's important to remember that when you're dealing with complex of interest, it doesn't mean an entire elimination, it just means that they have to be looked at transparently by the board.
Taisha Sturdivant: Teresa? Before we move on from that point, we have a question that I think would be useful to clarify here. Someone is asking, "When a conflict arises in say, different organizations and they remove themselves from the conversation, does that literally mean that they should leave the room, or can they just abstain from voting? What constitutes removing themselves?"
Teresa Santalucia: The legal definition of removing themselves means that they don't vote. But I would pose the question to the President or whoever is leading the meeting about whether other people would feel free to comment and talk about this. Because remember, we talked about being able to voice your opinion and being able to speak independently. People often know each other. They have connections, friendships, and so I think good practice is to actually have them leave the room, so that there is clear discussion about, people feel very free to be able to discuss the issue at hand without feeling like they were going to hurt somebody's feelings. Again, that really is up to the board and the board dynamics, but I think that that's something to certainly think about is to actually ask the person to leave the room so you can have an open and honest conversation without the fear of offending anyone.
Teresa Santalucia: So leadership, we talked about leadership a little bit. I think one of the key factor of a good board is one that is developing leadership for the organization, continually thinking into the future. One of those things is cultivating board members, their talents and experience and always looking in the community for new board members for your organization, or to enliven it, to keep it relevant and make sure that the issues that you're supposed to be addressing are being addressed. Working with senior staff to develop strong leadership. If you're lucky enough to have staff and your nonprofit, you want to make sure that you hire and support and cultivate your executive director, have a clear job description, yearly goals, yearly evaluations. Again, I think this is something that is happening across the country to a lot of non-profits, is this cultivating member towns and experience. I'm constantly hearing from boards about feeling like they are outdated, they don't have the right voices and it's a constant challenge. There are different techniques that boards can use in order to bring new people onto the board. I like the use of committees. If you have committees inviting people in their community to sit on those committees, you can see if they fit in the organization, if they bring a voice that's relevant to the organization. You can also see if they're just willing to do the work or not of being on a board. It's a great way for those members in the community who maybe aren't so sure about you and whether they want to spend their time and energy with the organization, for them to try out the organization by sitting on a committee too before they commit to being a board member. So that's one way to do it. I think boards really need to get out and feel a little uncomfortable by getting out and getting into the community and looking at it in different ways to bring on new voices, particularly younger voices. Sometimes that clashes with this idea that board members should be fundraisers and she'd come with a certain amount of resources behind their membership on the board. I think that has often I've seen a clash in terms of reaching out to a younger generation. I think boards really kind of need to address that and try to find other avenues to bring younger voices onto their board in order to build capacity as they go into the future. So when we talk about leadership, I think it's also really important as we were talking about the board making sure that they're supporting the executive director. This is, I have a whole training that I do on where is the line? Because there's often in non-profits, this contention between an executive director and the board and who's supposed to be doing what and who's supposed to be leading the organization? It's funny, I did a training one time and it walked into the room and it was a where's the line training, and this one organization had sponsored it, saying that there were several non-profits in the area that we're having some contentious relationships with their executive directors. When I walked in in the morning, all of the nonprofit board members were on one side of the room and all of the executive directors or on the other side of the row hippies very clear that there was tension between these two. The first thing I do is meet them all, move around the room and have to sit next to each other. Then we walk through some scenarios and kind of walk through where's the board's role and whereas executive directors role. So this is a very, very simplified list of what the role of the board is and what the executive director is that the role of the board hires, evaluates it determines salary for the executive director also fires the Executive Director of the Executive Director is not in fact, living up to its job description, adopts and updates policies. It develops the vision and the strategy for the organization and approves and monitors budgets. It does advocacy and fundraising. Whereas the role of the executive director is to enact policies and formulate procedures. It's to carry out the vision that was given by the board and develop a strategy to do that. It's to hire and manage all the other staff. It's to propose a budget and also work within the budget that was adopted by the board, and also to do advocacy and fundraising. Shifting gears just a little bit, another thing that I hear quite a bit from directors these days are potential directors is, and so wants me to join their board but I'm a little worried about what my liability is if I do. What am I, what am I liable for? And I think people have a right to ask that. I think it's clear that in most states, directors of non-profits are or can be held liable for breach of duty of care, loyalty, and obedience. If you're found to ignore those duties, you can be held liable for that. Directors can be held liable for knowingly participating and rockfall acts. That's that's understood that if your embezzling money from the nonprofit, you're liable for that. Directors can also be held liable for accuracy, the nonprofit itself. I think that's the piece that worries most people is if I'm joining this board, what kind of liability might taking off from the nonprofit? There are quite a few different avenues to have protection. If you are serving as a nonprofit director. Most of these apply if you are a volunteer director. If you're getting compensated as a board of director, some of these go away. I think that's also important to understand about whether you are a director that is compensated or whether you're a volunteer director. For instance, in Massachusetts, non-profits can compensate their directors. Sometimes non-profits have come to me and said, oh, well, we'd like to give a couple thousand to our directors. I always say, well, make sure that they really want that because some of the protections that they have in place go away when they become paid directors rather than a volunteer director. Things that you should think about if you're thinking about joining a board and what kind of protections they might have, the nonprofit might have for you. One is indemnification, that is language that would be in the bylaws. It says, if the nonprofit is student, they're going to protect you, are going to indemnify you. That's great. If the nonprofit has the resources to be able to do that. There are some statutory protections. In Massachusetts, for instance, the Secretary of State has given some language that you can put in your organizing documents that say the nonprofit shelf protected directors and officers of an organization. There's also charitable immunity laws. These are often good Samaritan laws. There's Massachusetts, there's also federal laws. Again, all of these are contingent on the fact that if you are a volunteer director, if you're a paid director, then these don't apply to you. The best thing that can be helpful in terms of protection and the thing that you should ask if you're thinking about joining a nonprofit as a director, or if you're a director, you should make sure that you understand whether you have it or not is director and officer insurance. So this isn't this is a very common insurance that a nonprofit we carry. It can be part of the umbrella coverage of insurance, but it basically is a policy for directors and officers so that in the event that the nonprofit assumed it would cover the directors and officers personally as well. It's called Dn0 Insurance if you use the shorthand name. All right. Well, I'm just touch it up in my notes here. Okay, so moving on from that. One thing that directors should know and again, this is state specific, but that as a director, you're responsible for making sure that the nonprofit is compliant, which means that it does all of its filings with the state and federal government. Now remember, a nonprofit organization is a tax exempt organization, which means you don't have to file tax returns like we all do. But the IRS and the state require that you file informational retards. They say, okay, fine, we've granted you tax exemption, but we would like to know what you're up to. In most states, you file all corporate annual reports which basically gives corporate information, the office address, where your directors and officers are. You also file with another entity, typically, it's your Attorney General's office. They care about the charitable assets of your organization. The state wants to make sure that if you're out fundraising in their state, that you're actually using your the fund raising funds for the purpose intended. The IRS, similarly, they care about things like, are you actually engaged in your tax exempt activity? If you say that you're going to run a food pantry, Are you in fact running a food pantry or are you doing something different? They want to know what funds are coming into your organization and how you're spending them. They ask about governance issues. They want to know who your directors are, are there any directors that have conflicts? Have those conflicts been addressed? They also will ask questions about document retention or joint ventures or some of those other things that we had talked about a little bit in terms of the policies, depending on how big your organization is really the determinant factor of how much information you have to give in these Finally. For instance, if your nonprofit is a smaller nonprofit, that brings in $50 thousand or less. The form that you file with the IRS every year is much much smaller and the information that you have to produce is at a much lower level than an organization that has $250 thousand a year. That's a much larger informational return that you're giving to the IRS. Again, it depends on the type of organization you have. One thing to think about in terms of all of this information or reporting and non-profits have to do at the state and federal level is to remember that it's all public. When you say, Oh, I am about to join this nonprofit, you're able to go online and pulling this information before you even join the nonprofit. It also means that funders and other members of the community can go get this information too. It's really important that the information is accurate and it's up to date. Incredibly important that the information is an adequate and truthful representation of your organization because again, it is all public. From the state government, there are certain filings that you do at the beginning of an organization. When you're creating a nonprofit, you get your legal existence through the state. Then the federal government grants you tax exemption, right? So there's, there's two sort of functions. The state grants you existence. The federal government grants you tax exemption. Both the state and the federal government care about those initial filings, but also those annual reports.
Teresa Santalucia: This is some of the initial filings that we were talking about. When you're a brand new organization, your nonprofit is just being created. You initially file articles of incorporation, typically with the Secretary of State. Again, it's different with every state. You also do an initial filing with a division of your state that cares about your fundraising, often that's an Attorney General's office. In Massachusetts, for instance, it's an Attorney General that they have a specific public charities division. You would also file with the Department of Revenue for sales tax exemption in your state. Then some states and municipalities also have filings if you are requesting property tax exemption. After you've done your initial filing and you're created and you're up and running, they are still in your failings that we've been talking about, these informational filings. In this case Massachusetts as a general example. But in Massachusetts, if you're a nonprofit, exempt from taxation under Section 501(c)(3) nonprofit, every year by November 1st, you have to file your annual report. This annual report again is a pretty simple form. It's all online. It gives information about the office, the directors, the officers, your fiscal year, some basic corporate information about your organization. In order for your organization to remain in good standing under the law, you have to file this every year. If your organization fails to file this, you are not in good standing. So if you were, for instance, to try to go get a loan from a bank, they wouldn't give it to you because they would say your organization is not a good standing and you have to go refile all these annual filings. The Attorney General's office in Massachusetts also requires an annual filing. That annual filing is more about the charitable assets of the organization. They want to know how you're spending the money. They want to know if you're doing fundraising, and how you're doing that fund raising in Massachusetts. In Massachusetts, if you don't file with the Attorney General's office, the Attorney General can assess fees on the responsible agent. In Massachusetts, the responsible agent as the director. Directors can get a notice that they are being fined $50 a day, if they if their organization has not filed the Attorney's general's office. Now I think Massachusetts is one of the more strict and more aggressive Attorney Generals in the country in terms of this. But just as a reminder that there are filing requirements and directors are the responsible entity to make sure that these get done. The IRS also has a form that has to be filed on an annual basis, there's the 990. Again, based on how much money your nonprofit is bringing in, there's different levels of the form 990. There's the form 990 Postcard, which is a very simple online entry. There's the 990-EZ, which isn't actually easy. It's about nine pages and it still has quite a bit of information. Then there's the full 990. The thing to know about the 990 is that if you do not file the 990 for three consecutive years, if your nonprofit does not file it, you automatically lose your tax exemption. There's no a letter from the IRS to say, "Hey, friendly reminder, you forgot to file. " If for three years your organization doesn't file it, that's it. You've lost or tax exemption and you're just a corporation and you need to pay taxes like everybody else. So it's a really important filing that gets done. Again, it's public, everybody can see it. It's very clear to determine whether somebody has filed it or not. I think as a board member, this is one of the most important things that you need to look at. You need to review it before it goes into the IRS. You need to make sure that whoever is prepared it has prepared an accurate representation of the nonprofit. In fact, there's even a question that says, "Has the directors of the nonprofit reviewed and approved this 990 form?" If you're sitting on a nonprofit board and you've never heard of the form 990, now you know, you need to go back and figure out where that 990 is, and makes sure that you see it. If you're about to join a board, you want to make sure that that's a question that you ask, "Can I see your last three 990s, and when does the board approved the next 990?" In terms of resources for folks who are thinking about going or joining a board, this is my individual board member top 10 things. If you're going to join a board, these are the top 10 things that I think you should be able to do. You need to show up, you need to speak up, and you need to follow up. You need to know your purpose. Remember, you need to go to the organizing documents, your articles of organization, find your purpose, and know what your organization is supposed to be engaged in. You need to review your bylaws so that you have a good understanding of how the organization is supposed to run. You want to study the numbers so that you feel comfortable with your executive director is giving you a report about the numbers of the organization, you want to feel comfortable with that. If there are committees, you want to join them and jump in and do the work. That's one of the best ways to really learn about the organization. You want to be attentive outside of the board meeting. Board members are the ears and eyes of the organization. You want to know what the community thinks about your organization. You want to know if there are any issues out there. You want to know if your staff is doing good work and be able to congratulate them. You want to really make sure that you're being attentive to not only what the organization's doing. At the particular issues of the organization, you want to be educated about those as well. You want to govern as a group. So you want to make sure that you can have spirited discussions at your board meeting. But at the end of that, you want to make sure that the board is actually engaging as a group together to run the organization. Finally, and I think this is so important, you want to share your passion. If you want to be on a board, make sure that you really want to be there for the right reason. It should resonate with you. It should feed you. It's not always fun. Sometimes a board meeting, especially over Zoom is the last thing that anybody wants to do on a Thursday night or whatever days. I get that, but there should be enough about being on the board that really inflames your passion, that makes it worthwhile. If it doesn't, look around and find another board that does that. Because I think your participation in the board and your ability to really contribute to the board will be informed on whether it really excites you or not, whether you see long-term engagement and change. Often people who are joining boards asked me for resources, and this is a good list of some other websites out there that provide great support for board members. Board source is an organization that has all kinds of information for board members. The National Council on Nonprofits has wonderful resources for non-profits. Guidestar is the organization that has contracted with the IRS to provide all of the 990 filings. So all those informational violins you file with the IRS, they go on GuideStar. You have to register, but it's a free registration. The IRS actually has some very good information about charities and the life cycle of a charity. If you're in Massachusetts, there's an organization called Lawyers Clearinghouse. I serve on their board. I love it. I'm at one of their biggest cheerleaders, and so I just want to tout Lawyers Clearinghouse. What we do is we match up non-profits with Attorneys who provide pro bono, free legal assistance for those non-profits if they qualify. We do a lot of education for non-profits. I do a lot of free seminars for them. So check out Lawyers Clearinghouse. Go on their website, have great resources. Then in New York there's an organization called BoardAssist that does great work as well. With that, I'll turn it back to Taisha and see if there are any questions that you'd like to.
Taisha Sturdivant: Thank you, Teresa. Yes, folks had been weighing in with questions. We have a handful of them, so I think I'll just take them in order if that's okay with you. But the first question is, do have any advice on sort of ideal term limits? Part and parcel to that, how do you ensure that there is an appropriate level of board turnover?
Teresa Santalucia: It's hard, and it really depends on every organization. I used to feel really strongly about there being term limits just to really keep things moving, however, that organization that I was talking about Lawyers Clearinghouse that I loved so much and love being on the board, there are people on that board who have been on it for 25 years. Frankly, they are amazing resource. I think one of the reasons that the organization is so good is because they'd been devoted to the organization for so long. I go back and forth. I think what's helpful is to have some language in your bylaws that, do terms but allow people to serve consecutive terms. But at least you have to check in every three years or something to say, "Hey, do you still want to be on the board? Do you think this is a good idea?" It gives the board an opportunity to really kind of check in with board members. The other thing I always put in bylaws when I draft them is that, if a board member doesn't come to three consecutive board meetings, that they can be removed from the board. Because if somebody can't show up for the board meetings and can't participate, then there should be a way to remove that person from the board. I think in terms of term limits, whatever you do in terms of your bylaws, you want to make sure it's very clear. Sometimes I've seen very convoluted by laws that have these very incredible complicated staggered terms with some people serving two years, and some people serving three years, and it's very complicated. People just end up throwing that out and not using it at all, because it gets too complicated.
Taisha Sturdivant: The next question also pertains to board members but earlier you spoke about the importance of having diverse voices on the board. The question, this person recognizes that is important for him but they're wondering if you have any advice on how to market to and attract more diverse candidates both for the board or perhaps also at the staff level.
Teresa Santalucia: Yeah, where I've seen it not work is when you ask somebody to join a board because they check a box, right? That is not a great reason to have somebody on your board. What is more important is to put the work in, think of a long term vision and strategy to really reach out to the community, to do the work, to engage in different organizations that might be able to help you with that process. Again, to educate board members so that they feel-, it's is not just getting people on the board that's the challenge. I think it's keeping people on the board, keeping them engaged, making sure they feel comfortable, that they feel like they have the space and the comfort level to express their view. I think that's as much of a challenge as anything. I participated in an organization. It does a cultural inclusion program that I love. It is an organization up in the Merrimack Valley called Community Inroads. They surveyed a bunch of non-profits and said what is one of the biggest challenges that you have right now and how can we help? The non-profits said, we just are having a hard time finding board members from our communities to serve on a board. They do this program every year where people can apply to be potential board members and typically they are people of color, people who come from the community and people who have never served on a board before. They become a class and then the non-profits also have to send a representative. Then every month they actually have an event together whether it is learning about financials of a nonprofit, whether I do the legal training for the nonprofit, they do speed dating so that people can actually get to know a bunch of different organizations in one night and the organizations can get to know the candidates. At the end of the year after they've gone through this together, the candidates are so incredibly well versed in what it means to be a board member that they are highly sought out to be on these boards. The boards have a much better understanding of what are the concerns and the issues of the candidates who are looking for board opportunities. Then they match up and then they kind of move forward and it's an incredibly successful program. I would love to see it replicated. We're actually talking about replicating it in Boston. It just gives everybody a better sense of what the responsibilities of being on the board are but it takes time and it's the long game, right? It's not a simple solution.
Taisha Sturdivant: I mean, I want to be conscious of time, of course. We're right at the hour mark but I think there are a couple more questions that if you have time for I think might be...
Teresa Santalucia: I'm happy to stay and answer questions but I understand that people have to drop off.
Taisha Sturdivant: We just have a couple more. One is about DnO insurance. If you could talk a little maybe generally about what are the scope of that insurance. If you have insurance, does that mean that board members are totally exempt from any liability or are there some acts that are beyond the scope of that?
Teresa Santalucia: That's a great question. Whoever asked that question, so you get a gold star. Is that you Napoleon did you ask that question?
Taisha Sturdivant: No that was Rhonda.
Teresa Santalucia: Rhonda good job.
Taisha Sturdivant: Yeah.
Teresa Santalucia: Directors and officers insurance is not hard to get. You can ask your insurance agent for director and officer insurance. It's not a difficult thing. Again, like I said, it comes into the umbrella policy. People always say, well, how much is the cost? It really depends on how big your organization is and what the scope of your organization is, and how it fits into your umbrella policy. But the important thing to know about directors and officers insurance, just like all other insurance is that it has exclusions sometimes. One thing I often bring up in my training is that I represent a lot of organizations that are community development corporations and are engaged in affordable housing. Almost all that they're doing is real estate transactions because they're building affordable housing and community centers. One time I read the director and officer insurance of one of these organizations they were re-upping and sort of said, "Oh, can you just give it a quick look?" What I noticed in very fine prints at the bottom was that while they covered all suits against the directors and officers that resulted from an action of the nonprofit, they excluded any transfers of real property, which was basically all that this organization did. A lot of the liability that the directors were taking on was liability that came from purchasing real estate and building affordable housing. In effect, that director and officer insurance was not very effective for those directors and officers and they had all thought that they were covered. It's really important that when you get the director or an officer insurance to actually ask the insurance agents what are the exclusions to this and make sure that that doesn't exclude the activities that your nonprofit is engaged in.
Taisha Sturdivant: As a follow-up to that question, does incorporation protect you from liability?
Teresa Santalucia: Without incorporation, I was just counseling a small group of people that I was helping incorporate into a nonprofit. They said, "Well, what were we before? You know what, before we incorporated, we don't quite understand what we were." I said you were just a group of people who were trying to do a good thing, but you are all individually liable, right? At this point now that you have incorporated, the corporation is treated as the entity that's doing a good thing. You are directors and officers of that cooperation and so you bear some liability for the decisions of the organization. But now there's a corporate entity that is contracting and doing the work. By incorporating, you are now creating a barrier of liability for directors and officers. Again, recognizing that a lot of directors and officers of organizations are in fact volunteers. There are these state and federal charitable immunity laws that say if you're out there and you're volunteering and you're not doing anything willfully negligent or intentionally wrong, that you should have a level of protection. It's not perfect because a lot of times those don't cover legal fees, for instance so if you do get sued, you'd be responsible for your own legal fees. That's why having another layer of insurance, like a director and officer insurance is really important.
Taisha Sturdivant: Then just one of the final questions, I know there are a few more that have come in. But one of the final ones is to talk a little bit more about the distinction between officers and board directors in their respective roles and responsibilities.
Teresa Santalucia: Yeah. When I do training I bring metaphorical hats and I say, you know, the directors are the members of the board who have voting rights. If you are a director, you have the legal fiduciary duties of loyalty and care, and in some instances obedience. You have the authority and the responsibility of the organization and you vote. Okay, so that's a director's role. It's very specific. The directors, in order to carry out their duties, in order to make sure that they are leading the organization appoint officers as an administrative role to help the directors carry out their duties. That those officers are typically the president, the treasurer, the secretary in Massachusetts, we call that the clerk, vice presidents, vice clerks, vice treasurers, whatever it is. Those are offices, their administrative roles. As an officer, you do not vote as an officer has very specific roles and in Massachusetts, for instance, president, clerk, and treasurer actually have in statute defined roles what they're responsible for. Treasurer is responsible for the finances of the organization. A clerk is responsible for the corporate records of the organization. That's all should be defined in your bylaws. A lot of times people don't understand that so somebody who's a president votes at a board meeting. I often spend some time trying to remind people that only directors vote. Now in a lot of boards, directors also act as officers so they serve two roles. They are a director and they vote, but maybe they also are president or clerk, our treasurer. Just remember that when you're voting, your voting as a director, you're not voting as your president or clerk or treasurer, right? I think that's something that often gets mixed up. Sometimes where it becomes an issue is when you have people who are not directors, service officers, and those officers vote, they shouldn't be voting. Only directors vote, officers serve the directors and serve at the pleasure of the directors. Typically bylaw state that the directors appoint the officers and directors can remove officers as well.
Taisha Sturdivant: Well, Theresa, thank you so much. This was a very engaging, very informative and just viewing all of the questions in the chat. The primary question being can we keep this presentation? Where would this presentation be? I think that just goes to show that this is really helpful. Just to answer that question for everyone. The presentation will remain available on the Brandeis website for some time. If you go to the website and you look at the events tab, there is an index and so feel free to go and look at this, this presentation again afterwards. Thank you again. Theresa, thank you to all of the participants.
Rhoda Ribner: Taisha, I had asked earlier, is there any way that we can get a printout or printable form of the bullet points, which were extremely helpful.
Teresa Santalucia: I will give Courtney a PDF of the slides so that she can circulate those among meeting participants.
Rhoda Ribner: Great, thank you so much.
Teresa Santalucia: You're welcome.
Taisha Sturdivant: Sorry for missing that question. But with that, I think we should all drop off. I hope you all remain safe in healthy. Thank you again for participating.