What are the Risks of Being a Board Member? And How to Avoid Personal Liability Risk
When it comes to being a board member, there are a few risks that you should be aware of. One of the most significant risks is personal liability risk. You could be held personally liable if something goes wrong with the company.
There are a few ways to avoid this risk. First, ensure you are well-informed about the company and its operations. You should also have a good understanding of your role as a board member and what your responsibilities are.
Finally, you should make sure that you have adequate nonprofit insurance coverage in case something goes go wrong.
Before you consider a board membership positions consider the following first.
What are the Risks of Being a Board Member of a Nonprofit Organization?
1. Liability for actions taken while serving on the board
Serving on the Board of Directors of a nonprofit organization can be a rewarding experience, but it also involves some key risks of personal liability. To mitigate these risks, board members must adhere to specific standards of conduct and fiduciary duties, such as the duty of care and loyalty. The risks associated with serving on a nonprofit board include the following:
- Actions and activities that intentionally cause injury, harm, or damage to persons or property
- Personal participation in the tortious conduct of a nonprofit’s employees
- The knowing approval of criminal acts or active involvement in illegal activities by the organization
- Personal involvement in a contract involving the nonprofit that is tainted by fraud
- Active participation in a transaction approved by the board with an entity in which the board member had a substantial personal or financial interest.
In addition, Board member officers and directors must exercise good judgment, rely on trusted experts, and make decisions based on complete information to protect themselves from personal liability.
2. Legal Fees and Costs
Board members of a nonprofit organization can bring associated legal fees and costs. These can include fees for defending against any claims made against the organization, its directors, officers, or employees; fees for any settlements, judgments, and fines or penalties; and fees for counsel to review the company’s program for D&O coverage.
Additionally, any fees for the company’s indemnification provisions, the company’s charter or by-laws, standalone indemnification agreements, and any litigation or regulatory investigations involving the company or its personnel may also need to be factored in.
3. Damages Sought by Shareholders
Being a nonprofit organization’s board member carries risks and potential damages that shareholders may seek if the company fails to comply with certain obligations. On the one hand, the company must ensure it adequately protects its directors through indemnification and D&O insurance.
A board director may be exposed to personal liability in the event of a claim from a shareholder or other party, with potential damages including legal costs, settlements, judgments, fines, and penalties. D&O policies are not designed to protect criminal behavior if a board member is found criminally liable.
4. Lack of Information and Understanding of the Nonprofit Business Operations
While it may be tempting to join a company board as it could look good on a resume, board members take on additional liabilities when joining a board of directors. A lack of information and understanding of nonprofit business operations can have severe consequences for board members of a nonprofit organization.
Without knowing the legal liabilities and risks of their position, directors and officers may be unprepared to manage their responsibilities. This could lead to the misappropriation of funds, donor lawsuits, and the misuse of grant money.
Social media and online networking also carry risks that board members may be unaware of, putting them in a vulnerable position.
Ultimately, a lack of information and understanding about nonprofit business operations can cause board members to make mistakes that could be detrimental to the organization and the people it serves.
5. Conflict of Interest is Personal Business Ties
The conflict of interest due to personal business ties for being a board member of a nonprofit organization is that directors and officers may use their power for their benefit or that of another interest or entity.
This can include self-dealing activities in which board members and staff have personal financial gain from the nonprofit or ties of friendship between corporate directors and CEOs which can compromise a firm’s integrity.
Board members can be held civilly liable, and their personal assets could be a financial resource for third parties to recover monies.
6. Intensive Workload
Board members are responsible for making decisions that affect the organization’s direction and performance. This includes setting goals and objectives, developing and implementing policies, providing financial oversight, and taking legal and ethical responsibility for the organization.
Additionally, board members are responsible for fundraising, advocating for the organization, and developing stakeholder relationships. Managing strategic risks is an integral part of this responsibility. Strategic risks are highly complex and challenging to quantify.
As such, board members must be able to assess such risks and develop strategies to manage them while being aware of emerging trends and changes in the industry. This intensive workload requires board members to be knowledgeable and proactive to ensure the sustainability and success of the organization.
7. Lack of Proper Training and Support
The lack of proper training and support for being a board member of a nonprofit organization can lead to boards failing to add value to their executive team. Without a solid understanding of modern risk evaluation and management techniques, board members may be unable to evaluate and manage risk adequately.
It is also critical that board members are aware of employment insurance and income tax laws, payroll-related standards and regulations, and workplace safety. Additionally, they should know the revenues and costs of the organization and be knowledgeable of financial safeguards and policies.
Board members should understand their fiduciary responsibility to exercise a high standard of care in managing the organization. Without proper training and support, board members may be unable to fulfill their roles adequately.
What are the Responsibilities of Board Members?
Board members of non-profit organizations have a wide range of responsibilities that must be adhered to prevent any risk to the organization. They have a duty of diligence, a duty of loyalty, and a duty of management.
The duty of diligence requires board members to act in good faith and the organization’s best interest. This includes reading minutes, agendas, and other support material, attending board meetings regularly, and voting on issues brought before the board. Board members must also stay informed and knowledgeable about the policies and operations of the organization.
The duty of loyalty requires board members to place the organization’s interests first, avoiding and declaring any conflicts of interest and positively representing the organization. They must also respect the confidentiality of any information the board is privy to.
The duty of management requires board members to act and make decisions in line with the governing policies and bylaws of the organization. They must understand the scope of authority for staff and directors, regularly review bylaws and procedures, and meet legal requirements for governance and incorporation.
Failing to adhere to these responsibilities can result in risks and liabilities for the board members. Although being part of an incorporated organization does provide some protection from such risks, the onus is still on individual board members to be knowledgeable about risk management and the legal duties that come with their positions.
Board members must not assume they are not liable for any decisions or actions were taken by staff, as risk management results from a team effort between the board and the staff. It is recommended that board members seek legal counsel if they are unsure of their personal or the organization’s liabilities.
How to Mitigate Risks as a Nonprofit Board Member?
1. Obtain General Liability Insurance For Nonprofit Organizations
Obtaining general liability insurance protects the organization from potential lawsuits arising from injury or damages caused by its activities. This type of policy covers legal fees, court costs, settlements, and judgments. It also protects against negligence claims and helps protect the organization’s assets in the event of a lawsuit.
2. Research and Understand the Risks Associated with Your Board Role
By researching and understanding the risks associated with a board role, nonprofit board members can better identify and mitigate against potential issues that could arise in their role. This could include understanding the legal and financial risks associated with the role and any reputational risks that might come with it.
3. Discuss Risk Management Programs with Your Organization
As a nonprofit board member, you can discuss risk management programs with your organization to help mitigate risks in the following steps:
- Start by understanding the risks inherent in your organization’s strategic plans and risks arising from the competitive landscape and potential for technology developments.
- Encourage the organization’s executives to discuss the most likely sources of material future risks and how the organization addresses potential vulnerabilities.
- Promote an effective, ongoing risk dialogue between the board and management.
- Design the proper relationships between the board and its standing committees to ensure appropriate oversight and resources for risk management.
- Tailor the risk management system to the specific organization, ensuring that material risks are identified promptly, appropriate risk management strategies are implemented, risk and risk management are integrated into strategy development and business decision-making, and necessary information on material risks is transmitted to senior executives and the board or relevant committees.
- Monitor risk management progress and ensure that the organization’s programs align with the company’s risk profile, business strategies, and risk tolerance thresholds.
4. Obtain Director Liability Insurance
Nonprofit board members must obtain Director’s and Officer’s (D & O) liability insurance to protect themselves if a liability claim is filed against them. With D & O insurance, board members are protected against legal costs such as attorney’s fees, settlements, judgments, and sometimes fines and penalties.
This insurance also offers protection if the nonprofit does not have adequate indemnification provisions in its charter or by-laws and if statutory immunity has its limitations. D & O insurance can assure potential board members who might otherwise be reluctant to join a board without this protection.
This insurance can still be obtained for organizations struggling with finances at a reasonable cost. Considering this cost in the context of the potential risks associated with not having it is essential.
Contact one of our licensed nonprofit insurance agents at Integrity Now Insurance Brokers.
5. Familiarize Yourself with State Statutes and Corporation Laws
Nonprofit board members should be familiar with laws and statutes that could help them mitigate risks, such as state fiduciary duties, federal and state laws and regulations, stock exchange listing requirements, and various domestic and worldwide best practices.
Specifically, board members should be aware of the applicable tax laws, including requirements for filing an annual Form 990-N or 990, depending on the nonprofit’s annual gross receipts. They should also be aware of the IRS’s regulations regarding employee compensation and must ensure that it is reasonable and comparable to other nonprofits of a similar size.
6. Develop an Understanding of Your Organization’s Risk Profile
By understanding the organization’s risk profile, nonprofit board members can better identify, assess, and manage potential risks before they escalate and cause damage. By examining the various sources of risk and analyzing their interrelationships, board members can spot trends and anticipate risks before they arise.
This helps the board respond more quickly in the event of a crisis and helps ensure that the organization’s strategic plans are better suited to mitigate risk.
7. Check Your Organization’s By-laws and Bylaws for Risk-Related Provisions
Bylaws should include the following information:
- Establishment and regular review of operating policies
- The disclosure of personal dealings and conflicts of interest
- The recording of all disclosures by directors of conflict of interest and any dissent or abstention from voting
- Implementing effective internal systems and policies in all areas of organizational activity, including finance and human resources, avoiding possible conflict of interest situations.
- Maintaining a proper record-keeping system and conducting an annual financial audit.
- An annual board orientation should be provided to all board members, and communications should be kept open to keep the governing body informed of organizational developments, contractual relationships, staffing changes, stakeholder concerns, threatened or ongoing claims and litigation, and fundraising trends and forecasts.
- Bylaws should hold board members accountable for their commitments to ensure the organization is adequately prepared to manage risks and liabilities.
8. Develop a Personalized Risk Management Plan
As a nonprofit board member, creating a personalized risk management plan can help mitigate risks by understanding and evaluating multiple sources of risk, influencing management risk appetite, taking a portfolio view of corporate risks, being apprised of significant risks, and implementing joint decision-making procedures.
With an in-depth understanding of risk assessment and management techniques, a personalized risk management plan can help identify potential problem areas and create a mitigation strategy to address them.
9. Engage in Risk Awareness Training
Risk awareness training can help nonprofit board members mitigate risks by better understanding the current risk assessment techniques and management tools. With a working knowledge of these techniques and tools, board members can be confident that management is taking the necessary steps to ensure a balanced risk/return trade-off for stakeholders.
10. Keep Records of Decision Making and Transparency
Keeping records of decision-making and transparency can help to mitigate risks as a nonprofit board member by providing evidence that the board is aware of its legal duties, is informed and up to date on programmatic, contractual, and legal developments, and is taking steps to protect the organization, its members, and the mission of the nonprofit.
Transparency in decision-making ensures that all parties involved are kept abreast of potential conflicts of interest, allowing the board to respond to potential issues on time, thereby avoiding legal action or other negative consequences.
Thorough records of decision-making processes can prove that the board is acting in the organization’s best interest and that established norms and policies make the decisions.
Top 5 Reasons for Suing a Non-profit Board of Directors?
Suing a non-profit board of directors is not something to be taken lightly, but certain circumstances may be necessary. The five most common reasons for suing a non-profit board of directors include:
- Mismanagement of funds
- Duty Breaches of fiduciary duty,
- Failure to comply with legal or regulatory requirements.
- Engaged in conflicts of interest
Importance of Working with Nonprofit Insurance Brokers
Being a board member at a nonprofit organization requires several vital coverages to protect the organization and its leadership from potential claims. These coverages include:
Are board members of a nonprofit organization held liable for compliance with laws and regulations?
Yes, board members of a nonprofit organization may be held liable if they fail to comply with laws and regulations. The board owes a duty to institutional and individual donors to ensure that donated funds are spent in accordance with their wishes.
What are the state indemnification laws for board members of a nonprofit corporation?
State indemnification laws for board members of a nonprofit corporation are laws that provide legal protection for the members of the board. These laws, typically referred to as volunteer protection statutes, limit the personal liability of board members from claims that may arise from their role in the organization.
The Revised Model Nonprofit Corporation Act of 1987 states that directors must actively participate in decision-making and act carefully in fulfilling their responsibilities, and most states have some form of volunteer protection statute in place to provide legal protection for board members.
The federal Volunteer Protection Act of 1997 also offers additional protections to board members, and in states where the VPA offers more robust protection than the state law, board members can rely on the broader protection of the federal law.
Are board members of a nonprofit organization liable for misconduct?
Yes, board members of a nonprofit organization can be liable for misconduct, depending on specific considerations. If a duty was owed to the plaintiff by the nonprofit, and the board members failed to act in good faith and with ordinary diligence, then the board members may be liable.
It is also important to note that board members may be protected from liability in certain circumstances, such as if the board members are acting in good faith and with due care. Additionally, many nonprofits have liability insurance that can provide coverage for judgment and settlement costs.
Are board members of a nonprofit organization immune from shareholder suits?
No, board members of a nonprofit organization are not immune from shareholder suits. While board members are typically protected from personal liability by their organization’s bylaws, volunteer protection statutes, and insurance policies, they may still be held responsible in court if they fail to exercise their duties with due diligence or act in bad faith.
Who should not serve on a board of directors?
Individuals with a history of misconduct, such as fraud or criminal activity, should not be considered for the role. Additionally, individuals lacking adequate knowledge and experience in the field should not serve on a board of directors.
This includes those without financial, legal, or strategic planning expertise.
Someone who has recently held a senior position within the company or has significant personal relationships with other board members should also not be considered for service to maintain objectivity and fairness. Additional risks of being paid board members?
Can a board member be sued individually?
Yes, a board member can be sued individually. This can occur when a board member has acted illegally or failed to meet the standard of care expected of them as board members.
When does a for-profit corporation need a directors and officers liability policy?
A for-profit corporation needs a directors’ and officers’ liability policy when there is a risk of the company being sued by shareholders and held liable for any acts or omissions of the directors and officers.
How Can We Help Protect Your New Board Members From Financial Liability
Integrity Now Insurance Brokers can help protect your new board members from financial liability. Our experienced church and nonprofit insurance brokers will assess the risk of potential liabilities and provide advice on how to protect your organization best.
We offer a range of insurance products, such as directors & officers insurance, that can give your board members peace of mind regarding financial responsibility.
As a licensed church insurance agent, we help churches throughout the US with their church property insurance needs. We also provide risk management services to help identify potential issues before they become a problem.