The directors of a nonprofit organization play a key role in the oversight of the organization and in the fulfillment of its mission. Directors are particularly critical in times of crisis such as the COVID-19 pandemic. Below we discuss the principal duties of directors, the key issues directors should consider, and the key actions directors should take in times of normalcy and especially in times of crisis.
General Duties of Directors
Duty of Care: Directors have a duty to make well-informed decisions (for example, by asking questions of management and engaging and taking advice from experts) and to act in the best interest of the organization. Generally, a director should act on some reasonable basis, the director must have knowledge of that basis, and his or her actions must be based on that knowledge.
Duty of Loyalty: Directors have a duty to act in the best interest of the organization, act in good faith, and avoid (or fully disclose) conflicts of interest. The good faith requirement is generally satisfied if a director does not have any personal interest in, or obtain any personal benefit from, the action in question.
Duty of Obedience: Directors have a duty to ensure that their decisions further the organization’s mission and to ensure that the organization adheres to its stated mission. While the duty of obedience may be treated as a component (or the foundation) of the core duties of care and loyalty, rather a standalone duty, it is often highlighted as an important role in the nonprofit context because the mission of the nonprofit organization is key to its existence and the scope of its actions.
Key Issues and Key Actions of Directors
To fulfill their duties, directors should consider key issues and take the following key actions:
1. Engage in Oversight and Insight
a. Communicate: At all times, and particularly in times of crisis, directors should stay in close contact and communication with management and focus on ensuring the health and safety of employees and other stakeholders. Directors should also consider the need for more frequent and ad hoc board meetings.
b. Ask Questions: Directors should ask thoughtful and appropriate questions of management about their decisions and underlying assumptions in order to ensure a rigorous decision-making process. Asking questions is a critical means of fulfilling the duty of care to make informed decisions.
c. Understand Risks: Directors should understand risks to the nonprofit organization, its employees and stakeholders, and its mission, and should discuss (as a board and with management) strategies to mitigate these risks and ensure short-term and long-term viability. As the COVID-19 pandemic changes the way colleagues interact, directors (as a board) should explore the ability of the organization to continue fulfilling its mission, even if it looks different than it did before the pandemic.
d. Provide Support: In times of crisis, it is natural for directors to want to help more, but directors should maintain the critical role of providing oversight and insight and supporting – rather than becoming –management. Directors should give advice and ask questions, and let management continue to run the organization.
e. Address Liquidity and Funding Needs: Generally, the board is involved in setting annual and quarterly budgets and implementing and overseeing financial controls, with the goal of maintaining a healthy financial situation. Directors may also be involved in fundraising efforts. Directors should understand the liquidity needs and resources of the nonprofit, including recent changes in fundraising brought about by COVID-19, such as postponed fundraising events and reduced sources of revenue. Directors should work with management to develop a plan to address lower levels of funding and/or secure new funding sources. Directors (as a board) may need to reevaluate budgets, recommend changes that are aimed at financial viability, and consider the organization’s ability to access endowment funds in a manner consistent with legal limitations.
f. Consider Temporary and Permanent Changes: In light of the effects of the COVID-19 pandemic and the measures implemented to address its spread, directors should work with management to address and consider the need for temporary and/or permanent changes in how the organization fulfills its mission. It is important to keep the long-term mission of the organization in mind and focus on objectively assessing situations based on known facts and avoid optimism bias.
g. Make Decisions for Prudent Use of All Assets: Part of the duty of care includes making decisions for prudent use of all assets of the organization: employees, volunteers, facilities, financial assets, reputation and good will.
2. Keep Records: Boards should maintain records of decision making and discussions, particularly of key decisions, including by taking detailed minutes. Clear records are evidence of a board effectively carrying out its duties and the individual directors effectively carrying out their duties.
3. Comply: Directors should keep abreast of legal and regulatory developments and restrictions (or the lifting thereof) that affect the organization. Directors (as a board) should review policies and procedures to ensure compliance and the implementation of best practices. While compliance is particularly important in times of crisis when there are rapid and increased regulatory changes, directors should generally work to ensure compliance with the organization’s documents (charter, bylaws, mission statement, etc.) and with applicable laws and regulations.
4. Advocate for and Monitor the Organization’s Mission: Directors should provide oversight of the organization’s activities and transactions to ensure that they advance its mission. In furtherance of this duty, directors should regularly monitor the organization’s mission and the actions taken in furtherance of that mission. Due to the COVID-19 pandemic, the ability of the organization to engage in its mission may have been temporarily impeded, or perhaps the organization is more critical than ever, or the organization may have needed to change how it carries out its mission. No one organization is the same and directors should consider how they can best support the organization and its beneficiaries and continue to advocate for the organization’s mission.
5. Maintain Respect and Patience: Directors and management may be facing individual challenges during these stressful times, and promoting an environment of respect, patience and compassion will promote effective decision-making, benefiting the organization in the short- and long term.
6. Conduct Succession Planning: Particularly if the organization is dependent on one key leader, directors should ensure there are plans for how to manage if that individual were to fall ill or need to take time away to care for an ill family member. Generally, directors (as a board) should regularly engage in succession planning in case key individuals decide to leave the organization.
7. Work with Advisors: Given the rapidly evolving regulatory environment, directors (as a board) and the organization should engage with and rely upon outside lawyers and other advisors when necessary. For example, each state has rules on when a nonprofit organization can tap into the corpus of its endowment for operating expenses, and the board is responsible for both ensuring financial viability and compliance with applicable law.
8. Engage in Self Evaluations: Directors (as a board) should review their own processes and functions to determine if changes should be implemented or new methods implemented. These evaluations may be undertaken annually and may need to be undertaken more regularly in light of changing means of interaction and new challenges.
****
Please visit Goodwin’s Coronavirus Knowledge Center, where lawyers from across Goodwin are issuing new guidance and insights to help clients fully understand and assess the ramifications of COVID-19 and navigate the potential effects of the outbreak on their businesses.