Before the pandemic, I was asked to join a local nonprofit’s board of directors. I supported the organization and was already friends with several of the board members and even some of the staff.
Without too much thought, I agreed to become a board member.
After several months on the board, I began to suspect that something wasn’t right with the organization’s finances.
The chief financial officer was presenting financial reports in Excel format and the numbers presented to the board looked realistic on paper but did not tie into the prior month’s financials. When I asked questions, the CFO always answered, “I will get back to you.” I learned that I would never receive any of the promised supporting documentation.
Eventually, the team discovered the CFO was mismanaging the finances and intentionally presenting inaccurate data to hide the truth.
We soon learned this person was embezzling funds.
In the end, a police report was filed, the CFO was terminated, and a claim was filed with the insurance company to make the organization whole again. Not only was this situation difficult for the board members and staff to navigate, but it also placed the nonprofit at risk of negative publicity, possibly impacting future community donations.
While it may be difficult to know whether someone is embezzling from a nonprofit when you join a board, before committing to board service, you should familiarize yourself with the culture, governance, and finances. Take some time to do your research and ask questions about the organization. Make sure you are comfortable with what you are observing and reading before you commit yourself as a board member.
Are fully committed?
Never agree to serve as a board member without doing your homework first. Do you believe in the cause the organization supports? Do you have the time and resources necessary to support the mission of the nonprofit? Are you willing to put your personal interests aside when voting on the issues presented to the board? Are you prepared to donate to the organization, seek sponsors, and fundraise?
Additionally, before accepting the opportunity, be sure you are serving for the right reasons. And if you do not have the time or desire to fully commit, or you question the integrity of the organization, respectfully decline the invitation to serve.
Do your due diligence
Don’t assume because you are personal friends with the board members that the organization is well managed. Often, board members don’t ask questions, especially regarding finances.
Attend a meeting or two to observe the team’s procedures and meeting protocols before joining the board. Are these meetings run professionally? Do the board members seem engaged, and do they ask thoughtful questions? Are the financial statements current? Does the board package include prior meeting minutes?
If you are interested in joining the board after observing how the meetings are managed and how data is presented, then ask the following:
—Does the board host an annual board orientation for new and returning board members?
—Can you review the governance documents such as the organization’s bylaws and articles of incorporation?
—Is there a history of board minutes documenting communications to the board to keep the governing body apprised of programs, major contractual agreements, staffing changes, threatened or ongoing litigation, and finances?
—Is there an employee handbook and other written employment policies?
—Are there any prior or pending lawsuits?
—Does the organization have the appropriate annual audit reports available to review?
—Is the Form 990 tax return filed on time annually? Can you review the 990 before committing to join?
—Is the board educated about its responsibility to disclose actual and potential conflicts of interest? Is there a written conflict-of-interest policy signed annually by the board members?
—Is the annual budget available to review?
—How are board members held accountable for their commitments to the board?
Is the organization insured?
Next, try to understand what risk-management practices have been implemented by the nonprofit to prevent or minimize exposure to litigation? The organization should carry general liability (GL) coverage, professional liability (PL) coverage, and directors’ and officers’ (D&O) liability insurance.
Each of these policies responds to distinct types of claims, all of which could be filed against the nonprofit, its board, or both. GL coverage responds to claims alleging bodily injury and property damage. PL coverage responds to claims alleging negligence in the delivery of professional services.
Sometimes, a board will carry GL and PL insurance but will not purchase D&O insurance. Don’t assume that because the board has an executive director, all insurance is in place.
Nonprofit executive directors have many and varied daily responsibilities. In addition to managing their staff, they manage finances, engage donors, and serve those in need. Their focus is naturally on implementing the organization’s mission, so they may not give due attention to managing risk.
Nonprofit board members do assume personal liability. If you plan to serve on a nonprofit board, always ask if a current D&O policy is in place. Board members may face lawsuits related to employee matters, discrimination, mismanagement of funds, and injury claims. D&O insurance helps mitigate your personal risk.
Being asked to serve on the board of a local nonprofit is often perceived as a compliment, and so you may be inclined to accept the offer without much consideration. Individuals who are willing to serve as board members are usually known for their passion and support of vital community programs.
Serving on the board of a nonprofit organization can be even more rewarding when you understand the benefits to your community. Before doing your due diligence and joining the board, make sure you have the time, are committed to the cause, and are comfortable with the governance of the organization.
Then, you’ll be even better positioned to help the organization fulfill its mission.
Teri Parker is a certified financial planner and vice president for the Riverside office of CAPTRUST Financial Advisors. She has practiced financial planning and investment management since 2000. Contact her via email at Teri.parker@captrust.com.
