5 Risk Tips To Reduce Board Liability

Being on a board connotes status. Board members help solve community issues. Board members help senior managers at organizations take risks. It’s that last thing that can get them sued.

Follow the tips below to manage the risk of board liability and reduce the exposure of board members to legal claims and judgments, according to the Nonprofit Risk Management Center.

  • Provide an annual board orientation to which new and returning board members are invited. The orientation should address the legal duties of the board, the expectations of all board members, the structure of the organization and its governance function, current board policies and governing documents, and the oversight role of the board with respect to fiscal health, risk, and employment matters.
  • Provide regular communications to the board to keep the governing body apprised of programmatic developments, major contractual relationships, staffing changes, stakeholder concerns, threatened or ongoing claims and litigation, and fundraising trends and forecasts. A board kept in the dark is of little use to the management team or the mission of a nonprofit. And when trouble surfaces, an informed board is a valuable partner. A misinformed or neglected board will be unable to provide needed support during a crisis, nor will it be able to boost and sustain the confidence of external stakeholders. And in a worst case scenario an uninformed board could take action that makes the crisis worse, rather than better.
  • Keep the board apprised about the steps the organization has taken to protect the nonprofit and its governing team, including the promise of indemnification found in the bylaws and details surrounding the nonprofit’s directors’ and officers’ liability insurance (“D&O”) and other liability coverages. Include the bylaws and D&O policy wording in material provided to the board as part of its annual orientation and make sure that these and other background items are readily available year-round.
  • Hold each and every board member accountable for their commitments, from the beginning of their term of service until the end. Accountable simply means doing what you have agreed to do. To make accountability a reality, consider designating a member of the board, such as the board chair or the chair of the Board Development Committee, to follow up with board members who fall short of their commitments, such as missing more than an acceptable number of meetings, failing to submit reports for the committees they lead, etc. For more information on holding the board accountable, see “Enforcing Board Member Responsibilities” at www.nonprofitrisk.org
  • Help the board understand its responsibility to disclose actual and potential conflicts of interest through a thoughtful, annual process. Explain to the board that conflicts of interest may be inevitable and are not necessarily a bad thing. For example, nonprofits that have two board members who have a family or business relationship must disclose these reportable relationships on the IRS Form 990, yet whether a conflict of interest exists depends on the circumstances before the board. 

The key questions are:

    • Do any board members have potential or actual conflicts of interests?
    • If yes, is the conflict of the type that must be reported on Form 990 or only disclosed in the annual conflict of interest disclosure process? Family and business relationships must be disclosed on Form 990, while it is not necessary to disclose to the IRS that a board member serves on the staff of a philanthropic foundation from which the nonprofit receives or intends to solicit funds.

Where conflicts are disclosed, what process will the board use to address the conflict if it becomes necessary to do so? For example, a board member owns a piece of property that the nonprofit seeks to buy. The conflict should be disclosed to the full board prior to the board’s discussion about the purchase and the board should decide, possibly after hearing the recommendation of the executive committee, whether to excuse the member from the discussion and the vote about the purchase, or only from the vote.