Previously we posted about surviving a micro-managing board where directors can be overbearing. However, another type of board that can be equally damaging to nonprofit organizations is the rubber-stamp board.
Rubber stamp boards tend to take a hands-off approach to their duties and simply approve everything put in front of them by management without actively participating in deliberation and debate. This approach is dangerous for the nonprofit and the directors.
Nonprofit boards are responsible for overseeing the management and affairs of the nonprofit. This includes hiring the CEO and monitoring the CEO’s performance, creating a vision and direction for the nonprofit, setting goals, developing policies and procedures, ensuring sufficient financial resources, and generally safeguarding the organization and its mission.
When board members simply approve the decisions of management or the executive committee without engaging in serious deliberation, they surrender to groupthink and lose sight of what is really happening beneath the surface.
Directors who don’t take their fiduciary duties seriously risk personal liability for corporate obligations. Thus, one way to ensure that a board does not just rubber-stamp management’s agenda is to educate them about their duties and their potential liability if they fail to fulfill them. While it’s rare for board members to be held personally liable, it is not unheard of and rubber stamping is typically the first step to a major scandal.
Although we have posted about director liability and fiduciary duties in the past, this topic cannot be stressed enough. Generally, the business judgment rule works to protect directors from personal liability for poor decisions made in the course of performing their duties as directors.
However, the business judgment rule does not protect directors where it can be proven that they failed to fulfill their fiduciary duties of good faith, loyalty and due care on behalf of the organization.
Implement Appropriate Policies and Procedures
Directors should be aware of the organization’s policies including those on compensation and expense reimbursement, conflicts of interest, and other governance policies. The authority of the Chief Executive should be appropriately limited through policies and procedures that require the Chief Executive to operate within the confines of an approved budget, signature authority policies, compensation policies, financial procedures, etc.
Policies and procedures can also define the scope of authority delegated to officers and committees. Directors should also understand that it is up to the entire board, rather than just the Chief Executive or an executive committee, to govern the organization.
Where an executive committee has been empowered to act on behalf of the Board, Directors should ensure that the entire board is informed of executive committee action “ where directors are not aware of the action of the executive committee, they will have a hard time arguing that they have fulfilled their fiduciary duties.
Get Directors Out of the Boardroom
Finally, where directors feel a personal connection to the organization, its staff and volunteers, and its mission and impact in the community, they will be encouraged to take an active rather than passive role in governance and decision-making.
Some disengaged directors may not feel a connection to the organization and its work. If they do not feel invested in the organization’s programs, directors are more likely to approve staff recommendations without fully understanding their potential impact on the organization and its mission.
Increasing the board’s exposure to the organization’s day-to-day work helps directors grow their understanding of the organization and gain insight that will help guide decision-making. Greater exposure to the organization’s programs can give directors a greater sense of engagement with the organization beyond simply approving documents that come across the table at board meetings.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.