How to Talk to Not-for-Profit Boards About Their Responsibilities
As a CPA and community volunteer, I’m often asked to talk to not-for-profit boards about financial and governance topics. My presentations often generate lively discussions. Some people are surprised to learn that although it is not necessary to be a financial or business expert to serve on a board, there are some broad fiduciary responsibilities that apply to all board members. Most nonprofits are formed as corporations under their particular state’s law (I’ll leave the nuances to the lawyers), but a cornerstone of these laws is that board members owe a fiduciary duty to the corporation they serve on. A fiduciary responsibility is defined as the obligation to act in the best interest of another party, and this pertains to all matters regarding the not-for-profit, including its financial oversight. There are three basic responsibilities that apply to board members: the duty of obedience, duty of care and duty of loyalty.
Duty of Obedience
When I explain that all board members can be equally responsible and liable to safeguard the not-for-profit’s assets and interests, the response I often receive is, “The entire board? Even commissioners?” or “But I’m just a commissioner. I shouldn’t be held responsible!” The duty of obedience means board members are accountable for internal laws (that is, bylaws and policies) and all applicable external laws and regulations. For instance, the IRS can hold each board member personally liable for failure to pay certain taxes incurred by the organization. It does not matter if they are the Chair or President or “just” a member at-large; generally, all board members have responsibility.
Duty of Care
The duty of care requires the board to conduct the affairs of the not-for-profit in a way that a prudent person would, which is more than just showing up for meetings and exercising good judgment. Consider this: are transactions in the best interest of the organization from an objective perspective? I advise board members to keep asking questions until they feel they can comfortably make an informed and independent decision before casting their vote at a board meeting.
Duty of Loyalty
Board members are expected to put the organization’s needs above their own. To introduce the duty of loyalty, I ask my audience how many of them joined the board because of their belief in the organization’s mission. The majority proudly raise their hands. The next question I ask is, “As a board member, how does your organization guard against misuse of assets?” This question sparks a discussion on how to protect the not-for-profit’s interests. Then I ask, “Is a board member with a personal or professional interest that is at odds with the organization’s best interest demonstrating loyalty to the organization?” Someone will usually answer “no”. Then, I let them know they just identified the definition of a conflict of interest, which is addressed in the duty of loyalty. This provides a great segue into discussing various conflict of interest scenarios, and how to address them.
To drive this home, I like to point out the IRS’s excess benefit rules that apply to charitable organizations. An excess benefit transaction occurs when a person in a position to exercise substantial influence over the organization’s affairs (including board members), impermissibly benefits from a transaction with the organization. Examples include if they receive unreasonable or unsubstantiated payments, such as fees, compensation, benefits, or expense reimbursements that serve a private interest and not the public interest. If such a transaction is not corrected within the taxable period, then:
- The organization must report the transaction(s) to the IRS;
- The person(s) benefitting is subject to an excise tax of up to 225% (there is a first-tier excise tax of 25% and then a second tier excise tax of 200% in the absence of timely correction)
- Plus, the organization’s tax exempt status could be jeopardized;
- In addition, generally, any officer, director, manager, etc. who knowingly approved such a transaction is subject to an excise tax of 10% (up to a maximum of $20,000 for each excess benefit transaction, and additional second tier penalties may apply).
What transaction is worth all of that? To date, no one has thought of a single transaction worth all of the above.
One noteworthy exception to the 10% excise tax is if a board member votes against the excess benefit transaction. Then, he or she is not considered to have participated in the transaction.
Insofar as board leadership comes with great responsibility, it has even greater rewards. From my own experience, I can say the most satisfying years of my career have been in service to not-for-profits in my community. It is deeply rewarding to lend your skills to a cause that is meaningful for you. Just make sure you are going into it with your eyes wide open.
Want more information on this topic? The AICPA’s Not-for-Profit Section is a community that supports not-for-profit professionals and business advisors. You can find a number of board governance resources, including an extensive overview of board responsibilities, a guide to board member orientation and a sample conflict of interest policy here. To learn more about the ins and outs of excess benefit transactions, the AICPA Not-for-Profit Section and Tax Section have teamed up to co-host a webcast on June 1 on Emerging Tax Topics for Not-for-Profits.
Annice Reed, CPA, Controller for North Texas State Soccer. She has more than 20 years of professional experience. Annice is also a CPA who specializes in not-for-profit accounting, taxes and consulting. North Texas State Soccer is a not-for-profit organization that offers soccer programs for over 165,000 youth and adults in that region.