Transcript BASICS OF CORPORATE GOVERNANCE FOR NOT-FOR

WHAT EVERY NOT-FOR-PROFIT
DIRECTOR SHOULD KNOW
By REUBEN S. SEGURITAN
450 Seventh Avenue, Suite 1400, New York, NY 10123
Phone 212 695 5281 Fax 212 563 2664
www.seguritan.com
December 12, 2006, New York, NY
I.
Characteristics of Not-for-Profits (NFPs)
 A separate and distinct legal entity established to serve a
charitable purpose.

Includes charitable, educational, religious, scientific, cultural
 Governed by the state laws on corporations (Not for Profit
Corporation Law or “N-PCL” in New York); the applicable
provisions of the Internal Revenue Code; and the charter
documents (the Certificate of Incorporation and By-laws)
 May not engage in “substantial” lobbying and may not
participate in political activities (election campaigns) if organized
as a 501 (c) (3) organization
II.
Organization and Governance
 Board of Directors - principal governing body
 Executive Committee – optional, except for large boards; no
statutory duties
 Officers - discharge duties provided in the By-laws or delegated
by the Board through board resolutions
 Members
III.
Accountability of Directors
 CHARITABLE CLASS - referred in the incorporation documents,
such as the needy; homeless; veterans; inner-city youth, etc.
 MEMBERS - generally are interested in the NFP’s objectives
and activities; voting members have the right to elect and/or
remove directors; approve amendments to charter documents
(certificate of incorporation or by- laws); or decide to dissolve
the NFP.
 DONORS – may impose restrictions and other terms on their
gifts or contributions; directors must know these donation terms
of the donation and determine whether the NFP can comply with
them.

PUBLIC – Directors have no legal obligation to the public, but
they still have to consider the public’s perception of the
corporation as revealed through its fundraising materials, IRS
Forms 990 / 990PF; website or news items about its activities.

GOVERNMENT

Internal Revenue Service - the NFP must comply with reportorial
requirements to the IRS which also oversees and examines the
corporation’s audit processes. The organization must be mindful of
the limitations on its activities in order to retain tax exemptions or
other benefits.

State Attorney General - represents the charitable class and may
sue the organization on behalf of such class.
IV.
Legal Duties of Directors

Duty of Care - duties must be discharged in good faith and
with that degree of diligence, care and skills which ordinarily
prudent men would exercise under the same circumstances.

Duty of Loyalty – must pursue the objectives and interests of
the organization with undivided allegiance.

Duty of Obedience - must be faithful to the mission and
objectives of the organization
 Duty of Care

Know the corporate documents (charter and by-laws)

Track finances directly or through committees

Review corporate records

Attend Board, committee and membership meetings

Review written materials distributed at meetings

Delegate duties to qualified professionals
 Duty of Loyalty

Duty to the corporation comes before individual

Private interest loans from NFP to director or officer is forbidden

“Interested party transactions” allowed only if full disclosure is made and
authorized without interested director’s vote

No private inurement (self-dealing prohibited)
 Duty of Obedience

Know the purposes of the organization as stated in the Certificate of
Incorporation

Exercise independent judgment

Organization’s activities must be consistent with the stated purposes

Comply with all appropriate laws, including registering with the Attorney
General; comply with registration and reporting laws and other laws in which
it conducts its activities and or solicit contributions; file financial reports
VI.
Enforcement of Directors’ Duties
 Legal action may be brought against the erring director by any
of the following:



State Attorney General;
Another director; or
Members representing at least 5% of the membership.
 Erring director may be removed and/or ordered to return the
benefits received in violation of his/her duties.
VI.
Tort Liability of Directors
 Liability to third parties could occur with regard to accidents or
employment claims.
 In New York, a volunteer director is NOT liable for third party
claims unless s/he acted with either:

gross negligence

intent to cause harm
VII. Indemnification and Liability Insurance
 Indemnification

As a general rule, directors have the right to claim and
corporations have the authority to pay reimbursement for
costs of litigation against directors.

Indemnification may be beyond what the law requires under
certain circumstances.
 Indemnification required

If director is successful on the merits, s/he must be
indemnified the judgments, fines, settlement payments and
other reasonable expenses of litigation.
 Indemnification allowed but not required

If director acted in good faith and had a reasonable belief
s/he acted in the best interest of the corporation , even if the
case had been settled or the case was not successful on the
merits.

As to criminal proceedings, indemnification is allowed if the
director had no reasonable cause to believe his conduct was
unlawful.

Where it is provided for in the Certificate of Incorporation, or
the By-laws, Board Resolution or contract.
 Indemnification prohibited

In derivative actions, which is a lawsuit brought by a member
on behalf of the NFP against the directors or officers to
enforce the NFP’s rights.

Where the director acted in bad faith, with active or
deliberate dishonesty or gained personal profit or other
advantage in an adverse judgment.
 NFP may purchase directors’ and officers’ liability insurance
 NFP director or officer must therefore determine the following:

NFP policy on indemnification (check certificate of
incorporation and by-laws)

Whether directors and officers have liability insurance.

If there is liability insurance, determine the scope, whether
correct titles of the officers are used; whether expenses of
investigation and excise taxes are covered; whether defense
costs are included.