Board Meeting 3/29/2017 Training

Minutes:  March 29, 2017 GLN Board of Directors Meeting – Board Training

 Present on the 11 AM EST meeting of the Board via WebEx and conference call:  Andrew Brown, GLN President and Chairman; Richard N. Sawaya (Secretary), Charles Maslin, Bennard Cann (Treasurer), Ilya Budik, and Benjamin Klein from Morgan Lewis.

The meeting consisted of Ben Klein providing a training to the Board of Directors that included the following material:

 Morgan, Lewis & Bockius LLP

 March 29, 2017

 Overseeing A Director’s Conduct

ØThe conduct of the Board and of individual directors is governed by:

  • The D.C. Nonprofit Corporation Code. The provisions discuss the conduct of Board meetings, the fiduciary standards for directors and when a director may be held liable for his or her misconduct.
  • The Internal Revenue Code. As condition for receiving the exemption under 501(c)(3), the organization must comply with the provisions of the IRC, and the directors are responsible for ensuring such compliance.


 Overseeing A Director’s Conduct

ØWho may enforce the provisions of these statutes?

  • The IRS has the authority to audit a nonprofit to ensure compliance with the IRC. Remedies – loss of exempt status and penalty taxes imposed on directors who misuse nonprofit’s assets for personal benefit.
  • At common law, fellow directors and the DC Office of the Attorney General have authority to ensure that directors are operating nonprofit for the public benefit.


 Board Members’ Duties

ØDuty of Care

ØDuty of Loyalty

ØDuty of Obedience

ØDuty to Inform

 Duty of Care

ØMust act in good faith as a reasonable, prudent person would act under similar circumstances. Be informed, use common sense and be diligent.

ØAttend Board meetings and committee meetings.

ØIt is important for the Board to engage in open debate.

ØReview financial records.

ØThe Board should create minutes demonstrating reasoned decisions.


 Duty of Care

ØIn exercising his or her duties, a director may rely on information provided by management, outside experts and any committees acting within their subject area, unless it is clear should not.

ØIndependently evaluate position taken by other Board members, senior management, and consultants. Ask for clarification if necessary.

ØBoard may delegate its duties, but not abdicate its responsibilities.  It has ultimate responsibility for the affairs of the organization.

 Business Judgment Rule

ØUnder the business judgment rule, the presumption is that in making its decisions, Board acted:

  • In good faith
  • On an informed basis, and
  • In the honest belief that the action was in the organization’s best interests

Ø If all 3 prongs are met, decision is given respect and deference.

ØDoes not apply to criminal activity, fraud, or willful misconduct.



 Board meetings

ØThe Board may only act at a duly called Board meeting, where proper notice has been given and a quorum is present.

ØA Board member can participate via electronic communication (skype or conference call) provided the director can hear the other directors, speak and vote.  The director is considered present at the meeting.

ØA Board member cannot vote by ballot and proxy voting is not allowed.

ØThe only exception is a unanimous written consent, provided:

  • The action to be taken is clearly spelled out
  • All directors then serving on the Board agree in writing to the action.
  • Email consent is acceptable provided the action to be taken is specified in the director’s written agreement, and it is clear who is sending the email. (i.e., footer)

 Ensuring Proper Recordkeeping

ØUnder the Nonprofit Code, a nonprofit must maintain at its principal offices, copies of the following:

  • Articles of Incorporation and Bylaws.
  • Minutes and accounting records for past three years.
  • Communications to membership for past three years.
  • Names and business addresses of officers and directors.
  • Most recent biennial report.
  • If a membership organization, an accurate membership list that includes names, addresses, and voting class of all members.

ØThere is no penalty for failure to do so, although directors and members have a right to inspect the records and can sue to enforce that right. 



 Ensuring Proper Recordkeeping


ØMinutes of all Board and committee meetings should be prepared within the later of 60 days or the next meeting (IRS) and kept permanently.

ØIRS requires that certain records be maintained and made available for public inspection.  Failure can result in penalty tax.   These documents are:

  • The nonprofit’s Form 1023, application for exempt status
  • The Form 990 for the past three years.

ØIf a nonprofit does not have any of these documents, they must file Form 4506 with the IRS, requesting a copy. 


 Duty of Loyalty

ØA Board member is obligated to act in the organization’s best interests and not use his or her position to advance the interests of third parties (e.g., family members or another organization with which the Board member is associated).

ØThese interests may be financial, but they can also be personal – enhancing prestige and one’s own professional reputation.

ØDirectors’ actions must further the best interests of the organization as a whole, not benefit a particular constituency.

ØCovers both affirmative acts and refraining to act.


 Duty of Loyalty

ØIn particular, a director must:

  • avoid conflicts of interest,
  • not usurp a corporate opportunity without first offering it to the organization; and
  • maintain confidentiality of non-public information about the organization.


 Conflict of Interest

ØWhat is a Conflict of Interest?

ØWhere a Board member has a direct or indirect financial interest in a transaction involving the organization.

ØConcern is that member may advocate for approval of a transaction for reasons other than the benefits that would accrue to the organization.

 Conflict of Interest

 Steps to Satisfy the Duty of Loyalty

ØBe sensitive to potential conflicts.  Disclose even when there is only the appearance of a conflict of interest.

ØAbstain from participating in the discussion and vote if a conflict of interest exists or it reasonably appears that way.

ØIt is the role of the disinterested Board members decide if conflict exists, and to approve the transaction.

ØConsult with counsel if you need to do so.

ØAct on perceived failure of another Board member to disclose a potential conflict.

 Duty of Loyalty – Steps to Avoid Usurping the Organization’s Opportunities

ØHow can a Board member avoid “usurping” the organization’s corporate opportunities or competing with the organization?  A director should ask:

  • Would the organization likely be interested?
  • Has the organization expressed an interest?

ØWhen a Board member is presented with a business opportunity, and he or she knows or reasonably should know it would be of interest to the organization, the Board member must disclose to the organization so disinterested directors can decide whether the organization should act or decide to not act.

ØDoes not matter whether he or she learned of it through his position with the organization or otherwise

ØIf the organization declines, the director can take advantage of opportunity.


 Private Inurement and Private Benefit

ØThe Internal Revenue Code affords tax-free status to charitable organizations because they provide important benefits to the public.

ØAccordingly, nonprofit organizations must be organized for the benefit of the public and not for the benefit of insiders. 

Ø“No part of the net earnings of the corporation shall inure to the benefit of, or be distributable to its members, trustees, officers, or other private persons, except that the corporation shall be authorized and empowered to pay reasonable compensation for services rendered and to make payments and distributions in furtherance of [its exempt] purposes set forth in these Articles of Incorporation.” 

 Private Inurement and Private Benefit

ØHowever, it is not enough for the corporation to be organized for the benefit of the public and not for insiders.  It also must be operated in such fashion.

ØBoard members must ensure that insiders do not receive favorable treatment or the organization may lose its tax-exempt status.

ØExamples of favorable treatment include:

  • Paying more than fair market value for goods or services provided by an insider, and
  • Creating jobs for relatives of insiders.


 Director Compensation

ØDirectors are not compensated for Board service but may be reimbursed for out-of-pocket expenses incurred on behalf of the organization.

ØThey may also be compensated for the fair value of any other services they provide to the organization.

ØBoard members may be subject to penalties under the Internal Revenue Code if they are party to an “excess benefit transaction” with the organization.


 Excess Benefit Transactions

ØIf an organization engages in an “excess benefit transaction,” the IRS may impose an excise tax on any insider who is a recipient of excess benefits, as well as the managers who approve the transaction.

ØAn excess benefit transaction means a transaction that provides the insider with an economic benefit which exceeds the value received by the nonprofit in return.

ØThe insider must correct the transaction by putting the organization in a financial position no worse than that it would be in if the transaction had not occurred.  If the individual does not correct the transaction, a second tier tax is imposed.

ØApplies to any individual who was in a position to exercise substantial influence over the affairs of the nonprofit at any time during a 5-year period ending on the date of the transaction, including board members, the CEO, the COO and the CFO and close family members.


 Duty of Obedience

ØA Board member must follow the organization’s purposes and goals as set out in bylaws, articles, and mission statement.

ØThe Board member must also obey any policies or procedures adopted by the Board.

ØThe Board member must obey all federal, state and local laws and regulations, and take steps to ensure that the organization does as well.

 What Must Be Held Confidential?

ØDirectors should not disclose information about the organization’s activities or operations unless:

  • there has been general public disclosure;
  • information is a matter of public record;
  • Is required by law to disclose the information; or
  • the information is a matter of public knowledge.

 Duty to Inform

ØOfficers of the organization have a duty to provide the Board of Directors with any material information that the officer has learned while performing his or her duties.

ØOfficers must also inform the Board of any actual or proposed violation of Board policies or the law.

ØDirectors must also inform fellow Board members of any wrongdoing as part of carrying out their duty of care to the organization.

 Protection of Directors

ØDC law generally limits Director liability unless:

  • The director receives a financial benefit from the organization to which he or she is not entitled;
  • There is an intentional infliction of harm or violation of criminal law; or
  • There is an unlawful distribution of the nonprofit’s assets.

ØIf the director is sued with respect to any conduct which he or she reasonably believed to be in the best interests of the organization the director is entitled to indemnification by the organization.

ØDirectors’ and officers’ liability insurance.


 Role of the Board

ØOne of the most difficult tasks for a Board is to define the line between governance and management

ØThe Board’s role is to provide general direction and governance of the organization’s affairs, as distinct from operational management of the organization.

ØThe Board must assure itself through knowledgeable and responsible inquiry that the organization’s management has performed satisfactorily without being involved in everyday affairs.

 Role of the Board

ØThe Board sets the strategic direction of the organization in a manner consistent with its mission.

ØThe Board also adopts broad ranging policies to ensure that the mission of the organization is served.

ØManagement executes these strategies within the boundaries of the policies.  Examples of management role:

  • Negotiation of material contracts
  • Hiring/firing decisions.


 Board Committees

ØBoard committees – committees that are authorized to take final actions, without further Board approval, such as an executive or audit committee – may only consist of Board members.  No third parties or staff.

ØBoard committees must be approved by a majority of all directors on the Board and the appointment of individuals to the committee must also be approved by a majority of all directors.

ØAdvisory committees which are only empowered to make recommendations to the Board for its approval, can include non-Directors.

ØAdvisory committees can be authorized to take any actions that might otherwise be delegated to management.

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