Successful Nonprofits: Know Your Legal Duties as a Nonprofit Board Member

Keeping yourself and your board on the right side of the law!

Your 3 Legal Duties as a Nonprofit Board Member with Bruce Hopkins

Keeping yourself and your board on the right side of the law!

Your 3 Legal Duties as a Nonprofit Board Member with Bruce Hopkins

by Ro

There are more than 1.5 million nonprofits registered in the US. But when we ask board members if they know the 3 fundamental duties of all board members, few know the answer. That’s a lot of boards and board members who put themselves, and their organizations, at risk every year!

But have no fear! This conversation with seasoned nonprofit attorney, Bruce Hopkins, outlines the 3 fundamental responsibilities of board members and how to perform them effectively.

So whether you are a current board member, thinking of becoming a board member, or are a nonprofit executive, today’s episode will keep you and your board on track.

And make sure to share it with your board!

Listen to the Episode Here!

Links

Website: Bruce R. Hopkins Law

Website: Bruce R. Hopkins Books

Book: Legal Responsibilities of Nonprofit Boards, 3rd Edition

Podcast Episode 144: Unlock Your Power to Recruit Great Boards

Podcast Episode 145: 5 Hacks for More Effective Board Recruitment

Podcast Episode 60: Engage Your Board with Rob Acton

Timestamps

(05:27) The duty of care

(11:09) The duty of loyalty

(20:51) The duty of obedience

Transcript

Dolph Goldenburg (1s):
Welcome to the Successful Nonprofits® Podcast. I’m your host, Dolph Goldenburg. And today we are going to be talking with Bruce Hopkins about the legal responsibilities of nonprofit boards. Before we do that, I want to share with you something really important that we are working on at Successful Nonprofits®. This is something that has been germinating for the last several years. It is no secret that executive directors, when they first start a new executive director job, often find themselves in a difficult spot because boards spend a lot of time recruiting the right executive director, but then don’t really spend a lot of time providing the onboarding, mentoring, coaching support – whatever is necessary to make sure that that executive director is successful. 

Dolph Goldenburg (51s):
That is why next month, we are going to be launching a group coaching opportunity for new executive directors. If you are in your first 12 months of being an executive director and you want to make sure that you break out of the cycle that causes over half of all executive directors to fail in their first 12 to 18 months, then reach out at successfulnonprofits.com. 

Dolph Goldenburg (1m 32s):
Today, we’re going to be talking with Bruce Hopkins about the legal responsibilities of nonprofit boards. I am so excited to be bringing Bruce Hopkins to you because he is one of the most seasoned and experienced nonprofit attorneys in the country. What do I mean when I say that? Well, I turn 50 this year and he has been practicing nonprofit law for as long as I have been alive. 

Dolph Goldenburg (2m 16s):
Not only that, but he has been continuously publishing a nonprofit newsletter since 1984. Let’s think about that for just a minute. In 1984, it was not nearly as easy to publish a nonprofit newsletter as it is today. In 1984, there was no email. So it’s not like he thought to himself, “Oh, I’m going to just put some words on a screen and I’m going to email them out to anyone who wants them.” No! He had to get an editor, get a publisher, and put all of this together. He has been producing this every year for 37 or 38 years. 

Dolph Goldenburg (3m 1s):
In addition to his newsletter, he is the author of numerous books and articles. I can’t even name all of them because it would take too long. We’re going to be highlighting a few of them today. One of them is ​Legal Responsibilities of Nonprofit Boards,which is in its third edition. If you’re not an expert, your book does not make it to the third edition. He also is a professor of law. Bruce, welcome to the Successful Nonprofits® Podcast. 

Bruce Hopkins (3m 38s):
Thank you, Dolph. I appreciate it. 

Dolph Goldenburg (3m 41s):
I will share with you that one of the reasons I felt a strong need to have you on is how well you explain the three duties that every single board member of a nonprofit organization has. And you and I share this in common, Bruce. I’m all about these three duties. I do some training on them and I cannot tell you how many times I’m orienting a board and just for giggles, I will ask, “Okay, who can guess the three duties of all board members?” Only once in the last six years, have I had even a single person get them. Do you do something like that as well? 

Bruce Hopkins (4m 30s):
I haven’t recently. Few people have been doing any serious training recently. But I have over the years. The main focus of my practice is the tax law aspects of nonprofit law. But I’ve been working with BoardSource forever and enjoy that organization very much. They asked me to start publishing this book with them. I do a fair amount of work in this area with my clients more than training per se. So I’ve done trainings, just not recently. 

Dolph Goldenburg (5m 10s):
The one person who could name all three duties was an attorney who was also a trust officer at a national bank. So I was like, “Yeah, okay, that’s cheating. You already knew what they were.” So let’s unpack these three duties: duty of care, duty of loyalty, and duty of obedience. Which duty do you want us to talk about first? 

Bruce Hopkins (5m 27s):
We normally start out with the duty of care. But first I’d like to point at out that these are very fundamental duties. They’ve been in the law forever. They’re common law principles derived from the English law, mostly around trusts. So we’re talking centuries of development of law here. Today, a lot of it is codified and has been reflected in a lot of court opinions, but the underlying principles are the same. It’s got some modern twist to them, but the underlying concept is pretty much the same as it’s always been. 

Bruce Hopkins (6m 10s):
So, let’s jump into care. When we’re talking about care, what we are talking about is the requirement of a board member to be prepared. The word “care” in this context means “care about the position.” It obviously means care about the organization, but it means taking the position seriously. And, essentially, that means to be prepared. I have a list of how you can be prepared in my book. The most important one is to participate by attending board meetings and asking questions. And this of course entails a certain amount of preparation in advance. 

Bruce Hopkins (7m 43s):
The board member should review the agenda and any reports that might be presented at the meeting, those should be read, reviewed, and thought about in advance. And there certainly is nothing wrong with obtaining information from other sources, if need be. For example, if there’s going to be some talk about an issue involving the organization’s program or a legal issue, the board member can go outside the bounds of what he or she has been provided and get additional information so he or she is properly prepared. A board member should also be familiar with the organization’s policies. And by policies, I mean conflict of interest policies, document retention policies, etc. And of course, a board member should be familiar with the nonprofit’s organizing documents, by laws, etc.

Dolph Goldenburg (8m 43s):
I’d like to jump in really quick and note that these three duties often overlap. For example, a board member needs to be aware of policies but also needs to obey those policies. 

Bruce Hopkins (9m 8s):
That’s right. And certainly that’s true with policies. Another important item on my list is to ensure compliance with federal and state law. I always wonder If I should have included it because, even for someone who is a lawyer, that’s a tough task because of the amount of law out there that applies to nonprofits. And if you’re not a lawyer, how can you possibly do that? In the real world, you probably can’t. But I think it is important that the board member be prepared by familiarizing themselves with some basic legal documents like the articles, the bylaws, and the annual return filed with the IRS. 

Dolph Goldenburg (10m 39s):
I love that checklist. When I’m presenting duty of care to boards, one of the things that some people will ask is, “How do I know whether or not I’m meeting it?” And what I say is, “If this was your own business or your own household, are you caring for it and governing it as well or better than you would your own business or household? 

Bruce Hopkins (11m 9s):
That is true and overlaps into the duty of loyalty as well. What that means is that the interest of the board and the organization come first, and the board member ought not to do things that somehow manipulate or abuse the position. 

Bruce Hopkins (11m 56s):
One aspect of loyalty that I think is very important but is often overlooked is confidentiality of information. I think people sometimes forget when they are talking about the organization to other people. But there can be confidential information and that confidentiality ought to be respected. I’m not saying the nonprofit ought to be turned into a secret society, but there are certain things that ought not to be talked about outside of board meetings. 

Dolph Goldenburg (12m 33s):
Absolutely. So as an example, if you’re a board member and you happen to be friends with a staff member, you can’t have conversations with that staff member about what happened inside the board meeting. You just can’t. 

Bruce Hopkins (12m 56s):
I agree with that. One of my favorite topics is conflicts of interest. As a lawyer, I find it fascinating because the duty of loyalty means that conflicts are supposed to be avoided, but in the real world that’s often difficult. And one of the things that I’ve noticed over the years is that most people (who aren’t lawyers) equate a conflict of interest with something improper, maybe even illegal. As an example, people believe a conflict of interest is the same thing as self-dealing. Or that conflict of interest and private benefit are the same thing. And that is not true. 

Bruce Hopkins (13m 38s): 

Often these conflicts are unavoidable and innocent. The key is to not avoid them, but to disclose them. And by disclose, I mean to the board or at least a committee of the board. That’s what a conflict of interest policy is about. It’s to ferret out conflicts board members may have and get them out there so that the rest of the board can understand them. If the board is comfortable with the arrangement, then fine. But if it’s hidden, then there’s always concern that somebody on the outside is going to find out about it and raise a question. 

Bruce Hopkins (14m 21s):
One of my favorites is a lawyer sitting on the board of a client. That is inherently a conflict of interest, but it is a very common practice. In many ways, it’s beneficial to the organization because they get free legal advice, but it does put the lawyer in an awkward spot. That’s why I’ve stopped doing it. Years ago I quit serving on client boards because I don’t want to give advice to myself. That’s inherently a conflict. 

Dolph Goldenburg (15m 18s):
Right. I think you would probably agree that it’s a best practice for boards to ask all members to disclose conflicts of interest once a year. 

Bruce Hopkins (15m 28s):
Well that’s right. And it is the conflict of interest policy that the IRS advocates quite vigorously. They’ve even drafted one that they use as a prototype and it requires an annual questionnaire where pertinent questions are asked and disclosed. 

Dolph Goldenburg (15m 50s):
I know you mentioned sometimes those conflicts are reviewed and decided by a committee of the board and sometimes by the full board. Do you have a recommendation for the way those conflict of interest disclosures are handled after someone has identified themselves as having one? 

Bruce Hopkins (16m 7s):
Well, you just touched on a very fundamental problem that comes up a lot. And it has to do with the size of the board. Frankly, the larger the board, the more unwieldy this kind of thing can be. If it’s a fairly intimate group, 5-9 members, you could probably do it at the full board level. If it gets to the point where the board is much larger than that, that function might want to be delegated to an executive committee. There aren’t usually committees just for conflicts of interest.  So the executive committee would work. 

Bruce Hopkins (16m 51s): 

Normally, the executive committee would be the president, the secretary or the treasurer, or a couple of other individuals who have some ex officio position. The review could be done at that level. If there’s a problem or a potential problem, then the committee could take it to the full board. So I think it depends on the overall size of the board, because the review group ought to be relatively small. There are politics everywhere, and politics can occur on boards. If you have a 50 person board and this thing is tossed to that group, it could be a problem. 

Dolph Goldenburg (17m 29s):
So Bruce, I’m going to throw another wrinkle into this. I think nonprofits dealing with conflicts of interest among board members is critically important. So let’s say it goes to the executive committee, but the board chair or the board vice chair or the treasury secretary is the person who’s disclosed the conflict. Is it okay for them just to recuse themselves from that conversation at the committee level? Or should they punt that to another committee that this person is not on? 

Bruce Hopkins (17m 59s):
I think it should go to the same committee. I think the proper procedure is to have that individual participate in the discussion at the outset. He or she should explain the conflict, why they’re in this position, how it benefits the organization, answer questions, and then leave and not participate in further discussion. 

Dolph Goldenburg (18m 33s):
Makes sense. Often, your officers are the people who are most committed and so they’re also the ones who will say, “my marketing firm will do this at an 80% discount.” But now they’ve got a conflict of interest. 

Bruce Hopkins (18m 48s):
That’s exactly right. But lurking in the background is always the federal tax law. As I mentioned a few minutes ago, the doctrine of private inurement, excess benefit transactions, and private benefit create situations where nonprofits will have a tax law problem, as well as a nonprofit governance problem. 

Dolph Goldenburg (19m 21s):
Oh, wow. Can you say some more about that? 

Bruce Hopkins (19m 25s):
Sure. Let’s say there is a private foundation that has just purchased an office building for itself. The board is deciding on administrative managerial expenses, and one thing they have to do is pick a company that will come in and perform janitorial services at the end of every day. And guess what? It just so happens that a board member owns a janitorial services company. That person says exactly what you just said: “I’ll have the company provide services to the foundation for half of the market rate.” It’s a great deal for the foundation. 

Bruce Hopkins (20m 5s):
Everybody assumes that, even though technically it’s a conflict, it’s a wonderful benefit for the organization. So they approve it. Now that would be an act of self-dealing that would give rise to tax law penalties. So to me, those tax penalties are far more important to worry about than a conflict of interest matter. Sometimes the law will take over and that will lead to the correction of that problem and you don’t even get into the conflict of interest situation. But that same scenario in a public charity probably could be tolerated. 

Dolph Goldenburg (20m 48s):
Interesting. I appreciate you diving into that. That was really helpful. 

Bruce Hopkins (20m 51s):
And then we have the duty of obedience. This does overlap with the duty of care because “obedience” means obedience to the law and obedience to the organization’s own documents. I’m looking here at the book and it says, “ensuring that the organization is in compliance with all laws that apply to the organization, federal, state, and local.” Over the years I have seen many situations where that rule is violated, and sometimes knowingly. 

Dolph Goldenburg (21m 35s):
Let me say that when that rule is knowingly violated by the board, members end up with significantly more liability than they normally have. 

Bruce Hopkins (21m 47s):
Absolutely. The key word there is “knowing.” You know. Ignorance of the law is not an excuse, but in a way it is in this context. If you really didn’t know that there was a problem, from a governance point of view, the board member would not be faulted. But deliberate violation of a law because it’s too costly to comply or you just don’t like it is a very awkward position. I’ll tell you where I see this a lot is in fundraising regulation. You take a charity that’s fundraising. Is that charity registered and granted a permit in every state to fundraise? 

Bruce Hopkins (22m 42s):
Some are, some are not. It even gets worse because a lot of counties have ordinances. Cities have ordinances. There are tens of thousands of bodies of law out there. I don’t think there’s any organization in the country that can possibly take the time or afford the expense of complying with and getting registered under every single one of those statutes. So again, this is an objective. It does put people in an awkward position if they know in their heart that some particular law ought to be complied with and the organization is not doing it. 

Dolph Goldenburg (23m 26s):
One of the real world ways I’ve seen this impact some boards is if the organization is not paying its payroll taxes or not filing its 990s and the board is aware of that. When the IRS comes knocking, they come and they talk to these board members. 

Bruce Hopkins (23m 46s):
But you’ve touched on a couple of areas where there are specific law penalties. If you don’t file the 990 or don’t file it on time, there are penalties. Now, these don’t fall on the board members. They fall on the organization with one exception. You mentioned payroll taxes. I talk about this in the book, because that is one area where a board member, particularly if he or she is an officer and is deeply involved in the financial operations of the organization, can be personally liable for those taxes for an organization of any size. That could be a considerable sum, particularly if it’s transpired over a few years. 

Dolph Goldenburg (24m 41s):
Right. I take that so seriously that I recommend board treasurers ask to see the payroll records once a year. I need to know, and see, that our quarterlies our 941 and 940 is being filed. Otherwise they don’t have that assurance. I’d love for you to weigh in. 

Bruce Hopkins (25m 12s): 

That’s exactly right. 

Dolph Goldenburg (25m 14s):
The other thing that I have noticed, from a media perspective, is that almost every article about a state attorney general investigating a nonprofit is because the board breached one of these three duties. Would you agree? 

Bruce Hopkins (25m 49s):
Absolutely. In the book I mention that the most important word for boards is “fiduciary.” The second is “liability.” The book looks at things that can be done to minimize liability. The first one is the obvious one, and that is to not get in trouble in the first place. The board member serves in a proactive way, by adhering to these duties. That’s the first thing to do. You can talk about insurance and immunities and indemnifications and incorporation and all those kinds of things, but the first thing to focus on is the duties and to follow those duties and not get the board member in that position to begin with. 

Dolph Goldenburg (26m 55s):
Right. I think what it boils down to is that if I don’t have the time or the inclination to do the work and show up at the meetings and read my meeting packets, then I shouldn’t be on the board. 

Bruce Hopkins (27m 16s):
There’s no question about that. You raise with that comment a very important point. Board service today is a lot different than it was two or three decades ago. In the old days, people would just show up for a meeting and listen to reports and then go to lunch. Those days are gone. Now it requires the preparation that I talked about and participation in the meetings. It’s a serious business. There’s no question about it. It can be extremely time consuming. 

Dolph Goldenburg (28m 5s):
Oh, absolutely. One of the areas that I think boards so often fall short on are their bylaws. The bylaws lay out things like member terms and how many people you need for a quorum. But for whatever reason, the board just ignores some portions of its bylaws. “Oh, well, you know, Dolph’s been such a great board member. We should really let them have a fourth term.” Well, the bylaws won’t let Dolph have a fourth. 

Bruce Hopkins (28m 40s):
Right, right, right. Unfortunately, that’s true. 

Dolph Goldenburg (28m 44s):
Well, Bruce, I’m so thankful that you’ve come on to talk about the duties of care, loyalty and obedience. I’ve got to ask you the off-the-map question and this off-the-map question is really on the edge of the map. You are not just a well-known nonprofit attorney with five decades of experience. You are also a poet. And I read a nine-page poem of yours called Ode to the 990. So you’ve got to tell me about your poetry. 

Bruce Hopkins (29m 21s):
Well, I’ve got two published books of poetry. They’re all on nonprofit law. Some of the poetry is probably stretching the definition of that term. I’ve never had any formal training as a poet. This started a few years ago. There was a friend of mine that published a book of poetry. I went to an event where he was promoting the book and reading some of his poetry. Somehow he infected my brain. I started to write poems about different aspects of nonprofit law. I’m working on a third book of poetry right now. The tax cuts and jobs act enacted at the end of 2017 gave the nonprofit world a lot of new law, most of it pretty hard on the nonprofit sector.

Bruce Hopkins (30m 13s):
So, I’ve been writing poems about some of those statutes – the excess compensation tax and the tax on college and university endowments and so forth. You mentioned the 990. I’ve gone back and I’ve started to redo the poem on the 990 because the version that’s out now is somewhat different than the one that I first wrote about in the Ode. So I’ve got to revise my Ode. But it takes some time to do that. I find myself with less and less time because I’m trying to do other things as well. But I do enjoy writing them, so I’m working on a third collection. 

Dolph Goldenburg (31m 11s): 

Do you have a favorite poem? 

Bruce Hopkins (31m 13s):
I’m not sure. I haven’t thought about that one in a while. If I’d known in advance, I would have gone back to look. There are probably a couple in there that I am particularly fond of, but I’m certainly not in a position to recite one. 

Dolph Goldenburg (31m 34s):
I was not going to ask you to recite one because I know that they are pages and pages long. Well, Bruce, thank you so much for coming on today. Listeners, I want to make sure that you are able to get more information about Bruce. There are two URLs I want to share with you. The first is brucerhopkinslaw.com and the second is brucerhopkinsbooks.com. On his website, he offers a free book that you can download that is called How to Start a Nonprofit Organization Legally​

Dolph Goldenburg (32m 19s):
I’ll share with you that Bruce is also working on a new edition. So download this one, but come back in a few months and make sure you get the new edition. Now his book, Legal Responsibilities of Nonprofit Boards,is a short read. I think it’s a little less than a hundred pages long, but it’s super important. If you are a board member and you care about doing this job well and doing it legally, check out this popular book. it is currently in the third edition. Hey, Bruce, thank you so much for coming on the podcast. 

Bruce Hopkins (33m 2s):

Good to talk with you. 

Dolph Goldenburg (33m 4s): 

Listeners, if you missed those URLs, because you were busy writing poetry of your own, have no fear and on writing that poetry. You can go to successfulnonprofits.com to get Bruce’s URLs. We’ll also link to the ​Legal Responsibilities of Nonprofit Boards.Finally, don’t forget if you are an executive director and you were in your first 12 months in a new position, consider our coaching group. The first 12 to 18 months are the toughest for an executive director. It is the period in which they are most likely to wash out. Go to successfulnonprofits.com and check out our coaching group that is going to start next month. 

If you enjoyed this episode with Bruce, I want you to check out Episodes 144 and 145 on recruiting great board members. And I also want you to check out Episode 60, Engage your Board with Rob Acton. Quick secret: we are about to have Rob Action back on the podcast in a few months. So listen to Episode 60 and come back in a few months so that you can get more great words of wisdom from Rob. That, listeners, is our show for this week. I hope you have gained some insight to help your nonprofit thrive in a competitive environment. 

Dolph Goldenburg (34m 27s):
And just a quick reminder that I am not an accountant nor an attorney, and neither I nor the Goldenburg Group provide tax, legal, or accounting advice. This show is intended for informational purposes only and should not be relied on for tax, legal, or accounting advice. If that’s what you need, you should find a qualified, licensed professional and talk to them. 

**  We have edited this transcript because how you listen is not how you read. If you have a problem with this, remember you got this for free!

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