Senior Living Alert: Good Governance Is Critical to a Nonprofit Organization’s Viability

McGuireWoods LLP

When serving on a nonprofit board, directors are required by state law to discharge certain fiduciary duties, including the duties of care and loyalty. These directors are entrusted with ensuring that the organization carries out its exempt purposes. For senior living organizations, this means directors must make sure the organization offers high-quality care and housing for seniors. A key component of exercising these fiduciary duties is periodically reviewing the organization’s governance structure and updating its governing documents, policies and procedures as needed.

Good governance leads to tax-compliant organizations and ensures that the organization has the policies and procedures in place to comply with any applicable regulatory standards. Failure to address these matters may jeopardize state or federal licensing and can result in loss of Section 501(c)(3) tax-exempt status.

Below are key features directors should consider when verifying that their respective organizations follow best practices for good governance.

Board Structure. A majority of the board of directors of a senior living organization should be independent and otherwise unrelated to the organization. This typically means a limited number of executive leadership members also serve as directors. The size of the board will depend on the activities and needs of the organization. The board should have individuals who are deeply engaged and who have the appropriate expertise to meet the organization’s needs. Board members should be actively involved in meetings and committees.

Setting the Mission. An effective board governs by establishing a mission and strategically directing the organization to successfully implement the mission. A clearly articulated mission statement should detail what the organization does, how it does it, and why. This statement should be aspirational in nature, highlighting the organization’s vision and values. Once the mission statement is adopted (and anytime it is revised), the following documents should be reviewed to confirm that the structure and operations matches the mission:

  • Articles of Incorporation govern the relationship between the entity and the state and outline the exempt purpose of the organization. Articles should be updated for federal and state law changes impacting the organization and if the organization changes its purpose or method of election or appointment of directors (if not covered in the bylaws).
  • Bylaws govern the relationship among and between directors and officers. Bylaws are more operational in nature and should accurately reflect the operational structure of the organization. Bylaws should be reviewed every three to five years to determine if any changes are needed.
  • A Code of Ethics communicates a standard of legal compliance and ethical integrity. It sets the tone and expectations for the board, officers and staff. This is a living document that should be updated over time. For example, with recent technological advances in artificial intelligence, organizations should update their code of ethics to reflect the organization’s standards surrounding the use of such technology. Remember that this code is the minimum standard and is only as good as it is enforced.
  • Board Meeting Minutes reflect board decisions and discussions that led to such decisions. Minutes are the official and legal documentation of board decisions during meetings.
  • A Board Manual ensures that board members are aware of board structures, policies and plans.

General Director Duties

Duty of Care. Directors must remain informed about the organization’s activities and participate in decisions using diligence, care and skill. They must use the care and judgment of an ordinarily prudent person in similar circumstances. The “good faith” standard requires directors to act in a manner that is aligned with their responsibilities and reasonably believed to be in the organization’s best interests. Any reliance on others must be informed and reasonable.

How to satisfy the duty of care:

  • Attend board and committee meetings.
  • Prepare for meetings in advance.
  • Use independent and best judgment.

Duty of Loyalty. Directors must act in the best interest of the organization rather than the personal interest of the director or any other person or organization.

How to satisfy the duty of loyalty:

  • Disclose any conflict of interest.
  • Establish and adhere to a conflict-of-interest policy.
  • Avoid using organizational information or opportunities for personal benefit.

Duty of Obedience. Directors must comply with all applicable federal, state and local laws. They also must act in accordance with the organization’s bylaws and ensure the organization is acting in pursuit of its mission.

How to satisfy the duty of obedience:

  • Maintain and effectively use systems to ensure compliance with regulatory and reporting requirements.
  • Thoroughly examine the organization’s adherence to governing and operational documents.
  • Speak as a unified board after a decision is made. Even if a board member voted against a decision, the board should maintain a united singular voice on decided issues.

Conflicts of Interest. While conflicts of interest are not prohibited, the process for addressing conflicts is important. Organizations need a conflict-of-interest policy so directors can avoid conflicts of interest that are detrimental to the organization. Boards should be aware of the potential impact of actual and perceived conflicts on public perception of the organization.For example, a conflict of interest would occur where an officer, director or trustee votes on a contract between the organization and a business that is owned by the officer, director or trustee. Conflicts of interest frequently arise when setting compensation or benefits for officers, directors or trustees.

A conflict-of-interest policy helps ensure that when actual or potential conflicts of interest arise, the organization has a process in place under which the affected individual will advise the governing body about all the relevant facts concerning the situation. A conflict-of-interest policy also is intended to establish procedures under which individuals who have a conflict of interest will be excused from voting on such matters.

Relationship Between Directors and Staff. For most established organizations, the board’s role is strategic and not operational. However, the board’s functions and activities set the example and tone for the organization’s staff. Directors should respect boundaries with staff. Generally, staff members report to the CEO/executive director. Therefore, directors should communicate staff concerns to the CEO. Directors should not interact directly with staff members on organizational (or personal) matters without the knowledge and approval of the CEO. Respecting boundaries is crucial because director interactions with staff members can lead to harassment or similar complaints against individual directors. Remember that directors generally have no individual authority and the board acts as a body.

Use of Board Committees. Many organizations, particularly those with large boards, operate under a committee structure whereby certain board duties and responsibilities are delegated to smaller committees of the board. Some organizations use “standing committees” that are in place at all times to cover certain areas, such as audit, finance, governance, nominating and investments. Many organizations also appoint “ad hoc committees” to address special situations or needs, but these are not normally intended to be long-term or permanent committees.

The number of committees and their authority and functions vary from organization to organization. If committees are used, the organization’s bylaws should include provisions regarding the composition and election of members, the committee’s duties and responsibilities, and the manner of the conduct of committee meetings, including quorum and voting requirements. Some organizations allow nondirectors to serve on a committee. Consult state law in this event to determine what limitations there may be on a nondirector’s ability to exercise board authority.

The board should carefully consider the authority of the committee to act on behalf of the board. At issue is whether the committee can act without full board approval or if it must bring its recommendations to the full board for final approval. State law typically prohibits committees from exercising certain authority, such as filling vacancies on the board of directors, amending the articles of incorporation or bylaws, and agreeing to a substantial disposition of the organization’s assets or dissolution of the organization.

Below is a description of typical committees and their functions.

Executive Committee

  • Typically, it is composed of board officers, chairs of committees and at-large members.
    • It normally will have full authority to operate and administer the organization between meetings of the board of directors.
    • In appropriate circumstances and depending upon the facts and circumstances of the particular organization, the board may limit the authority of the executive committee to act in certain situations.

Audit Committee

  • Under good governance principles, officers of the organization will not serve on the audit committee.
    • Its purpose is to review the adequacy of the organization’s internal financial controls, review with the organization’s independent public accountants the annual audit program and the organization’s financial statements, and recommend the selection of the organization’s independent public accountants.
    • Some states, such as California and New Mexico, now mandate an audit committee for larger organizations.

Finance Committee

  • Normally it is responsible for preparation of the annual budget for approval by the board of directors.
    • In addition, it typically reviews requests for funds and fiscal year expenditures, and recommends policies and procedures for the organization’s financial operations.
    • Membership of this committee should include individuals with appropriate financial knowledge and experience.

Compensation Committee

  • Its purpose is to review the chief executive and other officers’ performance annually and to recommend the direct and indirect compensation of such persons. It also should provide review of overall levels of compensation throughout the organization, and it often is responsible for review of pension and other benefit plans.
    • It should be composed of independent directors (i.e., those who have no financial interest in the compensation of any officer).

Nominating Committee

  • Normally this committee recommends to the board of directors the names of individuals for election or reelection to the board.
    • It often develops the slate of officers and committee chair for consideration and election by the full board.

Investment Committee

  • Its purpose is to provide general oversight of the security, funding and investment management of the organization’s endowment and investment assets.
    • Normally it is responsible for development and periodic review of the organization’s investment policy and asset allocation guidelines.

Advancement or Development Committee

  • It oversees the organization’s fundraising, public relations and related activities.

Strategic Planning Committee

  • This committee oversees the board of director’s responsibilities regarding mission and purpose, as well as long-term strategic direction of the organization, and is responsible for planning board retreats.

Governance Committee

  • It directs the board of directors’ orientation and mentoring programs, undertakes regular reviews of the articles of incorporation and bylaws, and works to develop and maintain appropriate policies.

Conclusion. Given the constraints on volunteer directors’ time, it is understandable that good governance may not be front of mind. However, it is essential for the board to establish policies or procedures that require the organization to periodically review the organization’s governance structure. Organizations evolve to stay current with the times; governing documents need to ride along to also remain current.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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