Guide to Nonprofit Governance 2019 - Weil, Gotshal & Manges

GUIDE TO NONPROFIT GOVERNANCE 2019

SPONSORED BY THE NOT-FOR-PROFIT PRACTICE GROUP AND THE PRO BONO COMMITTEE OF WEIL, GOTSHAL & MANGES LLP

GUIDE TO NONPROFIT GOVERNANCE 2019

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Not-For-Profit Governance and Best Practices ....................................................................................................1

An Update to the Key Provisions of the New York Non-Profit Revitalization Act.............................................2

Duties and Liabilities Directors and Officers of Not-For-Profit Organizations ...................................................3

Annual Reporting Requirements and Public Information Regarding Not-For-Profit Organizations...................4

Fundamental Tax Law Considerations .................................................................................................................5

IRS Form 990....................................................................................................................................5A

Sample Not-For-Profit Board Guidelines.............................................................................................................6

Sample Not-For-Profit Code of Conduct and Ethics............................................................................................7

Sample Not-For-Profit Conflict of Interest and Related Party Transaction Policy ..............................................8

Sample Not-For-Profit Whistleblower Policy ......................................................................................................9

Sample Not-For-Profit Investment Policy............................................................................................................10

Sample Not-For-Profit Audit Committee Charter ................................................................................................11

Sample Not-For-Profit Nominating and Governance Committee Charter ...........................................................12

Sample Not-For-Profit Compensation Committee Charter ..................................................................................13

Sample Not-For-Profit Executive Committee Charter .........................................................................................14

Sample Charters for Additional Not-For-Profit Committees ..............................................................................15

Finance and Investment Committee Charter.....................................................................................15A

Strategic Planning Committee Charter .............................................................................................15B

Development Committee Charter .....................................................................................................15C

Public Relations Committee Charter.................................................................................................15D

Sample Not-For-Profit Board Self-Evaluation .....................................................................................................16

Issues and Concerns for Directors of Troubled Not-For-Profit Organizations ....................................................17

Warning Signs of Distress for Not-For-Profit Organizations...............................................................................18

Comparison of Liquidation Options .....................................................................................................................19

Checklist for Directors of Troubled Not-For-Profit Organizations......................................................................20

"Right from the Start: Responsibilities of Directors and Officers of Not-For-Profit Corporations"....................21

"Five Best Practices for Transparent Cause Marketing"......................................................................................22

Form of New York Certificate of Incorporation ..................................................................................................23

Form of Delaware Nonstock Certificate of Incorporation....................................................................................24

Form of New York Bylaws ..................................................................................................................................25

Form of Delaware Nonstock Bylaws....................................................................................................................26

Copyright ? 2019, Weil, Gotshal & Manges LLP (Weil), . All rights reserved. Quotation for non-commercial use permitted with attribution. This Guide (including without limitation the sample documents contained herein) is provided for informational purposes only, and does not constitute legal advice or a legal opinion. Neither the existence, distribution nor transmittal of this Guide is intended to create, and shall not create or be deemed to create, an attorney-client relationship between you and Weil. You should not act or rely on any information contained in this Guide (including the sample documents contained herein) without first seeking the advice of an attorney.

Sponsored by the Not-For-Profit Practice Group and the Pro Bono Committee of Weil, Gotshal & Manges LLP

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May 2019

Tab 1

Not-For-Profit Practice Group

Introduction: Not-For-Profit Governance and "Best Practices"

Not-for-profit organizations play a significant role in our society by undertaking and providing funding for projects that benefit the greater good. They provide services and grants in a wide variety of areas that are of importance to the community, including supporting hospitals, educational institutions, museums and organizations dedicated to assisting those in need. A not-for-profit organization generally may not, however, be formed for financial gain, and generally cannot provide profits or excessive benefits for its insiders, donors or others outside of the charitable class for which the not-for-profit organization is formed and intended to serve. The mission of a not-for-profit organization sets forth the purpose for which the organization was formed and granted special legal not-for-profit status. This mission drives the activities carried out by the organization; the board of directors is responsible for governing the not-for-profit to carry out this mission. The assets of a not-forprofit organization are intended to benefit the public good and are restricted by law toward that use alone. Thus, given the prohibition against use of not-for-profit assets for anything other than the intended charitable objective, the founders, members, directors, officers and managers of a not-for-profit will have less control over a not-forprofit corporation than if they established a for-profit corporation and had conventional rights of equity owners or for-profit directors or management.

Effective governance, with its corollaries, transparency and accountability, leads to increased public trust in the organization and a greater willingness by the public to donate funds and services. Effective governance also provides protection from regulatory intrusion.

This outline (i) summarizes steps a not-for-profit organization may wish to consider taking to ensure that it is accountable, transparent and effectively governed by an active and engaged board and (ii) serves as an introduction to the other documents included in this volume.

Boards of for-profit organizations have worked to restore public confidence and increase investment in the wake of a number of highly public governance failures. The steps taken by boards of for-profit organizations ? including those required by reforms embodied in the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), the DoddFrank Wall Street Reform and Consumer Protection Act of 2010, and related rules and regulations ? have led to increased board engagement. Not-for-profit corporations incorporated under New York law (and, potentially, to a more limited extent, other not-for-profit corporations incorporated in other states) are also subject to the governance and oversight rules set forth in the Non-Profit Revitalization Act of 2013 (as amended, the "Revitalization Act"), which amends the New York Not-For-Profit Corporation Law. Most provisions of the Revitalization Act became effective on July 1, 2014. For a discussion of these amendments, see Tab 2. Boards of not-for-profit organizations may wish to adapt certain measures that have become "best practices," even where to do so may not be required by law.

A summary of statutory and case law applicable to not-for-profit organizations in the State of New York, as well as liabilities imposed by the Internal Revenue Service (the "IRS"), are set forth at Tab 3.

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I.

ROLE OF THE BOARD AND FIDUCIARY DUTIES ? AN OVERVIEW

The role of the board of directors of a not-for-profit organization is similar to the role of a for-profit board. In both cases, the organizations are tasked with providing oversight of the organization ? essentially, managing other people's money to accomplish certain end goals ? and in both cases they are judged by their success in doing so. Yet, there is a very key difference: in the for-profit context, shareholders are able to hold corporate directors and officers accountable, whereas in the not-for-profit context there is no private mechanism by which the organization can be held accountable when it fails to act in furtherance of its mission. Although governmental entities (such as the relevant State Attorney General and the IRS) play an important role in policing and monitoring not-for-profit activities, there is no private right of action available against officers and directors to ensure accountability. The not-for-profit board is required to fill this void, by ensuring that the organization acts in accordance with its mission through meaningful oversight of operations and policy guidance in a way that assures integrity and effective management but without requiring undue board involvement in the organization's day-to-day activities.

The basic duties of directors of not-for-profit and for-profit organizations are virtually the same, even though the organizations are typically governed by different laws and have different constituent relationships. Directors of not-for-profit organizations are required to discharge their duties in accordance with the following basic fiduciary duties, which are discussed in more detail at Tab 3:

Duty of care: Act with the care an ordinarily prudent person in a like position would exercise under similar circumstances;

Duty of loyalty: Act in good faith in a manner the director reasonably believes to be in the best interests of the organization; and

Duty of obedience: Act within the organization's purposes and ensure that the mission is pursued.

Breaches of fiduciary duty in the not-for-profit context are enforced by the Attorney General. Enforcement actions can result in significant personal liability for directors, which can be minimized through indemnification and/or directors' and officers' insurance. For a discussion of indemnification and insurance, and examples of enforcement actions, see Tab 3 and Tab 17.

II. BASIC FUNCTIONS OF A NOT-FOR-PROFIT BOARD

The board of a not-for-profit organization is responsible for directing the affairs of the organization in accordance with its mission. In practice, the board delegates responsibility for managing the day-to-day activities of the organization to managers or staff; however, fiduciary duties cannot be delegated and, therefore, the board retains oversight responsibility for matters that have been delegated. Board service should not be viewed as just an honor ? the oversight responsibilities of directors are real, and failure to discharge these legal duties can have unwelcome consequences for the organization and its board members.

The primary functions of the not-for-profit board typically include the following:

Selecting, monitoring, evaluating, compensating and ? if necessary ? replacing the Executive Director/Chief Executive Officer (the "CEO"), and developing and approving succession plans with respect to senior executives of the organization;

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 Defining and reevaluating from time-to-time the long-term strategy by which the organization fulfills its mission and monitoring the performance of the organization in implementing the strategy;

Reviewing and approving material capital allocations and expenditures and major transactions;

Approving budgets, financial plans and financial statements; monitoring and ensuring the integrity of the organization's financial reporting processes, internal control systems and audit; hiring the independent auditor (if any) and assuring itself of the auditor's independence;

Balancing constituency interests in a manner that is consistent with the mission;

Understanding the organization's risk profile and reviewing and overseeing the organization's management of risks;

Ensuring compliance with all applicable laws, regulations, policies and ethical standards of the organization (including laws and regulations enforced by the IRS, as well as the organization's conflict of interest/related party transaction and other policies);

Assisting in obtaining resources through making personally meaningful financial contributions, fundraising and/or grant-writing; comply with prudent management of funds rules and donor-imposed restrictions; and

Establishing the composition of the board and its committees and determining governance practices.

The demands of not-for-profit board service can be heavy ? board responsibilities are wide-ranging and board service is part-time (and usually voluntary). The board of a not-for-profit organization should consider implementing board processes and structures that can assist directors to more efficiently and effectively fulfill these responsibilities; however, in doing so, the board should bear in mind that board practices should address the unique needs and circumstances of the particular not-for-profit organization ? one size does not fit all.

In addition to implementing any governance mechanisms that may be mandated by law, the board should look for governance "best practices" that embody pragmatic solutions that will work given the particular needs and circumstances of the organization, including organizational structure, size, activities, life-cycle stage and funding mechanisms. The goal of "best practice" is to promote active oversight and objective and informed judgment by the board. An effective board provides oversight over the activities of the managers and staff to whom the board has delegated authority. This is necessary to promote the accountable functioning of the organization, including the responsible use of assets that have been entrusted to the organization by others. Board effectiveness can be enhanced by considering the following guiding principles that are common to effective not-for-profit boards.

III. COMMON GUIDING PRINCIPLES FOR EFFECTIVE BOARDS

3.1 Mission

Board accountability begins with the charitable, educational or social mission of the not-for-profit organization. The mission is the reason why the organization exists and has been granted legal status as a not-for-profit by the State and/or tax-exempt status by the IRS. The mission should be the not-for-profit organization's "polestar" in that it provides a measure of success and guides the organization's conduct. (This can be compared to the forprofit world "polestar" of maximizing shareholder value through the efficient production of goods and services.)

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