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A Step Towards Better GovernanceBalancing the Roles and Responsibilitiesof Board Members and Management

Robert Falk

Andras Kosaras

Bridget M. Weiss

March 28, 2017

Hosted by the Association of Corporate Counsel’s NationalCapital Region Non-Profits and Associations Forum

The Board Governs and Management Executes

The Meddling Board

The Absentee Board

The Fundraising Board

The Social Board

Board Factions

The “Real” Board

Board Is Never Held Accountable

Board Has No Liability

Founder’s Syndrome

Keep the Board in the Dark

The Board Just Gets in the Way

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Common ChallengesSound Familiar…?

Understanding the Environment– Governance and management are on a continuum

– Role of Board and management is dynamic – shifts dependingon the activities/issues before the Board

• Strategic planning

• Embarking on new programs

• Succession planning

• First year of new CEO

• Audit/enforcement by regulator

• Crisis/scandal

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Skills of an Effective GC

Role as a Lawyer– Develop reputation for expert and fair analysis and review of

facts and law

– Discuss gray areas openly and transparently in the context ofrisk

– Leverage outside counsel for expertise, to validateanalysis/conclusions, and to preserve independence

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Skills of an Effective GC

Role as a Trusted Counsel (“soft skills”)– Form relationships with the Board (beyond just having a direct line

of reporting), but with the knowledge of the CEO• Provide input on Board composition/skills

• Participate in on-boarding process

• Find Board members who are interested in governance

– Serve as a sounding board to CEO and Board• If CEO and Board are reluctant to ask you questions, you are not

maximizing your role as trusted counsel

– Serve as a sounding board to staff• Are staff using in-house counsel at the beginning of programmatic work,

rather than as an afterthought?

– Say “no” only when you really want it to mean something

– Be agnostic on outcomes, but a stickler for process• Insist on policies; policies are about process and risk management

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Skills of an Effective GC

Some Habits to Avoid– Fails to understand role

• Too focused on serving as decision-maker on the business side,rather than serving to illuminate and strengthen processes fordecision making

• New GC undertaking compliance review that has no focus and lackspriorities

• “Lifer” GC using institutional knowledge to shoot down ideas andundercut CEO and/or Board

– Defensive

• When do you recommend that the Board obtain separate legalcounsel?

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Skills of an Effective GC

Management Board Association Member

Peter – CEO John – Board Chair David – CFO of Member

Jane – General Counsel Vice Chair

CFO David – CFO of Member

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Takeaways from Case Study

Gap analysis by GC

Risk assessment (policies and practices based on priority areas)

Change issue from problem to common interest (solve issue jointly)– Leverage areas where there might be personal liability

May not be able to solve it now, but set it up for the future(strategies to “buy time”)

Be comfortable with uncomfortable discussions (that’s one of yourroles as GC)– Find strategies to have the discussion with the person (directly or indirectly)

Are difficult problems an opening or a red hearing to bring in otherissues?– Prioritize issues/problems

– Don’t serve up the kitchen sink

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Takeaways from Case Study

Make sure full Board is engaged, not just the most powerfulones

Conflict of interest– Review context and situation

Process for how organization takes position (especially withrespect to public policy)

Communicate to hear what others (colleagues) are worriedabout/working on (show curiosity)

Continuous process improvement (total quality improvement)

Prioritize areas where you can get a win (it can be small) tobuild capital/trust

Some issues need external validators– Strategy: Would it be helpful to find out what peers are doing?

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Takeaways from Case Study

Appendix:Review of Fiduciary Duties and

Roles and Responsibilities

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Officers and directors owe a fiduciary duty to thenonprofit organization– Duty of obedience, care, and loyalty

In performing their duties, officers and directors mustact in the best interests of the Organization (e.g., work tofulfill the Organization’s tax-exempt purposes andmaintain its tax-exempt status)

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Fiduciary DutiesThe Basics

Officers and directors must not engage in ultra viresacts – acts that the corporation, under its charter andapplicable law, cannot perform because such actsare prohibited or beyond the scope of thecorporation’s powers

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Fiduciary DutiesDuty of Obedience

The duty of care generally describes the level of attentionrequired of a director in all matters related to the Corporation

The duty of care is perhaps more accurately described as a“duty to be informed”

A director has the responsibility to be informed about an issuebefore making a business decision relating to the issue

– A director will fulfill the duty of care if, prior to making a decision,he or she considers all material information reasonably available tohim or her

– To fulfill the duty of care, the directors of a Corporation shouldfollow deliberate procedures and consult with appropriatecommittees, officers, or employees of the Corporation or otheroutside experts in making corporate decisions

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Fiduciary DutiesDuty of Care

Delegating or Abdicating Authority– When delegating responsibility (e.g., to a committee or

individual director, or outside advisor), Boards should documentsuch a delegation, be clear as to the scope of the delegation, andclearly delineate criteria and goals

– Board must still monitor activities to make sure the delegatedauthority is being exercised in a prudent and reasonable way

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Fiduciary DutiesDuty of Care

In general, under the “business judgment rule,” if aBoard of Directors properly exercises its duty of care, itsmembers generally will be protected from liability fortheir actions on the Board– In effect, there is a presumption that, in making a business

decision, the directors acted on an informed basis, in good faithand in the honest belief that the action was taken in the bestinterest of the Corporation, even if the Board’s decisions lead to a“bad” outcome

– This presumption can be overcome with a showing that theBoard acted with gross negligence

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Fiduciary DutiesBusiness Judgment Rule

The duty of loyalty requires a director to act solely in the bestinterests of the organization rather than in his or her owninterests, or those of his or her associates

One important aspect of the duty of loyalty is to retain theconfidentiality of information that is explicitly deemedconfidential by the organization, as well as information thatappears to be confidential from its nature or matter

The duty of loyalty also encompasses a director’s obligation toavoid conflicts of interest– For a director, a violation of this duty may result in personal liability

for a breach of fiduciary duty

For the organization, such a breach may allow a court to voidthe corporate transaction in which a conflict was present

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Fiduciary DutiesDuty of Loyalty

In general, a conflict of interest exists when the organization doesbusiness with:– a director of the organization;– another entity in which a director of the organization is also a trustee,

director, officer, employee, consultant, or agent; or– another entity in which a director has a financial interest (a “financial

interest” can generally be defined to include an ownership or investmentinterest in the entity with which the organization is contracting, or acompensation arrangement with such entity)

To avoid even the appearance of a conflict of interest, a director maywant to treat as a conflict any transaction between the organizationand (i) the director’s spouse or domestic partner, or the director’ssiblings, descendants, or ascendants (as well as the spouse ordomestic partner of any spouse, descendant or ascendant), (ii) anyentity in which such a relative is a trustee, director, officer,employee, consultant, or agent, or (iii) any entity in which such arelative has a financial interest

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Fiduciary DutiesDuty of Loyalty and Conflicts of Interest

In addition, the organization should have its own conflict of interestpolicy that must be followed– Indeed, on the federal tax return (Form 990), tax-exempt organizations are

now required to disclose whether they have a written conflict of interestpolicy; report whether officers, directors or trustees, and key employees arerequired to disclose annually any interests that could give rise to conflicts;and describe how the organization monitors and enforces compliance withthe conflict of interest policy

If a conflict of interest is or may be present, the director must:• Disclose to the Board of Directors or relevant committee of the Board the material

facts as to his or her relationship or interest.

• Not participate in any Board discussion or vote, unless the organization’s Boarddetermines that the director may participate in such discussion or vote.

If a director follows these disclosure and recusal procedures, a partychallenging a transaction on the grounds of a conflict ofinterest/breach of fiduciary duty will face a heightened burden

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Fiduciary DutiesDuty of Loyalty and Conflicts of Interest

Understand the organization

Help develop and approve key organizational policiesand strategic goals (short-term and long-term)

Approve major transactions– Amendments to organizing documents; sale of assets; joint

ventures and partnerships; etc.

Hire and fire CEO

Fiscal oversight (approve and monitor annual budget)

Evaluate and help manage risk

Plan for the future– Board composition, CEO succession planning

Be a resource for management as needed

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Role of the BoardOverview

Governance and management are on a continuum

Role and work of the Board is dynamic and will shiftdepending on the activities/issues before the Board:– Small or new organization with no or few staff

– Strategic planning

– Embarking on new programs

– Succession planning

– First year of new CEO

– Audit/enforcement by regulator

– Crisis/scandal

– Rumors/innuendos (HR issues)

– Social/political/community changes

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Role of the BoardContext Matters

Juggling Hats…Oh So Many Hats– Overlapping directors with Chapter/Affiliate boards

– Affiliate/Member representatives on Association’s Board

– Interests of Association and Affiliate/Member may not bealigned on all issues (what works for Association may not workfor Affiliate/Member)

Association may desire to take a position on an issue, butMembers may have a different view– Often the “negotiated” position is silence, but is this the

appropriate outcome for the Association when taking intoaccount the Association’s mission/core principles?

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Role of the BoardChallenges for Associations

In a Board meeting, what do you do if there is somethingin the best interest of the Association, but not in theinterest of your employer, the Association Member?

Consider whether a Board member (who represents anAssociation’s Member) may need to resign if the Boardmember cannot balance competing roles/duties

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Role of the BoardChallenges for Associations

Understand the role of the Board– Use the Board (and committees) as a whole

– Avoid giving the impression that individual Board members orthe Board chair has individual power/authority to govern

Keep the Board focused on its role– The Board and individual directors will try to do what comes

naturally to them.

– Individual directors who serve as CEOs/executives in their dayjobs may focus on management, instead of governance

Provide the Board with timely and helpful informationabout the organization’s activities and finances

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Role of the CEO

Help evaluate and mitigate compliance and risk

To whom does the General Counsel owe a fiduciary duty?– Is the GC an officer?

– Attorney-client privilege?

– Duty of confidentiality?

Who is the client?

How does the General Counsel manage expectations ofconfidentiality of discussions s/he has with theCEO/executives and the Board?– Especially when engaging in discussions with one about the

other

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Role of In-House Counsel

Be consistent in analysis of law and risks

Direct line of reporting to Board/Board Chair

Oversee development and maintenance ofgovernance policies

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Role of In-House Counsel

Be informed – can’t delegate fiduciary duties

Board materials should be informative and helpful (not datadump that goes unread)– Update Board about important/significant new activities

(experiments) as they happen, not 12 months later through thefinancial statement

Fiscal oversight– Create a common sense financial dashboard or other means to

translate financial statements to non-financial expert Boardmembers

• Easy to “hide the ball” on an audited financial statement that takes intoaccount non-intuitive accounting rules (cash, accrual, etc.)

– Track use of restricted assets

– Be aware of management borrowing from/against restricted assets

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Tips and Traps

Balance role of full Board and committees– If committees are used extensively, make sure they report to the

Board

Include other staff at Board meetings, not just the CEO– Include programmatic staff

Hold executive session at every Board meeting– Part should be held with the CEO out of the room

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Tips and Traps

Be consistent in communication regardless of the partyinvolved (e.g., Board, CEO, Members)– The message and delivery can be modified and adapted

Understand the different perspectives and risk toleranceof all parties involved

“Conflict of interest” is not a dirty concept– Everyone wears multiple hats

– Don’t try to argue away a “conflict of interest”; acknowledge it andmanage it

– Disclosure and transparency should always be a guiding principle

Focus on the organization’s mission and guiding principles asa way to diffuse personal conflicts and clashes– Do you have guiding principles?

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Final Points

Board composition should not be an afterthought; it isessential for good governance– Do you have a Board matrix? Do you evaluate the Board’s

performance?

Be mindful of ways to engage the full Board– Don’t reserve all the important decisions to a few key committees

– Don’t hide the ball from the Board, but don’t overwhelm them withdetails. Balance. Give them overview of what is going on with theorganization and go deeper in key areas that may be controversial orwhere the Board could be particularly helpful, given their expertiseand experience.

Understand your organization’s weaknesses and challengesand address them head on by appropriate action/policies– And then don’t forget to follow your policies

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Final Points

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Speaker Biographies

Bridget M. Weiss (Partner, Arnold & Porter Kaye Scholer) represents tax-exempt organizations,including charities, private foundations, advocacy organizations, trade associations, medical researchorganizations, and international nongovernmental organizations. She has experience advising tax-exemptorganizations in a wide variety of contexts throughout their entire lifecycle -- from initial qualification fortax-exempt status to ongoing operations, including implementation of complex programs, grantmaking,lobbying and political activities, and business activities. Ms. Weiss counsels tax-exempt organizations andtheir governing bodies facing tax and governance controversies, including both internal investigations andaudits and other examinations by the IRS and other government regulators. She also represents individualsand corporate donors on major gifts and other charitable programs.

Andras Kosaras (Counsel, Arnold & Porter Kaye Scholer) represents domestic and internationaltax-exempt organizations on a broad range of regulatory, transactional, and operational matters, includingstructuring domestic and international programs, grantmaking, and business ventures. He also representsindividuals and corporate donors on charitable giving. He advises exempt organizations on executivecompensation, private foundation rules, unrelated business income tax, mergers, joint ventures and theestablishment of for-profit subsidiaries, as well as on managing investments and endowments, includingmission- and program-related investments. He also advises exempt organizations involved in tax andgovernance controversies, including internal investigations, disputes over charitable gifts and giftrestrictions, internal investigations, and examinations by the IRS and state charity regulators.

Robert Falk (General Counsel, Human Rights Campaign) joined the Human Rights Campaign in2006. He supports the organization’s work by advising both the Human Rights Campaign and the HumanRights Campaign Foundation on legal issues including election and campaign finance law, non-profit taxissues, real estate, human resources matters, and intellectual property. Prior to joining HRC’s staff, Mr. Falkserved as general counsel of the Whitman-Walker Clinic and acting general counsel at DC General Hospital.He has 15 years of private practice experience in prominent national law firms where he concentrated onhealth care issues. He graduated from Yale Law School and went to Princeton University as anundergraduate. He is also a previous recipient of HRC’s Ally of Justice award.

This summary is intended to be a general summary of the law and does not constitute legaladvice. You should consult with competent counsel to determine applicable legalrequirements in a specific fact situation.

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Contact Information

Bridget M. WeissPartner

Arnold & Porter Kaye Scholerbridget.weiss@apks.com

202.942.5839

Andras KosarasCounsel

Arnold & Porter Kaye Scholerandras.kosaras@apks.com

202.942.5271

Robert FalkGeneral Counsel

Human Rights Campaignrob.falk@hrc.org

202.216.1526