Will Changes in N.Y. Non-profit Laws Cause Board Resignations?

New York governor Andrew Cuomo recently signed into law the “Non-Profit Revitalization Act,” which totally overhauls our State’s antiquated nonprofit regulations. Most of the reforms will go into effect July 1st of this year. Applauded by many, the new provisions will eliminate unnecessary and outdated bureaucratic burdens. More importantly, the Act should reduce some of the fraud prevalent in the industry (see my blog post dated 01-21-2014).

However, one thing that the Act did not do, is to reduce the personal liability that non-profit Board directors take on in New York for their philanthropic service. Quite the contrary, not only does the Revitalization Act place all the responsibility on Board directors to carry out the stricter provisions, but it also grants the Attorney General sweeping new powers to prosecute them for negligence and even incompetence. Although the intention to crush fraud is laudable, I believe it will cause some un-intended consequences.

Keep in mind that unlike the for-profit world where most Board members are experts in their fields (such as risk management, audit, finance, legal, etc. — and are compensated for that expertise), Board directors for tax-exempt organizations (TEOs) are mostly un-paid volunteers who care about doing good. This is not to say that TEO board members do not have any expertise in corporate governance (many do). However, the culture at many TEOs is more easy-going and casual, the type that focuses on social benefits such as how many trees were planted, how many scholarships were awarded or how many whales were saved — and not on designing and administering a whistleblower policy, for example, that includes procedures for the reporting and handling of suspected violations of law. Does the average volunteer director even have the expertise for this type of work?

In many ways, non-profit directors are at much greater risk for personal liability than for-profit Boards because the volunteers have at their disposal smaller budgets and staffs, and worse yet, limited access to experts such as lawyers and accountants.

The Revitalization Act puts the volunteers’ existing personal liability on steroids. Consequently, some volunteer directors may choose to resign to avoid the additional burdens and risks being placed on them. After all, they can continue to do good by simply donating money to their favorite causes, but without any of the personal liability.

So what can you do if you’re the Executive Director or the Board Chair to prevent resignations? Start with a careful and thorough review of your Director and Officer (D&O) liability insurance policy. Since there is no such thing as a “standard” D&O policy, you should hire an expert (usually “fee-only” insurance consultants) to help you. Be sure to have your Board participate in the discussions, so that their concerns are heard and acted upon. At the very least you want to know if your aggregate coverage limit is still adequate considering the new law; whether certain sneaky exclusions (such as “failure to provide insurance”) can be removed; whether the cost of legal representation falls in or out of the aggregate coverage limit; and whether the policy offers “tail” (or extended reporting period) coverage. Based upon your Board’s reaction, you may have to change underwriters.

You also want to determine whether to hire a consultant to train two key volunteers on your team: the Chair of the Finance Committee (i.e., the Treasurer) and the Chair of the Audit Committee.  Ask them if they want/need a training or refresher course on their duties. Among their many responsibilities (and depending on the size of the non-profit), the Treasurer should be reconciling the organization’s bank accounts monthly, insuring that month-end cash balances are correct, and reviewing/co-signing all out-going checks above a certain amount. And the Audit Committee should be double-checking that work on a quarterly basis.

Although the Revitalization Act does not specifically require that each tax-exempt organization have an Audit committee, you should have one. However, if your non-profit is too small to have both a Finance and an Audit committee, don’t be tempted to merge both functions into one “Finance and Audit Committee” for the sake of expediency. That’s because one of the primary duties of the Audit Committee is to carefully examine the Treasurer’s work. And it has to be able to do that independently of the Treasurer.

If an Audit committee is not feasible, then the responsibility falls on the entire Board of Directors to evaluate and approve/disapprove the Finance committee’s output. When directors realize that the Revitalization Act makes them even more financially and criminally liable for this work, you may find that some of them may want additional training. Give it to them!

Hopefully, if you respond proactively to the new legal landscape, you should be able to keep all your directors. Good luck!