Serving as a board member on a board of directors for a nonprofit organization can provide a chance to give back to a community or institution in a rewarding and impactful way. Through their decisions, board members determine an organization's purpose and path, how funding is gathered and spent, who controls operations and much more.

Almost anyone from a variety of backgrounds can become part of a board. A starting point for those looking to sit on a board is generally the so-called “middle-market nonprofits”—those which may not have thousands of employees but still have significant budgets. These boards, of course, include attorneys—but as legal professionals, there's always a catch.

While the experience of serving on a board is invaluable, particularly if it's a cause in which you strongly believe, attorneys must be mindful of certain areas. Conflicts of interest and crossing the line between board member and attorney are two important areas requiring mindfulness. In a time when nonprofits are under intense scrutiny, certain ethical considerations as well as best practices in connection with serving on a board must become common knowledge among board members, especially those who are attorneys.

Rules

A central characteristic when we think of a nonprofit is that it's an organization which has been granted tax-exempt status by the Internal Revenue Service (IRS). This exempt status is granted to a variety of nonprofit organizations pursuant to numerous IRS subsections. Most familiar is the 501(c)(3), however there exist 29 types of nonprofits under Section 501(c) of the Internal Revenue Code. 501(c)(3) organizations are those that further religious, scientific, charitable, educational, literary, public safety or cruelty prevention causes or purposes, as well as generate some public benefit.

Generally speaking, 501(c)(3) nonprofits can be separated into two categories: public charities that benefit the public's interest and carry out some type of direct charitable activity, and private foundations that make grants to unrelated organizations, such as institutions or individuals for scientific, educational, cultural, religious or other charitable purposes.

Unlike publicly traded, for-profit corporations, which are governed heavily by federal laws such as the Sarbanes-Oxley Act, there are only one or two provisions of the Sarbanes-Oxley Act that expressly apply to nonprofit organizations. Accordingly, nonprofits operating under a “best practices” model, generally borrow significantly from for-profit corporation regulations. Moreover, each state has the ability to adopt legislation to govern nonprofits within its borders. Often these state's legislatures pull from the Model Nonprofit Corporation Act, promulgated by the American Bar Association, which state legislatures use as a guide and “modify” as they see fit. Many legal experts, however, see no reason not to incorporate into the board's management and operation some of the better practices of the Sarbanes-Oxley Act, such as audit committees and policies for document retention, whistleblower protection and conflicts of interest.

An understanding of at least minimum competency regarding what laws pertain to nonprofits in your state is crucial for all board members, but especially for those who are attorneys.

Obligations

Think back to law school. We all know we have certain ethical duties and obligations as attorneys. Additionally, we all remember learning the basics of fiduciary duties in our business associations or corporations course. These same duties and obligations apply when serving on a board. In Pennsylvania, for example, fiduciary obligations established under corporate law, as well as case law, are the rule:

• Duty of care: It's not enough to simply be a board member. You need to carry out your duties with a reasonable amount of diligence and good faith. Attend board meetings and engage in discussions, review financial information and other reports, and ask questions to hold management accountable. If you don't have the time to invest yourself in the board, maybe you shouldn't be a part of it.
• Duty of loyalty: Carry yourself in a manner that is reasonably believed to be in the interest of the nonprofit and its purpose, rather than your own self-interest. Typically, this is done through a conflict-of-interest policy. If there is a matter that arises which may affect you outside your board activities, be it personal or work-related, recuse yourself from votes and other decisions.
• Duty of obedience: Ensure the nonprofit is acting in accordance with its purpose and operating within applicable laws. You can do this by having an independent audit done regularly and changing auditors from time to time. The board can have its own audit committee, as well, but make certain the executive director is not part of it. This is as much about optics as it is staying accountable.

These jurisprudence concepts are largely consistent nationwide. Taken as a whole, they mean board members are required to make careful, considered, good-faith decisions that are in the best interest of the nonprofit, consistent with its mission and independent of undue influence from any other party.

Large national or international nonprofits have the depth and resources to have these rules thoroughly understood, worked out and conveyed to their board members. However, so-called middle-market nonprofits tend to be less consistent when it comes to educating their board about their duties. A best practice is to provide a board packet consisting of a set of documents outlining duties for meeting conduct and attendance, the organization of the board, conflict-of-interest and whistleblower policies, and other key information at the start of the nonprofit's year and as new board members come aboard.

Roles

A board works best when all board members are using their unique skills in concert to work toward the nonprofit's mission. As a lawyer, your legal expertise and opinion will certainly be useful and in demand, but should you always offer it?

There is no hard and fast rule about how to separate yourself as “just another member of the board” and legal counsel. Instead, there are ethical rules by which lawyers are bound, and it's your obligation as an attorney board member to actively be aware of and stay out of conflict-of-interest situations.

If you're on a board but strictly serving as its legal counsel, one solution to avoid any type of impropriety or conflict of interest is to have a non-voting seat and refrain from weighing in on decisions unless and until a legal issue arises. But if there's a conflict of interest —say, the board is thinking of buying a parcel of land from a client of your law firm—it's time to sit out (quite literally).

Even if you are not formally wearing your “attorney hat” and simply acting as another board member, it's important to make qualifying statements when participating in a discussion: “This is my opinion, not a legal opinion.” You want to make clear you're not giving legal advice in any situation.

Liabilities

If you're giving the wrong legal advice and the recipient believes it to be given in the capacity of an attorney providing legal advice—and this is true, no matter if it's serving on a board or serving drinks as a bartender—you open yourself up to malpractice. Malpractice insurance exists to cover instances such as this, but not all insurers may honor a claim if you were acting as a board member rather than official legal counsel. This is why boards need to have in place Directors and Officers Insurance coverage (D&O coverage).

D&O coverage is easy to obtain and not necessarily expensive. Large for-profit corporations are certainly taking advantage of this, especially in the wake of major corporate scandals in the early 2000s, but many middle-market nonprofits neither know about nor have this type of insurance coverage. The organization should work with an insurance provider to ensure that D&O insurance covers employee/employment matters, which is from where the majority of litigation stems.

Motivations

A good introspective question before agreeing to join a board (or, really, before agreeing to do most things in life) is: Why am I doing this?

For some, sitting on a board for a noted charity may simply be a marketing tool. For others—and this should certainly be your primary reason—it's because there exists a true sense of care and devotion to the cause. Your reasons ultimately belong to you, but there are certainly additional benefits to sitting on a board, including networking opportunities and a chance to gain unique insights into a specific industry that can help you as your career continues and grows.

Regardless of why you're there, when you're sitting on a board, your position as an attorney board member is unique and comes with important considerations.

Patricia E. Farrell is an attorney at Pittsburgh-based law firm Meyer, Unkovic & Scott. She focuses her practice on corporate and business law services. Farrell can be reached at [email protected].

Maxwell Briskman Stanfield is also an attorney at Meyer, Unkovic & Scott. He focuses his practice on corporate, business, financial and commercial real estate law. Stanfield can be reached at [email protected].