10 Most Common Bylaw Problems Facing Nonprofit Organizations (Part II)

May 9, 2016Articles Nonprofit Roundup Blog

Last week, we discussed the notice period for special board meetings, the proper power of executive committees and the differences between officers of the board and officers of the corporation. Below, we continue on our countdown to the most frequently seen bylaw problem.

7. CEO Designation – Many nonprofit organizations designate the board chair, generally a volunteer director, as the CEO of the nonprofit organization. Under state law, a board chair’s sole duties are to call the board meetings to order and preside over those meetings. The board chair is not vested with the duties and responsibilities commonly associated with a CEO, who is typically an employee with more control over day-to-day operations. Nonprofit organizations should decide whether to have a CEO and, if one is desired, should give thought to who should bear the title. In many cases, the nonprofit organization’s executive director is most akin to a CEO.

6. Membership Duties & Responsibilities – If a nonprofit organization rightfully has “members” as that term is defined under state law (more on this next week), then the nonprofit organization’s bylaws should be careful not to charge such members with too many duties or responsibilities. A member’s role in a nonprofit organization should be akin to a shareholder’s role in a for-profit corporation. Specifically, a member should be entitled to elect the nonprofit organization’s directors and vote on fundamental transactions (e.g., merger, sale of assets, dissolution). A member should not, however, be able to elect or remove officers, sign checks or agreements on behalf of the nonprofit organization or engage in the nonprofit organization’s day-to-day activities. Such over-involvement can open the member up to liability for any damages the member causes. The member’s over-involvement is also unlikely to be covered by the nonprofit organization’s directors & officers policy. Finally, the member’s over-involvement may give the nonprofit organization’s creditors cause to “pierce the corporate veil”, making the member personally liable for the nonprofit organization’s debts.

5. Conflicting Bylaws – A nonprofit organization will likely amend its bylaws several times over the years. These amendments can lead to conflicting bylaw provisions. If the conflicting provisions deal with hot topics, such as director or officer elections, director or officer terms or voting rights, the inconsistencies could lead to time-consuming arguments between board members and even costly litigation. Therefore, it is important that an individual with comprehensive knowledge of the bylaws undertakes the task of reviewing and revising them, if necessary. The revisions, if any, should then be reviewed in detail by the full board. It is also a best practice to draft amended and restated bylaws in lieu of leaving the bylaws in their current state and simply drafting a stand-alone amendment, which could be easily forgotten or misplaced.

4. Non-Voting and Honorary Board Members – Many nonprofit organizations have non-voting or honorary board members. This practice is not recommended because those individuals may be held liable for board decisions in which they participated in deliberations but were unable to vote. Thus, the onus lies with the non-voting or honorary board member. To avoid potential liability for such individuals, the individuals could instead serve as committee members. If a nonprofit organization nevertheless wishes to have non-voting or honorary board members, the nonprofit organization should ensure that the individuals serving as non-voting or honorary board members understand the liability involved with serving. Such individuals should determine whether their actions/inactions are covered under any personal policy (e.g., homeowners’ policy, professional liability coverage) the individuals may have. The nonprofit organization should also contact its insurance carrier to confirm that non-voting and honorary board members are covered under the nonprofit organization’s directors & officers policy.

Check back later this week for our final installment. Will your bylaws contain the most frequently seen bylaw problem?