How to Ensure Your Board is Making Ethical Decisions
What should boards do when facing an ethical dilemma? How can boards effectively establish ethical standards?
It’s important that board members understand the organization’s values and know how to act in the best interests of the organization when values collide. Board members often want to focus on doing what is “right”. But sometimes making the “right” decision is tricky. Here are some suggestions to help boards make proper ethical decisions:
- Viral News Test: If this were a front-page headline, or viral story, how would that look? Would I be proud of the action or choice? Would this anger our members, sponsors, leaders or other stakeholders?
- Outcomes: Will this choice provide the best outcome for everyone involved – directly or indirectly?
- Everybody Test: What if everybody did this? Or, what if other associations or societies did this? How would I/we feel about that?
- Character/Virtue Test: Does this choice represent our association the way we want to be seen?
Managing Legal Risk
Another important role board members play is to understand the legal duties involved in board service and then learn how to manage any potential risks.
Legal Duties Encompass the Following:
Compliance with Laws and Regulations
Board members must understand and ensure the association adheres to all relevant local, state, and federal laws, including tax regulations, employment laws, and industry-specific rules.
Avoiding Fraud and Misrepresentation
Board members are responsible for ensuring that the association operates with transparency and honesty.
Understanding Financial Oversight
Board members must be able to review financial statements, understand the association’s financial condition, and ensure that resources are being used appropriately.
Liability Protections
While board members can be held liable for certain actions, most nonprofit and for-profit associations provide some level of liability protection (such as indemnification) to board members.
Record Keeping and Documentation
Accurate and timely records must be maintained for all board decisions, including minutes of meetings, financial records, and policy decisions.
Insurance and Indemnification
Understanding the insurance policies (e.g., Directors & Officers insurance) that protect board members from personal financial loss due to legal actions, and the indemnification clauses that protect board members within the association
Regular Education and Training
Board members should stay educated on the responsibilities, laws, and regulations that affect their role.
Effectively Managing Risk
Organizational Documents: Bylaws are Key
Following the bylaws protects the association. Both the association and the board members can be found liable if the bylaws are not being followed.
D&O Insurance: A Must-Have
This is insurance coverage intended to protect volunteer leaders from personal losses if they are sued because of serving as a director or an officer.
Avoiding Risk: Do’s and Don’ts
- Apparent Authority: Who Speaks for the Board?
Care should be taken that board members or other volunteers do not assume the authority of the chief elected officer (such as the president) or take on authority not specifically delegated to them. Authority rests with the chief elected officer and may not be assumed by others within the association. - Public Records: Make Your 990’s Available
The 990 is an IRS form that provides the public with financial information about the nonprofit association. Board directors should always be given the opportunity to view the 990 before it is submitted. - Antitrust: Keeping Competition Fair
Board directors should remove themselves from conversations that would change how business is conducted because of a joint agreement among competitors. - Conflict of Interest: Situations to Avoid
It is a best practice for board directors to disclose all conflicts of interest as defined and have a policy that all sign these documents annually.
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