What is Giving in L.A.?

Giving in LA Giving in L.A. is a go-to source, an aggregator for strategies and points of view about trends and issues in giving, challenges for philanthropists and philanthropic organizations, tools and techniques for individuals or families, insights and opinions from experts, and more – all centered on Los Angeles County.

May 7, 2015 ~ 0 Comments

Mentorship on the Mountaintop

By Chris Chandler

Celebration-CroppedOn his first trip out into the mountains, Jose got to witness the power of the backcountry.  He was not in the best physical shape and was fighting a cold. He struggled from the start, feeling discouraged and ready to give up. But with encouragement from us and his peers, he kept going. Just as it was getting dark, we reached the top. Looking out from the 10,000 foot peak, he smiled and said to me, “I never thought I’d make it.”

My family impressed a sense of civic responsibility upon me, and I’m inspired by their legacy.  Much of what I hope I can do isn’t as easily measured as dollars and cents, or newspapers, or growing a metropolis – it’s more like what one student, Steve, once told me after an emotional campfire and grieving his missing parents, “You’re the most inspirational person I’ve ever met!’” I still get teary-eyed.

From my wilderness education on a college freshmen orientation backcountry trip, the WYLD has always given me a sense of community and spirituality and then faith.  I’m inspired by mentoring and learning from youth, especially those with high potential and challenging backgrounds, because I can relate with many of them through my own life experiences.

The idea for Wylderness Youth Leadership Diversity (WYLD) came to me and co-founders, Meghan Shearer, Sonja Williams, Franchezska Zamora in 2013, while we were looking for an innovative way to make our outdoor youth education programs more effective. We also recognized that wilderness therapy for veterans was a growing field. By building a relationship Hand-Up-Croppedbetween veterans and the youth we served, both would benefit, using resources more efficiently and, more importantly, addressing incredible needs.

WYLD’s mission is to empower underserved urban youth and U.S. Military Veterans through transformative wilderness leadership programs and mutually beneficial mentor relationships. WYLD envisions a city where every youth and returning U.S. Military Veteran is given an opportunity to explore, connect and discover through nature.

In the wild, our participants learn about shared responsibility, environmental stewardship and the value of diversity. Today, the WYLD Mentoring program is taking root at Carver Middle School in South Los Angeles. We are committed to working with students and their families to provide opportunities throughout middle school and high school and setting them on a path towards post-secondary education. And this summer, we hope to send 32 youth on 3 backpacking and camping expeditions and train 16 veterans on the veterans mentor program.

It is incredibly satisfying to see these young people navigate their way over the mountain, overcoming their own mental challenges with the support of their peers. To see them stand at 10,000 feet, scream “I’m on a MOUNTAIN!!!” and fall in love with the wilderness and discover their own passions, resiliency and potential, has inspired me to give back in a more meaningful and impactful way.

Chris Chandler is the co-founder and executive director of Wilderness Youth Leadership Diversity.  To learn more about WYLD, please visit www.wyld.org or @LAWYLD on Twitter.

April 27, 2015 ~ 1 Comment

Nonprofit Governance: Directors Held Personally Liable for Mismanagement

Gavel-squareBy Ofer Lion, Douglas M. Mancino and Christian G. Canas

A recent court ruling highlights the need for robust governance practices for nonprofits. The Third Circuit Court of Appeals affirmed an award of $2.25 million in compensatory damages against former directors and officers of a bankrupt nonprofit corporation – personal liability for breach of fiduciary duties and “deepening insolvency.”[1]  The case indicates that nonprofit directors may not be able to rely on the “business judgment rule” if they fail to comply with the corporation’s bylaws and exercise reasonable diligence (including by showing up for board meetings) or to act once they are aware of mismanagement by the nonprofit’s officers or employees.

The Case: Lemington Home for the Aged

The Lemington Home for the Aged was a Pennsylvania nonprofit that operated a nursing home dedicated to the care of African-American seniors.  Its decades-long financial difficulties became particularly acute during the early 2000s, under the management of its directors and two officers: the chief executive officer and “Administrator” and the chief financial officer.

The directors allowed the Administrator to run Lemington for six years in the face of abnormally high deficiency findings and independent reports documenting her shortcomings and recommending that she be replaced.  Even after she ceased working at Lemington full-time, the directors allowed her to continue in her role (in violation of state law) and collect her full salary.  In addition, they relied on the advice of the CFO, even after discovering that he was not maintaining Lemington’s financial records and had failed to bill Medicare for at least $500,000.

The board was also in disarray.  Minutes of board meetings, including those involving compensation decisions, were incomplete or non-existent.  Board attendance was often below fifty percent, and at least one director failed to participate in a single meeting over several years.  Although Lemington’s bylaws required a finance committee with a treasurer as chairperson, this committee was not established, and the position of treasurer remained unfilled.

Duty of Care and the Business Judgment Rule

The standard of conduct for directors of nonprofits generally requires that a director perform the duties of a director in good faith, in the best interests of the corporation and with such care as an ordinarily prudent person would use under similar circumstances.

The “business judgment rule” insulates directors from judicial intervention and liability, in the absence of fraud or self-dealing, if the directors exercise reasonable diligence in reaching decisions and honestly and rationally believe that their decisions are in the best interests of the corporation.  Thus, its successful use depends on whether the directors’ reliance upon the information provided by one or more officers (or others) is in good faith and on whether there is a reasonable basis for relying upon such officers.

The court in Lemington Home for the Aged held that the evidence supported a finding that the directors breached their duty of care by failing to take action to remove the officers once the results of their mismanagement became apparent.  In other words, the directors did not exercise reasonable prudence and care in continuing to employ the two officers.  Furthermore, the board’s failure to follow its own bylaws and continued reliance on the information provided by the two officers, in the face of numerous red flags, supported a conclusion that the directors did not exercise reasonable diligence.  As a result, the court found that the business judgment rule should not shield the directors from liability.

Responsible Governance

The board of directors is ultimately responsible for management of a nonprofit.  The following recommendations are examples of strong governance practices that seek to ensure that the board’s duty of care is fulfilled.

  1. Bylaws.  To ensure that directors can fulfill their duty of care and thereby reduce their risk of personal liability, a board’s practices should remain consistent with the nonprofit’s bylaws (e.g., establish all required committees, ensure that the number of directors in office accords with the number or range called for in the bylaws, etc.), which should be reviewed regularly and amended when necessary.
  2. Term Limits and Turnover.  Short term lengths and limits on the number of consecutive terms a director may serve (as opposed to total number of terms) can help prevent board stagnation while reducing the artificial loss of qualified and experienced board members. In addition, staggered terms may ensure that experienced directors’ terms do not expire at the same time.  Vacancies in either director or officer positions should be filled as soon as possible, and directors who consistently fail to attend meetings should be reevaluated and replaced if necessary.
  3. Meetings and Minutes.  Board and committee meetings should be carefully planned and facilitated to foster full attendance, participation and thoughtful decision-making in the best interests of the nonprofit.  Minutes of all meetings should be taken and retained with the corporation’s records. Aside from being required by law, they may also provide evidence that directors faithfully discharged their various fiduciary duties. Minutes should include the names of all attendees, what votes were taken and how each director voted, including any objections or abstentions.  When the board or a committee acts on any matters for which there are specialized voting rules, such as where there is or may be a conflict of interest or in setting executive compensation, the minutes should note how those rules were met.  In many cases, information or documents the directors relied on when making their decision should also be appended to the minutes.
  4. Officer Evaluations.  Officers serve at the pleasure and under the supervision of the board, and their evaluations should be a significant component of a board’s responsibilities.  Evaluations are critical to ensuring officers are meeting the board’s expectations and fulfilling the duties delegated to them by the board in managing the nonprofit’s operations and finances.  If the board becomes aware that an officer is not fulfilling his or her duties, immediate corrective action may be in the best interests of the nonprofit.
  5. Director Compensation.  Board and committee members are expected to keep informed with respect to organizational, industry and regulatory developments, be prepared in advance of meetings and contribute their expertise and judgment in advising management.  Because personal liability is a real concern, even when reduced by statutory protections and insurance, an increasing number of nonprofits, particularly those primarily funded with program services revenue (e.g., healthcare, higher education, etc.), are paying directors’ fees in order to attract and retain qualified and experienced directors.  Director fees may also serve as a sort of moral deterrent to complacency.  Once they are being paid, even if the amount is relatively insignificant, directors may feel bad if they don’t diligently prepare for and attend meetings.  You get what you pay for, and paid directors may feel like they have to give nonprofits their money’s worth.

Conclusion

The award of $2.25 million in compensatory damages against former directors and officers of a nonprofit corporation is a stern reminder that both directors and officers of nonprofit corporations may be held personally liable for breaches of their fiduciary duties.

Nonprofit boards should regularly review and update their governance practices to ensure directors are meeting their fiduciary duties and reduce the risk of personal liability.

[1] In re Lemington Home for the Aged, No. 13-2707 (3d Cir. Jan. 26, 2015).

Ofer Lion, Douglas M. Mancino, and Christian G. Canas, attorneys at Seyfarth Shaw LLP, represent tax-exempt organizations and nonprofits on a wide spectrum of tax, corporate, governance, and fiduciary issues. For more information, please visit http://www.seyfarth.com/Tax-Exempt-Organizations. The contents of this blog are for general information purposes only, and should not be construed as legal advice. You are urged to consult an attorney for legal advice concerning your or your organization’s specific situation.

 

 

 

March 30, 2015 ~ 3 Comments

Ten Things We Don’t Know About Nonprofit Systems

Top-10-sizedBy Denise Tom

The nonprofit system in Los Angeles County has an identity problem. If you Google it, you won’t find much there. In today’s digital world, if Google can’t find you, you’re not “trending” and therefore not worth people’s attention. So here is a list, a la BuzzFeed, of the 10 things we don’t know about nonprofit systems, in no particular order:

1. What impact does the nonprofit sector have on the economic and social well-being of the society it serves? We’re not sure, because marketing itself is not a high priority of a sector that is too entrenched in the challenging work that government can’t do. Some in the sector also feel that marketing contradicts a mission directed at something more than self-interest.

2. Why isn’t systemic change part of every nonprofit’s mission? If it was, that premise alone might propel them to collaborate more to find solutions. They would look for interdependencies and partner up more with other nonprofits and across sectors to find leverage points to help create change.

3. Why can’t nonprofits and funders get past the “power dynamic”? If they approached each other as equal partners, each needing the other to fulfill their missions, they would be able to find what Nancy Olson of Southern California Leadership Network calls a “triple bottom line,” the sweet spot that connects the two with the needs of the community.

4. Why do people still start nonprofits? If they knew that there are 30,000 nonprofits in Los Angeles County — most of them with annual operating budgets of $100,000 or less — competing for limited foundation and corporate dollars and with missions that cover the gamut of issue areas, they might instead serve on a board, volunteer, contribute financially or get involved in some other way.

5. Are funders  listening as much as they should to the nonprofit sector? Yes, funders hold the purse strings and regularly participate in panels at which they share their funding priorities and processes with nonprofit organizations. (See No. 4) But there needs to be more of an intentional effort to have real conversations about strengths, weaknesses, opportunities and threats to the nonprofit system, as well as how nonprofits and funders can work together on shared goals to solve a particular problem.

6. Can we better understand the business models of nonprofits, which are unique to each organization? Funders need to know not only the mission and goals of the nonprofits they support, but also their business strategies and the rationales behind how they create, deliver and track the value they provide to the community. Nonprofit leaders need to ensure their staff members are armed with that same knowledge, so that they understand how their business models lead to their missions.

7. What are the organizational cultures of nonprofits, each of which has its own set of values, norms, beliefs, assumptions and work habits? Understanding why and how nonprofits work will lead to a deeper knowledge about the challenges they face in effectively fulfilling their missions and sustaining their operations. Only then can funders and nonprofits work together to strengthen the sector.

8. Why do organizations spend so much time and effort solving the wrong problems? Is it because they have been in operation a long time and have not diverged from what is expected and what has worked in the past? Is it because they are focused on activities rather than outcomes?

9. What is a nonprofit system? Google aside, we still don’t really know. That’s because the nonprofit system doesn’t see itself as a system and therefore doesn’t see the whole picture of how it connects with and interacts with other systems, like government and business. And what are the right outcomes? Will they lead to systemic change? Perhaps the larger questions are: is the work they do relevant, and do they have the ability to evolve to stay relevant in rapidly changing times?

10. Finally, does the nonprofit system have the ability and the will to think in an increasingly systemic way about problems that need to be solved? Does it have the discipline to spend the needed time to diagnose problems rather than jumping straight to intervention and solutions?

The answer to all of these questions is “we don’t know.”

But here’s what we do know: organizations today are increasingly cooperating, coordinating and collaborating on their own across sectors — sharing thoughts, knowledge and expertise about problems that need solving. They are working together because they know that collaboration with a shared purpose, as muddled as it can be at times, promotes teamwork, deep listening and accelerates change.

And that’s worth knowing.

Denise Tom is the program manager for health care at California Community Foundation.