The Legal Perspective | The basics of what every nonprofit board member needs to know about their duties and responsibilities
Allison Lane is a member of the corporate, real estate and commercial lending departments at Fletcher, Tilton & Whipple PC. She can be reached at alane@ftwlaw.com.
With the economic downturn, more attention is being focused on nonprofit organizations, specifically how they are run and how they spend their endowment funds.
Under this new scrutiny, it is important that current and future board members are fully aware of their duties to an organization. This includes knowing the options now available to those organizations under the new Massachusetts Uniform Prudent Management of Institutional Funds Act (UPMIFA).
First, board members have a fiduciary duty to, or obligation to act in the best interest of, the organization that they serve. Specifically, this refers to the “duty of care” and “duty of loyalty.”
The duty of care requires that board members act in a reasonable and informed manner and exercise independent judgment on decisions.
Within this duty is the obligation to attend board and committee meetings, to gather information, and then to make informed decisions based on the information he/she acquires. A board member should ask questions and request further information if needed to make the appropriate decision.
As to the duty of loyalty, board members should act in the best interest of the organization, rather than their own interests or the interests of another person or entity. They must maintain confidentiality of meeting minutes, financial books and records of the organization, and avoid conflicts of interest and the utilization of the position for personal gain or advantage.
Endowment Rules
In July 2009, the Massachusetts legislature took action by enacting the UPMIFA to assist nonprofit organizations whose endowments had a significantly lower value than was historically recorded.
This legislation applies to both incorporated and unincorporated organizations that are formed and operated for charitable purposes.
Those with endowment funds (i.e. funds the principal of which may not to be expended by the organization under the terms of the gift instrument or documentation) are governed by UPMIFA.
Before UPMIFA, a charity could spend a prudent draw which exceeded income from an endowment fund provided that the current value of the original contributions exceeded the value of such contributions at the time of the gift. This meant that a charity could only spend current income and could not reduce the endowment below its historic dollar value.
Thus, charities that were “underwater” (i.e. the current value of the endowment was less than the historic dollar value of the endowment), were only permitted to draw endowment income and nothing more. (It is important to note that the gift instrument(s) can and could provide for alternate spend down provisions.)
Under the new statute, Massachusetts charities are not restricted by the historic dollar value of their endowment.
Instead, the charity and its representatives are to look to the donor’s intent as expressed in the gift agreement or other documents, and subject to the restrictions there, the charity can spend the amount it deems prudent, even if the endowment is “underwater” provided it considers the following factors:
• the duration and preservation of the endowment fund;
• the purpose of the institution and the endowment fund; the general economic conditions at the time;
• the possible effect of inflation or deflation; the expected total return from income and appreciation of investments;
• other resources of the organization;
• and the investment policy of the organization.
Also, under the previous statute, there had been a rebuttable presumption that it was imprudent for a charity to spend more than 7 percent of the average fair market value of the institution’s endowment funds in any one year.
The legislation eliminated that presumption. Any restrictions imposed by the donor will control; the purpose of this statutory change is to address the situation where there is not a directive from the donors.
With this new change, the board and its investment or finance committee should review and revise any policies on spending funds from the endowment to incorporate the factors set forth in the statute.
Then, before the board, the investment committee or finance committee takes action to spend funds from the endowment, they should review all gift agreements or documents that might include limitations so that the organization does not run afoul of the restrictions they might include.
Further, when the board, investment committee and/or finance committee consider taking action to spend funds from the endowment pursuant to this statute, the discussion should be thoroughly documented in the minutes to show that each of the factors set forth above have been carefully considered.
Portfolio Maintenance
Other aspects of the new UPMIFA require that board members making decisions about individual assets must consider the entire investment portfolio; that board members diversify the assets of the organization unless there are special circumstances that make it reasonable not to diversify; that board members periodically review the delegation of management and investment responsibility to professionals and that the fees for such services must be reasonable and appropriate in relation to the assets, the institution’s purpose and the skills available.
These new changes provide board members of charitable organizations with flexibility when considering spending their endowment.
Ultimately, the board members are bound by their fiduciary duty to act in good faith for the benefit of the organization they serve.
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